WASHINGTON, Jan 13 (Reuters) - A tax shelter case going before the U.S. Supreme Court on Tuesday puts $1 billion in potential government tax revenues at stake and may tackle questions about the enforcement powers of federal agencies that make some businesses nervous.

The high court, which rarely takes up tax disputes, will hear oral arguments in United States v. Home Concrete & Supply LLC. The case hinges on whether the Internal Revenue Service pursued tax cheats fairly or overstepped its authority in a rush to crack down on "Son of Boss" tax shelters.

First appearing in the late 1990s, "Son of Boss" shelters were some of the costliest tax schemes in U.S. history. "Boss" was an acronym for "bond and option sales strategies." The shelters involved creating paper losses to offset real gains.

There are about 30 docketed cases awaiting the outcome of Home Concrete with the government aiming to recover $1 billion in taxes, interest and penalties, according to court documents.

Some businesses are concerned about the outcome, with companies ranging from contact-lens maker Bausch & Lomb to home builders saying it could empower agencies to retroactively write any regulations they want to win a lawsuit.

"It's certainly not the way our founding fathers intended the executive agencies to operate," said Beth Gaudio, senior executive counsel for the National Federation of Independent Business (NFIB), a lobbying group for small businesses.

The government, in defense of the IRS, is arguing the Home Concrete case involves powers needed to enforce the law.

"You can understand part of the motivation of the IRS," said Eric Solomon, a director at Big Four audit firm Ernst & Young and a former Assistant Treasury Department Secretary for Tax Policy under President George W. Bush. "The IRS was very enthusiastic to make sure these taxpayers pay their fair share."

A spokesperson for the IRS declined to comment. The law firm Latham & Watkins LLP, which is representing the taxpayers challenging the tax collection agency, also declined to comment.

TAX SHELTER

The "Son of Boss" schemes involved 1,800 people and cost the government $6 billion in lost revenues, according to IRS estimates. Of that total, the government has recovered more than half.

The IRS started cracking down on "Son of Boss" in 2000. By 2005, 1,165 people had settled Son of Boss cases with the IRS, but the complex structures used in the schemes were hard for the IRS to unravel and it was losing some court challenges to its crackdown.

Home Concrete was a limited liability company formed in 1999 to facilitate a Son of Boss scheme for two North Carolina businessmen, Robert Pierce and Stephen Chandler, who owned a small oil-and-coal company. The two filed their 1999 taxes in 2000. They were audited by the IRS, but not until 2006, and they were billed that year for unpaid taxes totaling $6 million.

The Home Concrete partners sued, arguing the IRS violated a three-year statute of limitations on its power to claim unpaid taxes. The IRS replied it was within its power to bill taxpayers up to six years back when more than 25 percent of a taxpayer's gross income was involved.

The Home Concrete partners lost in district court, but won in February 2011 in an appeals court. The IRS appealed and the Supreme Court in November decided to take up the case.

In the interim, the law firm that helped the Home Concrete partners set up their Son of Boss transactions, Jenkens & Gilchrist, has closed. Two of its partners were found guilty of tax evasion in May.

CONTENTIOUS IRS DECISION

Home Concrete was not the only Son of Boss case where the IRS was pressed for time during its crackdown. So in 2009, the agency, interpreting a precedent-setting 1958 Supreme Court decision, made a controversial move: it wrote a regulation giving itself authority to use a six-year statute of limitations period and appealed some of the cases it had lost.

"The IRS didn't like existing law so it changed the law," said the NFIB's Gaudio.

The regulatory move was not a unanimous decision among top officials within the IRS or its parent organization, the U.S. Treasury Department, tax and legal sources told Reuters.

The sources said some officials argued the six-year limitations regulation was a bad interpretation of the law that also risked a court reversal and had the potential to weaken the IRS's authority to write regulations interpreting vague laws.

Business groups now say the IRS pushed its powers too far by applying a new regulation retroactively and by writing the regulation without a clear legal mandate.

"It is, in my view, a significant encroachment on the separation of powers between the executive and judicial branches," said Todd Welty, a partner at law firm SNR Denton, which has represented taxpayers in Son of Boss cases.

Donald Korb, a partner at Sullivan & Cromwell LLP and a former IRS chief counsel, said "the IRS could get carried away" with changing regulations and claiming they should subsequently win related cases. Home Concrete may be the case "where this retroactivity issue could be decided."

Michael Mundaca, a co-director at Ernst & Young LLP and a former Deputy Assistant Secretary for Tax Policy under President Barack Obama, disagreed.

"I don't think the court needs to address the issue of whether the IRS has the authority to extend statutes of limitations retroactively," he said, adding the court should make a narrow ruling addressing only the question of three years versus six years on the statute of limitations.

Richard Lipton, a partner with Baker & McKenzie LLP, said: "It will be very interesting to hear what goes on at the oral argument. The justices may push on issues that will show they're looking at a narrow interpretation or a broader issue."

Malcolm Stewart, deputy solicitor general, is scheduled to argue the case for the government. Gregory Garre, a partner with Latham & Watkins, is expected to argue for the taxpayer.

The case is No. 11-139 United States v. Home Concrete & Supply LLC et al.

(Reporting By Patrick Temple-West)

Follow us on Twitter: @ReutersLegal