Not Quite "Seven With One Blow," But Close

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Not Quite "Seven With One Blow," But Close

Post by jcolvin2 » Mon Oct 10, 2011 9:21 pm

DOJ Tax wins three shelter cases on same day:

(202) 514-2007
TDD (202) 514-1888


Federal Courts Deny Hundreds of Millions in Tax Breaks to Billionaire Dallas Banker,
Principal Life Insurance Co. and Wells Fargo & Co.

WASHINGTON – Three federal courts have issued decisions in favor of the United States in three separate cases involving abusive tax shelters, the Justice Department announced today. All of the court opinions were issued on Sept. 30, 2011.

In Southgate Master Fund LLC v. United States, the U.S. Court of Appeals for the Fifth Circuit, based in New Orleans, affirmed a lower court ruling that a company formed by billionaire Dallas banker D. Andrew Beal and others was a sham partnership that must be disregarded for federal income tax purposes. In an opinion authored by Judge Patrick E. Higginbotham, the court of appeals disallowed the company’s attempt to allocate approximately $200 million in income tax deductions to Beal. The deductions allegedly resulted from Beal’s acquiring (through a company that was treated as a partnership for tax purposes) a portfolio of non-performing Chinese debt for less than $20 million, disposing of the portfolio and generating more than $1 billion in artificial paper losses approximately equivalent to the debt’s face value. The court of appeals also affirmed the lower court’s disallowance of monetary penalties that the Internal Revenue Service (IRS) had sought to impose, while noting that the penalty issue was “a close one.”

In Pritired 1 LLC v. United States, Judge John A. Jarvey of the U.S. District Court for the Southern District of Iowa prohibited Principal Life Insurance Co. from claiming more than $20 million in foreign tax credits that the company had sought based on a complex transaction involving a $300 million payment to two French banks. The court determined that the transaction, which was designed by Citibank, was actually a loan rather than an equity investment, lacked economic substance, lacked a business purpose beyond using foreign tax credits and violated a Treasury Department “anti-abuse” regulation. Throughout its detailed opinion, the court emphasized the inability of Principal or Citibank to articulate any business purpose for the key aspects of the transaction, except to garner tens of millions of dollars in tax credits.

Finally, in WFC Holdings Corporation v. United States, Judge John R. Tunheim of the U.S. District Court for the District of Minnesota disallowed a tax refund claim for more than $80 million filed by a subsidiary of Wells Fargo & Co. The claim was based on an alleged capital loss deduction of more than $420 million stemming from a transaction involving the transfer of “underwater” commercial leases to a Wells Fargo subsidiary and a related sale of stock to Lehman Brothers, Inc. The court concluded that the transaction was actually a sham tax shelter that Wells Fargo had purchased from accounting firm KPMG LLP for $3 million and that it had no business purpose other than tax avoidance.

“These three significant decisions are further evidence that the courts will not countenance abusive tax shelters, no matter who designs them or how complicated they are,” said John A. DiCicco, Principal Deputy Assistant Attorney General of the Justice Department’s Tax Division. “Large corporations and wealthy individuals should think twice before pouring money into these sham arrangements.”

Principal Deputy Assistant Attorney General DiCicco thanked all of the Tax Division and IRS attorneys and investigators involved in these cases for their efforts.

More information about the Tax Division’s enforcement efforts can be found on the Division’s website.

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