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Tuesday, October 4, 2011

Forbes: 5th Circuit Nixes Billionaire Beal's $1.1 Billion Tax Shelter

Following up on Saturday's post, 5th Circuit Rejects $1.1b Tax Losses Claimed by Andrew Beal in DAD Tax Shelter:  Forbes, Appeals Court Nixes Billionaire Beal's $1.1 Billion Tax Shelter, by Janet Novack:

The 5th Circuit Federal Court of Appeals Friday nixed billionaire Texas banker Andrew Beal’s attempt to claim $1.1 billion in tax losses based on an investment of just $19 million in distressed Chinese debt. But in unanimously upholding a 2009 district court decision disallowing the losses, the three-member appeals panel  agreed with the lower court that Beal isn’t liable for penalties since he had “good cause” to believe his ploy might work.  The appeals decision described the penalty issue as  a “close one.”

Friday’s decision is the first from an appeals court involving what the government calls the “distressed asset debt” or “DAD” shelter.  The government has asserted in court papers that Beal, who is worth an estimated $7 billion, used DAD multiple times to “stockpile over $4 billion in artificial losses to shelter future income.” Beal’s lawyers did not respond Sunday to a request for comment, but he has consistently contended his tax moves were proper. (The full decision, Southgate Master Fund Limited, is available here through TaxProf blog, which first reported it yesterday.) ...

Last month,  U.S. Tax Court Judge Robert A. Wherry Jr. gave thumbs down to another group of DAD tax shelters—these marketed by Harvard trained tax lawyer John E. Rogers to less wealthy investors (primarily small businessmen and doctors) in 2003 and 2004. In a ruling here deciding 15 cases, the judge also upheld the IRS’ imposition of penalties on those taxpayers. ...

Son-of-BOSS has been consistently disallowed by the courts. In his recent decision giving thumbs down to the DAD deals Rogers had structured, U.S. Tax Court Judge Wherry put the relationship of Son-of-BOSS and DAD in some  perspective. He wrote:

“It seems only fitting that after devoting countless hours in the last decade to adjudicating Son-of-BOSS transactions, we have now progressed to deciding the fate of DAD deals. And true to the poet’s sentiment that `The Child is father of the Man’, the DAD deal seems to be considerably more attenuated in its scope, and far less brazen in its reach, than the Son-of-BOSS transaction.”

Less brazen, perhaps. But Wherry still imposed penalties on those who bought into DAD.

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