Paul L. Caron

Thursday, August 20, 2009

Court Rejects $1.1b Tax Losses Claimed by Andrew Beal in DAD Tax Shelter

In the first distressed asset/debt (DAD) tax shelter case to go to trial, the U.S. District Court for the Northern District of Texas on Tuesday rejected $1.1 billion in losses claimed by D. Andrew Beal, #329 on Forbes list of the 400 Richest Americans.  Southgate Masters Fund v. United States, No. 3:06-CV-2335-K (N.D. TX Aug. 18, 2009):

Beal is an aggressive risk-taker, a noted gambler who makes big bets. Sometimes he wins, and sometimes he loses—but he plays the game above board.

... [T]he Court concludes that although Southgate’s claimed capital loss appeared to fall within the literal terms of the statute, the transaction that created the high basis in the stock lacked economic substance and therefore must be disregarded for tax purposes. Consequently, the Court concludes that the Government’s adjustments to Southgate’s 2002 tax return are correct. The Court further concludes that because the calculation of taxes was done in good faith and with reasonable cause and the penalties assessed by the Government are otherwise inapplicable, no penalties are warranted. 

Tax Prof David Weisbach (Chicago) served as an expert witness in the case.  (Hat Tip:  Richard Jacobus.)

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