Andrew Beal Wins Partial Victory in Son-of-BOSS Tax Shelter Case

Following up on my prior posts:

• Court Rejects $1.1b Tax Losses Claimed by Andrew Beal in DAD Tax Shelter (Aug. 20, 2009)
• 5th Circuit to Hear Andrew Beal's Appeal of $1.1b DAD Tax Shelter Loss (Aug. 1, 2010)

Forbes, Billionaire Banker Beal Wins Timing Victory on Tax Shelter, by Janet Novack:

A federal magistrate judge ruled this week that billionaire Texas banker D. Andrew Beal used a sham "Son of Boss" tax shelter to create $153.6 million in phony tax losses for 2001 and another $46.5 million for 2002. But in a 42-page decision issued Monday, Eastern District of Texas Magistrate Judge Don D. Bush agreed with Beal's lawyers that the IRS had blown the deadline for disallowing the larger 2001 losses. According to Bush's decision (in Bemont Investments) Beal used the shelter to cut his 2001 income 95% to just $8.6 million. [Belmont Investsments, LLC v. United States, No. 4:07cv9 (E.D. TX Aug. 2, 2010).]

M. Todd Welty, Beal's lead tax lawyer, said in an e-mail Wednesday afternoon, "We are surprised and disappointed in the ruling. We have no further comment at this time." A Department of Justice spokesman said the government was reviewing the decision and had no comment at this time.

The Bemont case and another one, involving Southgate Master Fund, now before the Fifth Circuit Court of Appeals, show just how aggressively Beal, known for high-stakes poker games had played his tax hand. Last year, in the Southgate matter, a district court judge shot down Beal's attempt to claim $1 billion in tax losses on his 2002 through 2004 tax returns based on an investment of just $19 million in distressed Chinese debt. Both Beal and the government have appealed that decision, with the government objecting to the judge's refusal to impose tax penalties in the case.

In its Southgate appeals brief, the government says that Beal used what it calls the distressed asset/debt or "DAD" shelter multiple times to "stockpile over $4 billion in artificial losses to shelter future income." In his appeal Beal argues his Chinese debt deal wasn't a DAD shelter at all, but a legitimate, profit-motivated investment, and that the outsized tax benefits should be allowed. (The appeals briefs are available at TaxProf Blog, here.)

The Southgate case is being closely watched by tax lawyers, since it is the first decided involving an alleged DAD shelter. As Forbes reported in 2008, the little-known shelter was used by at least one other billionaire: Broadcom cofounder Henry T. Nicholas III. The district court has yet to rule in Nicholas' case.