Three Federal Court Rulings on Abusive Tax Shelters Issued in One Day

Three federal courts have issued decisions in favor of the United States in three separate cases involving abusive tax shelters, according to the Justice Department.  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.

Also See:

IRS Reminds Tax Preparers Need to File Due Diligence Checklist with All Earned Income Tax Credit Claims

IRS Provides Penalty Relief to Farmers Affected by MF Global Bankruptcy

IRS Issues Guidelines to Parents and Students on College Tax Benefits

Treasury, IRS Issue Proposed Regulations for FATCA Implementation

IRS Issues Guidance to Encourage Small Employers to Check Out Small Business Health Care Tax Credit