A district court in the Ninth Circuit has followed several of its peers in finding that a Son of BOSS tax shelter lacks economic substance. A forty-percent penalty was imposed under section 6662 for a gross valuation misstatement. See Download Maguire Partners.DCt CA.020409, No. CV 06-0774-JFW (RZx).
The shelter was undertaken by two real estate investors, Edward Fox and James Thomas, who were partners in trusts and partnerships with highly leveraged interests in properties in California, Texas and Pennsylvania, including the Wells Fargo Center in Los Angeles. In 2001, certain entities entered into BOSS transactions designed by Arthur Andersen involving a sale of a short option, purchase of a long option, purchase of a promissory note from AIG, and a pledge of the proceeds of the long option and promissory note to secure the short option. (Isn't it interesting, in light of the US taxpayer bailout of AIG in 2008, that AIG was a counterparty in the transactions?) The taxpayers claimed that the transactions were entered into as legitimate hedges against potential losses. In each transaction, the long option and promissory note was contributed to a partnership, and the partnership assumed the short option (all with the approval of AIG). The partnership did not take account of the short option in its Form 1065 or the partners' K-1s.
As a result, the partners were treated as having higher capital contributions (and higher outside bases). By engaging in these transactions, "a taxpayer would be able to create a basis in an amount substantially greater than the amount of money actually paid for the call-option spread by taking the position that the transaction created a 'contingent' liability for purposes of I.R.C. section 752. " Maquire Partners, slip opinion at 14. This was just "one of many tax-avoidance techniques marketed by Arthur Andersen." Id. "The partnership contributions were always viewed by [the participants] as integral to the entire transaction." Id. at 17.
The court determined that the transaction did not have economic substance, asking "whether the transaction had any practical economic effect other than the creation of tax benefits" and examining both objective substance and subjective motivation, not as "discrete prongs" but as ways of determining whether the transaction was a sham. Id. at 18. A de minimis economic effect is not sufficient to lend the transaction economic substance. Id. at 19. Subjective motivation may be revealed by whether a taxpayer acts like a "prudent economic actor" or "contrary to rational business interests." Id. at 20. The court also noted that a taxpayer's sophistication was relevant to the taxpayer's tax avoidance motivation--one of the taxpayers, Thomas, was a former IRS trial attorney. Furthermore, one of the people who was integral to selling the options transaction to the taxpayers, Mandel, was a tax expert rather than an options expert, and "there was no credible evidence that the transactions performed as a hedge." Id. at 24.
The battle of the experts in the case was easily lost by the taxpayers. Experts showed that the taxpayers "paid approximately 2700 and 2600 times the value of the transactions they purchased." Id. at 24.
The court found that "the transactions at issue do not have economic substance because Thomas and Fox received no economic benefit, other than the increase in basis, from the transactions. In addition, the Court finds that the evidence demonstrates that Thomas and Fox were motivated by this increased basis and not by any purported 'hedging' benefit." Id at 21. Ultimately, the transactions were shams because"tax benefits shaped the structure of the investment in order to achieve the goal of tax avoidance." Id. at 28.
2 comments:
Thoreau said...
KPMG KPMG KPMG. If I were a KPMGer, I would be worried about this blog post and the pending investigations you know are coming. KPMG is partially responsible for the desecration of the financial system or worse, KPMG helping turn the U.S. into the next Japan. The U.S. would be lucky to be a Japan 2, though it seems highly unlikely the U.S. can even achieve such wonderful economic success that has seen the Nikkei decline from over 30,000 to 7,000.
The U.S. unlike Japan is a 70% debt financed consumption based economy unlike Japan which is a savings and production based economy. It took Japan 20 years to arguably rid all its banks fraudulent financials of there bad debts. Everyone knows the financials of the banks are fraudulent but no one seems to care, why? The answer can only be the accounting firms are well connected to the global social fascist cabal.
How will the recessions ever end as long as the financial statements remain fraudulent? The balance sheets and business models are crap and everyone knows, why continue the charade? All the accounting firms are paid by their corporate masters to issue fraudulent financial statements, there can be no doubt all the banks like Citi are bankrupt yet KPMG keeps signing off on its fraudulent financials, why?
Why does anyone believe any of the fraudulent financial statements? Why does anyone listen to anything KPMG or other auditors have to say? Most of the banks are bankrupt yet the financials keep rolling out, no problem. As an angry Citi investor, I have tried to piece together how I lost most of my money.
KPMG audits many of the financials with all their SIV creations which are used to off load bad loans so the losses don’t have to be recognized on the financials in an Enronesque fashion like KPMG’s client Citi (which is bankrupt).
Of course KPMG’s never ending quest for fees does not stop with fraudulent financials, it also purveyed what Mike Hamersley would describe as fraudulent corporate tax shelters (not withstanding Hamersley’s willing participation in many of them) used by most of KPMG’s big banks including Citi, like the REIT transaction which eliminated tax on real estate loans; back to back loans or rate swaps creating interest deductions; financing arrangements generating noneconomic foreign tax credits; the list goes on forever. All KPMG’s big banks used the strategies to eliminate taxes and create what Hamersley would describe as fraudulent book income (except of course for Hamersley’s own tax shelters).
Tim Flynn is a banking guy and was brought in to purportedly clean up KPMG in 05. Yet Flynn prior to his appointment as KPMG CEO was a high level KPMG audit partner before taking over for O’Kelley and had most of his clients involved in all the fraudulent accounting and questionable tax shelters (which according to Hamersley were fraudulent).
There can be no doubt about the fraud as beginning as early as 2003 many were predicting the implosion that would result from the unsustainable lending patterns of KPMG’s banking clients. In fact, most of KPMG’s banks are bankrupt, what to do?
Flynn decided to throw a bunch of tax partners having nothing to do with all KPMG’s bankrupt banks under the bus for individual shelters which were miniscule in relation to all KPMG’s failed fraudulent audits.
Flynn hired Bennett and Holmes to do his dirty work and assist with the DOJ. Flynn had Bennett and Holmes lie to the DOJ according to an email wherein Joe Loonan KPMG’s head lawyer stated that he did not know if any of the allegations were true (“freedom is just another word for nothing left to lose”). Then to seal the deal Flynn denied legal fees to the tax partners he threw under the bus to the DOJ, even Ernst and Young paid its partners legal fees. Why would Flynn do this after O’Kelley had promised to pay the legal fees?
One can only infer to hide the greater tragedy at KPMG, all of the failed fraudulent audits (not to mention after Flynn cut his deal, KPMG was awarded the audit of the DOJ). If I were a KPMGer, I would not only be extremely concerned about all the civil litigation that is coming for the fraudulent audits but the potential criminal actions that must be coming once the books are scoured (which you know they will be in the civil litigation plus the fraud is relatively easy to discern) because KPMGer’s must know by now the first thing Flynn will do is throw you under the bus and cut off legal fees.
As a decimated Citi investor I am looking for any KPMGer to come forward and tell the truth.
Angry Citi shareholder
11:48 AM
mike scamersley said...
If you like Geithner and scams, you would love Mike Hamersely, just another financial scam miscreant working for the Government. In fact, Hamersley’s misdeeds are so brazen and he has gotten away with it for so long I heard he should change his name to Mike Scamersley. Mike Scamersley (a public figure who has appeared on Frontline perpetuating his lies) who like Geithner is a tax fraudster in a high level government tax administration position. Scamersley works as a high level tax shelter lawyer for the state of California which is bankrupt, illegally issuing its own currency and confiscating income from citizens. This should come as no surprise since the FTB has working for them one of the biggest tax fraudsters of all, Mike Scamersley, helping to confiscate more income from taxpayers who have honestly filed their own tax returns unlike the thief, Scamersley. On May 24, 2000 at 3:33pmpst Mike Hamersley working at KPMG at the time sent an email to a KPMG senior manager, advising her that their KPMG client had substantial authority to take a sham paper loss if the client sold stock of a subsidiary to the client's lawyer for one dollar. This was outright tax fraud. Further, on June 12, 2000 at 10:18ampst, the same KPMG senior manager sent an email to Mike Hamersly containing copies of the documents effecting Hamersley's fraudulent plan back to 1999 for his review, a classic case of backdating a fraudulent transaction. Also, February 9, 2003, at 1:18 pm one of KPMG’s top executives sent one of KPMG’s top lawyers an email stating that Mike Hamersley had disseminated confidential information to his wife, who worked at Latham and Watkins in clear violation of Section 7216, a criminal statute. In the recent KPMG case, it was also confirmed that Hamersley violated Sections 7216 and 7212 by illegally disclosing confidential information to various parties. Ask Scamersley for all his emails which he illegally late at night obtained in violation of KPMG protocol and stole many for his own personal gain when he sued KPMG (or ask KPMG for the emails, they all still exist). As an aside, Scamersley's fraudulent activities did not stop there, when he obtained his KPMG settlement based on all his lies and theft, Scamersley failed to report the settlement as income under a twisted analysis of Section 104 (or at a minimum conspired to do so as he discussed doing so with several witnesses). How can the FTB employ Scamersley in their tax shelter division when he did not even bother with legal tax shelters but rather engaged in outright fraud and likely continues this sham life of being a crusader? Much more evidence against Hamersley exists related to his fraudulent activities like when he returned his KPMG computer to KPMG, emails state that it was wiped clean with a sophisticated software program, under DOJ standards that makes Scamersley a criminal.
11:53 AM
Posted by: whistlewhat | February 07, 2009 at 09:37 AM
Thanks for the post on this important decision. It's always nice to hear about judges who bring an appropriate measure of logic to tax cases.
Posted by: Jake | February 09, 2009 at 05:29 PM