Activities on the side

Some tax shelter-related litigation in which I was an expert witness on behalf of the government has just apparently settled.  You can see an article discussing the case here.

In the words of the article, the case concerns “Texas billionaire banker Andrew Beal …. [and] relate[s] to Beal’s use of an abusive tax shelter the IRS calls Distressed Asset Debt, or DAD, to manufacture billions of bogus tax losses from junk Chinese debt…..

“In a DAD shelter, a U.S. taxpayer forms a partnership with a foreign owner of non-performing loans and then claims huge tax losses from the partnership—losses the foreign lenders, but not the U.S. taxpayer,  sustained.  The DAD technique spread among the wealthy in 2001, 2002 and 2003 after the Internal Revenue Service began a crack-down on better known abusive tax shelters, such as Son of Boss ….

“In 2004, after the IRS got wind of DAD, Congress changed the tax code to explicitly bar partnerships from being used to transfer foreign losses to U.S. taxpayers. Meanwhile, the IRS began auditing existing DAD partnerships, disallowing all their losses as shams and slapping on penalties…..

“Beal had created four separate DAD partnerships in 2002 and 2003 to hold non-performing loans made by the Chinese government, with the aim, the government says, of stockpiling $4 billion in artificial losses to shelter income.  (Even for Beal, whose net worth is an estimated $11.3 billion, $4 billion can offset income from more than a few years.)….

“[In an earlier case, the district court and Fifth Circuit]  nixed Beal’s attempt to claim $1.1 billion in tax losses from an investment of just $19 million in distressed Chinese debt, finding ... that the partnership was a sham that should be disregarded for tax purposes.  But the [courts] also ruled that Beal’s acquisition of junk Chinese debt had 'economic substance' because—and this sounds bizarre if you’re not a tax geek—he had a reasonable chance of making a real profit, even as he angled to claim big losses.  As a result …. both the district court judge and the appeals panel held Beal wasn’t liable for any penalties because he had opinions from both a  law and an accounting firm concluding that it was more likely than not that the partnership ploy would withstand IRS scrutiny. The appeals court called it a ‘close issue’ ….”

The issue this time around was simply whether Beal should face penalties for subsequent years’ disallowed deductions from DAD transactions.  Returning to the Forbes article:

"The government … has maintained that the circumstances of Beal’s three other DAD partnerships and in later tax years might be different—and more penalty worthy.

“Each side had already paid a big name tax professor to deliver an expert opinion on whether Beal could rely on those ‘more likely than not’ law and tax firm opinions to escape penalties.  New York University Law Professor Daniel N. Shaviro wrote for the government that the opinions in 2003 and beyond were weaker because they were based on 'factual premises that had been rapidly losing credibility.'  Specifically, they assumed that since Beal had made profits in distressed U.S. assets, he could reasonably expect to make money in the Chinese debt— which wasn’t turning out to be the case.  University of Chicago Law School Professor David A. Weisbach, whose expert opinion helped Beal escape penalties in the Southgate decision, weighed in again for his side.”

Anyway, this case has now been settled and there won't be a trial.