Tax Case Challenges IRS's Retroactive Application of Tax Rulings

[David Farber <dave () farber net>]

Begin forwarded message:

From: Jim Zellmer <zellmer () virtualproperties com>
Date: June 11, 2005 11:58:37 AM EDT
To: David Farber <dave () farber net>
Subject: For IP, if You Wish: Tax Case Challenges IRS's Retroactive  
Application of Tax Rulings


Hi Dave:


This case, filed last fall has received almost no coverage, until  
today.  The NY Times' Browning focuses on the personalities, rather  
than the IRS's unconstitutional attempt to retroactively apply  
current tax rulings to prior years transactions.

I hope we hear much more about this.

Disclosure, one of Presidio's principals is a good friend of mine.

I also note the very large business tax breaks passed by congress  
earlier this year (and backed by Wisconsin's populist Senators  
Feingold & Kohl) and the implications of that on the growing pile of  
spaghetti that is our tax code. As always, the rich can hire people  
to find opportunities and benefits but the little guy takes it in the  
shorts.

http://www.zmetro.com/archives/002432.php

Best wishes!

Jim

http://www.nytimes.com/2005/06/11/business/11shelter.html? 
ex=1276142400&en=86925803816f8247&ei=5090&partner=rssuserland&emc=rss


Court Case Gives Rare Look at Tax Shelter Clients

By LYNNLEY BROWNING
Promoters of tax shelters zealously guard the names of their wealthy  
clients. But in mounting an unusual court challenge against an  
Internal Revenue Service ruling that branded a certain tax shelter  
abusive and illegal, a promoter of the shelter has had to provide a  
rare glimpse of the investors who bought into it.

The list of those investors, disclosed in filings in federal court in  
San Francisco, reads like a who's who of rich Americans, including  
Edward S. Lampert, the hedge fund billionaire and chairman of Sears  
Holdings; Paul and Maurice Marciano, the founders and co-chairmen of  
the Guess clothing company; Gary C. Wendt, the former General  
Electric and Conseco executive; and Bill Simon Jr., who ran for  
governor of California in 2002.

The investors are clients of Presidio, a firm that sold the tax  
shelters to allow investors to shield billions of dollars in income  
and that has gone to court to defend those shelters. Presidio, which  
worked with the accounting firm KPMG and which maintains that the tax  
shelter is legal, is seeking to force the I.R.S. to disclose the  
internal deliberations and legal reasoning behind its decision to ban  
the tax shelter.

The I.R.S. is normally prohibited from identifying individual  
taxpayers, unless it sues them in federal court. But the judge in  
this case, Vaughn R. Walker, required Presidio to identify those who  
bought tax shelters from it.

Yesterday, Judge Walker denied Presidio's motion to depose I.R.S.  
officials, saying the request was not properly written, but he said  
the firm could refile its request, which it said it intended to do.

The I.R.S. and the Justice Department oppose Presidio's efforts,  
fearing that disclosure could provide ammunition to tax shelter  
promoters, as well as jeopardize major criminal investigations into  
the promoters, including KPMG.

The case will be watched closely because it could affect the campaign  
the I.R.S. has been waging against what it calls abusive tax  
shelters. The I.R.S. has successfully forced law firms and others to  
disclose to it - though not publicly - the names of the wealthy  
investors who bought a variety of abusive shelters. The aggressive  
moves by the I.R.S. have enabled it to collect billions of dollars in  
back taxes and penalties from those who used them.

According to calculations from other numbers in the court documents,  
Presidio arranged 69 partnerships for its wealthy clients, which  
shielded income totaling as much as $2.4 billion from taxes.

The tax shelter in question is known informally as Son of Boss, or  
sales option bond strategy. It uses complex partnership structures to  
produce artificial losses to offset capital gains.

The Justice Department, in court filings, calls these tax shelters "a  
sham." The I.R.S., which has never considered the shelter valid for  
deductions, declared it illegal in September 2000. The agency said  
yesterday that more than 1,200 investors in the shelters had come  
forward under an unusual settlement offer and paid more than $3.7  
billion in back taxes, interest and penalties.

Presidio, a financial services and advisory firm based mainly in San  
Francisco and Houston, has been under scrutiny in the government's  
clampdown on abusive shelters. It is being investigated by a federal  
grand jury in Manhattan, which is also looking at the possible role  
of KPMG in tax shelter abuses.

Both KPMG and the law firm now known as Sidley Austin Brown & Wood  
provided legal opinions to investors blessing the tax shelters.

Presidio has said that it is cooperating with other government  
investigations of its tax shelter work. It is a defendant, along with  
KPMG and several prominent law firms, in at least a dozen civil  
lawsuits filed by disgruntled tax shelter investors.

None of those challenges have stopped Presidio from testing how the  
tax code's ambiguities and complexity stand up in a federal court.

It filed more than a dozen lawsuits against the I.R.S. in October and  
in March after the agency told it that its role in 1999 in creating,  
setting up and selling these shelters to dozens of investors had put  
it afoul of the tax code.

Steven Bauer, a lawyer for Presidio, said Thursday, "We're asking a  
court of law to rule whether the tax results were appropriate under  
the law as it existed at the time. "

He asserted that the shelters sold by Presidio were different from  
the Son of Boss shelters, in that the Presidio shelter, known as  
blips, "has economic substance" regarding the foreign currency bets  
that the firm made through Deutsche Bank and that produced losses for  
investors. The I.R.S., however, considers the two types of tax  
shelters essentially the same.

The I.R.S. declined yesterday to comment on specific litigation, but  
said that an additional 700 investors in Son of Boss shelters chose  
not to settle with the agency. The I.R.S. said that the 1,200 who  
settled and the 700 who did not represented all known investors in  
Son of Boss shelters.

Barbara M. Flom, a tax lawyer with the firm of Goldberg, Kohn, Bell,  
Black, Rosenbloom & Moritz in Chicago, called Presidio's lawsuit "an  
unprecedented attack." She said she thought it was unlikely to  
succeed in court.

Through the Justice Department, the I.R.S. demanded that Presidio pay  
more than $2.3 million in taxes it owed on its minuscule stakes in  
partnerships set up to help clients avoid taxes. Presidio paid a  
fraction of that, then sued the I.R.S., asserting that the shelters  
were in fact valid for tax deductions.

Other big-name investors who bought the tax shelters through Presidio  
include Lodwrick Cook, a founder of Global Crossing; Joseph P.  
Nacchio, the former chief executive of Qwest Communications  
International; David Saperstein of Los Angeles, a prominent investor  
in the Westwood One radio network; and J. Paul Reddam, the founder of  
Ditech, a mortgage lender with billboards up and down the East Coast.

Presidio originally listed Philip F. Anschutz, the founder of Qwest  
Communications, as an investor in the shelter, but yesterday filed a  
legal document saying that he was not an investor.

None of the individual investors are plaintiffs in the Presidio  
complaints. Two Presidio units, Presidio Growth and Presidio  
Resources, as well as the investment entities set up by Presidio for  
each investor, are suing the government. Some of the investors may  
not even know that Presidio has disclosed their names.

Still, at least 50 of the investors named in the Presidio list  
participated in the I.R.S.'s settlement program, according to court  
papers, although the papers do not detail who did so and who instead  
chose to test the government's resolve.

The I.R.S. in part defines an abusive tax shelter as any transaction  
whose "significant purpose" is avoidance of federal income tax. While  
it has intensified efforts to root out promoters of questionable tax  
shelters and aggressively go after the investors in them, it has also  
suffered some legal defeats in corporate tax shelter cases, like  
those against Black & Decker and General Electric. The highly complex  
world of tax shelters is full of arcane economic and legal reasoning  
that is difficult to analyze.

Most of the investors named in the Presidio case did not return calls  
for comment. Mr. Reddam and Mr. Nacchio could not be located for  
comment.

Mr. Simon, asked about the case, replied, "Honestly, I don't know  
what you're talking about."


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