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U.S. Wins Tax Shelter Cases Against Wells Fargo, Principal,Beal

SUMMARY: (full article below)

In Southgate Master Fund LLC v. United States, the U.S. Court of Appeals for th

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)

portfolio of non-performing Chinese debt for less than $20 million, disposinof 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 monetapenalties that the Internal Revenue Service (IRS) had sought to impose,while noting that the penalty issue was “a close one.”

U.S. Wins Tax Shelter Cases Against Wells Fargo, Principal,Beal

By Greg Chang - Oct 4, 2011 8:51 AM PT

The U.S. won three tax shelter cases in opinions issued last week, the Justice Department said in an e-mailed

statement. The cases involved claims relating to Principal Life Insurance Co., Wells Fargo & Co. (WFC), and a

company formed in part by billionaire D. Andrew Beal, according to the statement. To contact the editor

responsible for this story: Greg Chang at [email protected]

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

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http://topics.bloomberg.com/justice-department/

http://www.bloomberg.com/quote/WFC:US


mailto:[email protected]

http://topics.bloomberg.com/justice-department/


mailto:[email protected]



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.

FOR IMMEDIATE RELEASE TUESDAY, OCT. 4, 2011WWW.USDOJ.GOVTAX(202) 514-2007TDD (202) 514-1888

JUSTICE DEPARTMENT PREVAILS IN THREE TAX SHELTER CASESON SAME DAY

Federal Courts Deny Hundreds of Millions in Tax Breaks to Billionaire Dallas Banker,Principal Life Insurance C

and Wells Fargo & Co.

WASHINGTON – Three federal courts have issued decisions in favor of the United States in three separate cas

involving abusive tax shelters, the Justice Department announced today. All of the court opinions were issue

on Sept. 30, 2011.

In Southgate Master Fund LLC v. United States, the U.S. Court of Appeals for the Fifth Circuit, based in Ne

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 allocat

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-performi

Chinese debt for less than $20 million, disposing of the portfolio and generating more than $1 billion in artific

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, wh

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 Iow

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

equity investment, lacked economic substance, lacked a business purpose beyond using foreign tax credits a

violated a Treasury Department “anti-abuse” regulation. Throughout its detailed opinion, the court emphasi

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

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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

related sale of stock to Lehman Brothers, Inc. The court concluded that the transaction was actually a sham

shelter that Wells Fargo had purchased from accounting firm KPMG LLP for $3 million and that it had no busin

purpose other than tax avoidance.

“These three significant decisions are further evidence that the courts will not countenance abusive tax shelt

no matter who designs them or how complicated they are,” said John A. DiCicco, Principal Deputy Assistant

Attorney General of the Justice Department’s Tax Division. “Large corporations and wealthy individuals shou

think twice before pouring money into these sham arrangements.”

Principal Deputy Assistant Attorney General DiCicco thanked all of the Tax Division and IRS attorneys and

investigators involved in these cases for their efforts.

More information about the Tax Division’s enforcement efforts can be found on the Division’s website.Related

Documents: Pritired vs.United States, Southgate Master Fund vs. United States, WFC Holdings Corp. vs. Un

StatesJPritired OpinionSouthgate OpinionWFC Holdings Opinion(PDF documents)Portable Document Format (P

files may be viewed with a free copy of Adobe Acrobat ReaderAccessibility Information

My advice if you go work at KPMG is don’t sell corporate tax shelters or engage in structuring special purp

vehicles to hide billions of banking losses. If you do, KPMG may turn on you to save itself and destroy yours

your family’s lives. KPMG is very good at this and retains firms like Skadden Arps to make false statements o

KPMG’s behalf so bad that you will end up in prison to suffer daily beatings and worse. Take a look at a

smattering of the corporate tax shelters KPMG was selling its best clients like BRK while at the same time

negotiating a deal with the DOJ to help it indict KPMG partners and managers who worked on individual

transactions. Bob Bennett was more than happy to cut such a deal with the DOJ on behalf of KPMG (KPMG ma

false statements to the DOJ about its very own Partners and Managers) apparently in exchange for allowing

KPMG to continue its massive corporate tax shelter business and government audits generating hundreds of

millions in fees for KPMG. Goodness gracious, Bob Bennett of Skadden Arps was willing to make statements t

the DOJ about KPMG Partners and Managers so the DOJ could indict the Partners and Managers working on

individual transactions (but not any of the massive corporate tax shelters KPMG was purveying) not withstan

an email from KPMG’s Chief Counsel Joseph Loonan to Bennett informing Bennett that the information and

statements he was making to the DOJ were absolutely false. Oh well, at least Buffet and BRK made out, BRK

over $1 Billion accrued on its balance sheet for tax shelters, penalties and interest, yet Warren thinks we all

should pay more, what a fraudster he is, just ask AIG. SMATTERING OF KPMG CORPORATE TAX SHELTERS

(FRAUD) a. “Tier 1 Capital”, which allows banks to obtain deductions when raising capital using offshore tax

haven Financial Asset Securitization Investment Trusts (“FASIT”);b. “TITUS”, which allows banks to create

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fraudulent income through the decrease of book tax rate; c. “German KG Financing Structure”, which allows

corporations to avoid taxes in the U.S. and Germany; d. “Verdi I”, which is the use of offshore tax haven FASI

to avoid taxes; e. “Default Captive Insurance”, which creates phantom tax deductions for banks on their cred

card receivables through the use of offshore tax haven subsidiaries”; f. “21% LIFECO Solution”, which is the u

of reinsurance contracts by banks to create phantom tax deductions; g. “Price”, which is the use of offshore t

haven insurance companies by executives to avoid taxes on corporate compensation; h. “RIPSS2”, which is t

use of foreign party and debt securitization to avoid taxes; i. “CARTELS”, which is an international 304 non-

economic loss generating transaction;j. “Repatriation of Foreign Parents Profits”, which avoids U.S. taxes on

distributions through triangular B Reorgs; k. “Securities Lending Transaction”, which allows banks to avoid U.

taxes by creating phantom FSI; l. “Partnership Buy in Strategy”, which allows U.S. corporations to avoid taxes

transfers of property to foreign tax havens; m. “LUX CO”, which utilizes a branch in the U.S. of a Luxembourg

haven company to avoid taxes in the U.S.; n. “Interest Allocation Coop”, which allows corporations to avoid

taxes in 2 the U.S. and other countries; o. “Spared Sparing”, which provides for the avoidance of withholding

taxes; p. “Original Issue Discount Strategy”, which allows for taking the same interest deduction twice; q.

“956/1032 Zero Basis Solution”, which avoids U.S. taxes on the repatriation of untaxed foreign profits; r. “Cha

Knights”, which is the use of a Luxembourg tax haven to avoid us Taxes; s. “Chase Squires”, which is the use

a Luxembourg finance subsidiary to avoid us taxes;t. “RBS”, which is the use of repossessions by banks to av

taxes; u. “Caesar”, which allows banks to fraudulently raise regulatory capital and investors to avoid taxation

intentionally structuring transaction to lack earnings and profits;v. “Global Currency Management Program”,

which allows banks to invest in sophisticated foreign currency positions which generate substantial non-

economic tax losses;w. “SOCS”, which is an artificial loss generator for banks;x. “Contingent Liability Trusts”,

which create artificial phantom losses for corporations; y. “Foreign Tax Haven Captive Insurance Companies”

which create artificial phantom losses for corporations; z. “Tempest”, which creates artificial phantom losses

banks; aa. “Contingent Liability Corporations”, which create artificial phantom losses for corporations; bb. “R

Strategy”, which eliminates income for banks; cc. “Compensation Partnerships”, which shifts income from

corporation to employees to avoid taxes;dd. “Guaranteed Payments”, which is the use of guaranteed payme

to avoid taxes;ee. “BIG”, which allows corporations to sell assets and avoid taxes;ff. “Hamlet”, which is the

fraudulent use of banking rules to avoid taxes Resulting from interest expense allocable to tax exempt

securities; gg. “Loss Planning”, which involves using IRC § 704d to avoid taxes; hh. “Debt Buy Back with Quas

Related Party”, which allows for the avoidance of taxes by a corporation on the buy back of discounted debt;

“AARTS”, which is the use of inter-company tax rules to avoid taxes on the transfer of assets; jj. “Nine Lives”

which is the use of options to avoid gain provisions of 355;kk. “RAPS”, which is the use of accounting periods

and REITS to avoid taxes;ll. “CAPPS”, which allows taxpayers to avoid tax by converting ordinary income into

capital under 306;mm. “B-Flip”, which is the use of foreign companies to generate non-economic tax losses;n

“351 Leaseback”, which is a strategy to avoid taxes on contribution to corporations;oo. “SZCBS”, which uses

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synthetic debt to avoid taxes; pp. “Stock Option Swap”, which is a securities transaction using options to not

only avoid taxes, but to avoid Securities and Exchange Commission Rules related to insider trading; qq. “Proj

Zodiac”, which allows for capital raising and creation of phantom losses to avoid taxes all at the same time; r

“Oilco”, which allows oil companies to raise capital and avoid taxes through the manipulation of basis rules o

depleted properties;ss. “Debt Repurchase Program”, which allows corporations to avoid taxes on 2 buy back

discounted debt;tt. “PARTS”, which allows for the issuance of debt and avoidance of taxes;uu. “FAS 140”, wh

allows banks to avoid taxes through the manipulation of accounting rules; vv. “Common Trust Fund Strategy

which avoids taxes through the manipulation of common trust fund tax rules;ww. “MACES”, which allows

individuals to avoid taxes on ordinary income property; xx. “CODA”, which avoids the recognition of income o

debt buy backs; yy. “FADS”, which creates artificial tax deductions through the use of swaps;zz. “Express”,

which is the use of foreign parties to avoid taxes through the securitization of receivables; aaa. “Stars”, whic

the use of a U.K. company to avoid taxes in the U.K. and U.S.; bbb. “Short Lease”, which avoids depreciation

rules; ccc. “Slots”, which creates tax deductions with leases that are otherwise unavailable; ddd. “Employee

Benefit Captive Insurance Company”, which creates otherwise unavailable tax deductions for

potential employee costs through the use of off shore tax haven companies; and eee. “PINSCO”,

which is the use of offshore tax haven insurance companies to avoid tax on the sale of assets.

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