Tax shelter labyrinth
Nacchio among clients caught up in challenge to IRS
By Lynnley Browning, New York Times
Reprinted in the Rocky Mountain News
Tuesday, June 14, 2005
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 been forced to provide a rare glimpse of the investors who bought into it.
The list, disclosed in filings in federal court in San Francisco, reads like a Who's Who of rich Americans, including former Qwest Chief Executive Joe Nacchio; Edward Lampert, the hedge-fund billionaire and chairman of Sears Holdings; Paul and Maurice Marciano, the founders and co-chairmen of the Guess? clothing company; and Gary Wendt, the former General Electric and Conseco executive.
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 is now mounting an unusual legal challenge to the government. Presidio, which worked with the accounting firm KPMG and which maintains that the tax shelter is legal, is seeking to force the IRS to disclose the internal deliberations and legal reasoning behind its decision to ban the tax shelter.
A Nacchio spokeswoman didn't immediately respond to requests for comment Monday.
Presidio had originally listed Qwest founder Philip Anschutz as an investor in the shelter as well but on Friday filed a legal document saying he was not an investor.
Anschutz spokesman Jim Monaghan said Monday that an Anschutz portfolio manager was pitched the tax shelter. But after examining the shelter, Monaghan said, the portfolio manager was uncomfortable with it and withdrew from the deal.
Qwest, the company, also has been in hot water for buying an apparently different tax shelter scheme from KPMG in 2000. It was unclear Monday if Presidio also had sold that strategy.
The Denver telco said in a recent regulatory filing that the IRS has proposed a $37 million penalty against Qwest for using the tax strategy. Qwest said it plans to "vigorously" fight the penalty on the grounds it acted in good faith, basing its decision on two tax opinions, and that it adequately disclosed the transaction to the IRS from the beginning.
The IRS is normally prohibited from identifying individual taxpayers, unless it sues them in federal court. But Presidio was required by the judge in the case, Vaughn Walker, to identify who bought tax shelters from it. Walker denied Presidio's motion to depose IRS officials on Friday, saying the request was not properly written, but he said that the firm could re-file its request, which it intends to do.
The IRS and 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 IRS has been waging against what it calls abusive tax shelters. The IRS 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 IRS have enabled it to collect billions of dollars in back taxes and penalties from those who used them.
According to calculations from other numbers provided 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 IRS, which has never considered the shelter valid for deductions, declared it illegal in September 2000. The agency said Friday that more than 1,200 investors in the shelter had came 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 clamp down 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.
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 in recent years by disgruntled tax-shelter investors.
None of those challenges has stopped Presidio from moving to test how the tax code's grayness and complexity will stand up in a federal court.
It has filed more than a dozen lawsuits against the IRS 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 that "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 argued 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 IRS, however, considers the two types of tax shelters essentially the same.
The IRS declined Friday to comment on specific litigation but said an additional 700 investors in Son of Boss shelters chose not to come forward and settle with the agency.
Barbara Flom, a tax lawyer with the firm of Goldberg Kohn 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 IRS had 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 IRS asserting that the Son of Boss shelters were in fact valid for tax deductions.
News staff writer Jeff Smith contributed to this report