WASHINGTON ― United States prosecutors said on Tuesday they had won three major cases against American clients of questionable tax shelters including ones used by a Dallas billionaire and Wells Fargo Co. and others designed by Citibank and accounting firm KPMG LLP.
The separate cases, the verdicts of which were rendered last Friday, represent a significant victory for the U.S. Justice Department, which was sued by each of the three clients when the Internal Revenue Service denied as improper their claimed deductions that totaled hundreds of millions of dollars.
The rulings also underscore how the two agencies, in the midst of a crackdown on offshore tax evasion by wealthy Americans at Swiss banks, are continuing to pursue corporate tax shelters used by large American companies.
In the first case, the Fifth Circuit appeals court in New Orleans upheld a lower court ruling that D. Andrew Beal, a Dallas billionaire banker, improperly used a sham shelter to deduct $200 million in federal income taxes stemming from more than $1 billion on sham losses.
A Justice Department statement said the shelter involved Beal acquiring “a portfolio of non-performing Chinese debt for less than $20 million, disposing of the portfolio and generating more than $1 billion in artificial paper losses approximately equivalent to the debt’s face value.”
Beal is the founder of Beal Bank, a small bank headquartered in Dallas and is No. 39 on the Forbes 400 list of wealthiest Americans with a $7 billion personal fortune.
In the second case, a federal judge in Iowa ruled that Principal Life Insurance Co., part of Principal Financial Group in Iowa, a large investment company, could not claim $21 million in foreign tax credits stemming from a $300 million transaction with Bred Banque Populaire and Natexis Banque Populaire, two French banks, from 2000 through 2005.
The judge found that the transaction lacked both economic substance and a business purpose — two key features of questionable tax shelters — and was a loan rather than an investment. The transaction, the judge ruled, was designed solely to generate foreign tax credits and thus violated anti-abuse regulations at the Treasury Department.