Home Wealth  Money Billionaire Banker Beal Wins Timing Victory On Tax Shelter

Billionaire Banker Beal Wins Timing Victory On Tax Shelter

Posted: Aug. 4th, 2010  |  By Forbes

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D. Andrew Beal

A federal magistrate judge ruled this week that billionaire Texas banker D. Andrew Beal used a sham "Son of Boss" tax shelter to create $153.6 million in phony tax losses for 2001 and another $46.5 million for 2002. But in a 42-page decision issued Monday, Eastern District of Texas Magistrate Judge Don D. Bush agreed with Beal's lawyers that the Internal Revenue Service had blown the deadline for disallowing the larger 2001 losses. According to Bush's decision (in Bemont Investments) Beal used the shelter to cut his 2001 income 95% to just $8.6 million.

M. Todd Welty, Beal's lead tax lawyer, said in an e-mail Wednesday afternoon, "We are surprised and disappointed in the ruling. We have no further comment at this time." A Department of Justice spokesman said the government was reviewing the decision and had no comment at this time.

The Bemont case and another one, involving Southgate Master Fund, now before the Fifth Circuit Court of Appeals, show just how aggressively Beal, known for high-stakes poker games, has played his tax hand. Last year, in the Southgate matter, a district court judge shot down Beal's attempt to claim $1 billion in tax losses on his 2002 through 2004 tax returns based on an investment of just $19 million in distressed Chinese debt. Both Beal and the government have appealed that decision, with the government objecting to the judge's refusal to impose tax penalties in the case.

In its Southgate appeals brief, the government says that Beal used what it calls the distressed asset/debt or "DAD" shelter multiple times to "stockpile over $4 billion in artificial losses to shelter future income." In his appeal Beal argues his Chinese debt deal wasn't a DAD shelter at all, but a legitimate, profit-motivated investment, and that the outsized tax benefits should be allowed. (The appeals briefs are available at TaxProf Blog, here.)

The Southgate case is being closely watched by tax lawyers, since it is the first decided involving an alleged DAD shelter. As Forbes reported in 2008, the little-known shelter was used by at least one other billionaire: Broadcom (nasdaq: BRCM - news - people ) cofounder Henry T. Nicholas III. The district court has yet to rule in Nicholas' case.

In the Bemont case, Beal's attorneys argued that the transaction, which involved foreign currency swaps, also had a legitimate business purpose and wasn't an example of a Son of Boss shelter--a ploy that consistently has been disallowed by the courts. The IRS has collected billions in back taxes, interest and penalties from wealthy users of Son of Boss, which manipulated technical tax rules to create an inflated basis in a partnership, leading to artificial tax losses.

According to the decision, Deutsche Bank (nyse: DB - news - people ) included Bemont on a list it gave to the IRS of foreign currency swaps it was involved in that could be considered Son of Boss shelters. Ironically that notice to the IRS helped Beal make his case that the IRS waited too long to challenge the shelter. Here's why: Bemont's 2001 return was filed in October 2002, which would normally give the IRS until October 2005 to challenge it. The IRS didn't disallow the losses until October 2006. A 2004 law gave the IRS extra audit time in cases where a shelter hadn't been disclosed to the IRS by either a taxpayer or a promoter. But Bush ruled Deutsche's inclusion of Bemont on its shelter list was adequate notice to the IRS.

Bush's decision notes that Beal used shelters before 2001 as well. During discovery in the case, Beal's lawyers filed papers saying they were convinced a tax informant had alerted the IRS to Beal's shelters. In his opinion Bush criticized the government for ignoring his orders to answer questions directly about the existence of an informant. But, he said, he was satisfied that that "there was no whistleblower" and that Beal's name came to the IRS' attention in its investigation of "another unrelated shelter he was involved in prior" to Bemont. (For more on the IRS' growing use of tax informants in big-money cases, click here.)

Beal owns 100% of Beal Financial, which owns Beal Bank. He operates Beal Financial as an S corp.--meaning it pays no corporate income tax and all the profits and losses from the firm flow to his individual 1040. So if he can generate paper losses to offset his real income from the bank, that income isn't taxed at either the corporate or individual level. In an interview with Forbes last year, Beal defended his tax strategies. "I'm a good guy made to look like a bad guy for doing what every taxpayer does--appropriately use the law to minimize my taxes," he said.

In March Forbes estimated Beal's net worth at $4.5 billion. The iconoclastic Beal virtually shut down his bank's lending from 2004 through 2007 because he foresaw that loans being made in those years would blow up. He began buying distressed assets in 2008, and in 2009 Beal Bank's net income nearly doubled to $547 million.




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