Law Offices of Connie Yi, PC - estate planning
Tell Us About Your Case

For the safety of our community, clients and staff, we have suspended all in-person meeting effective March 17, 2020. All consultation meetings will be via Phone or Zoom Video Conferencing. Please contact us at 925-484-0888 or email us directly at [email protected] to schedule the consultation.

Bay Area Estate And Tax Planning Law Firm
Estate Planning
Trust Administration and probate

California judge disallows a ‘DAD’ tax shelter

| Sep 27, 2012 | Uncategorized |

Contrary to what may be considered common wisdom, tax law is not set in stone. It is updated on a regular basis as taxpayers and professionals struggle to keep up with it. Likewise, tax shelters are not illegal but can be legitimate ways to mitigate the impact of taxes upon a company’s bottom line or on an individual taxpayer’s bank account.

Recently one of those tax shelters was disallowed by a California judge. The Internal Revenue Service calls the tax shelter the distressed asset/debt or DAD shelter.

The way that a DAD shelter works is that a U.S. taxpayer buys junk foreign debt for pennies on the dollar and then claims significant tax losses. The taxpayer buys the debt through a partnership, and the losses are real, although they were losses sustained by a foreign lender and not by the taxpayer.

The problem with the DAD shelter is that it used to be allowed, and has since been made illegal and is not allowed.

The billionaire in question claimed significant losses for the tax years of 2002 and 2003. The law passed by Congress to make the DAD illegal passed in 2004. The billionaire paid $6.2 million for $303 million worth of nonperforming Chinese and Korean loans. The $6.2 million investment claimed as a loss would save about $78 million in taxes according to the IRS.

The IRS denied the losses claimed for the tax years of 2002 through 2004 and as a result the billionaire sued in district court stating that those losses were necessary to diversify his portfolio and reduce its volatility.

The California district court judge dismissed the lawsuits and the case was ended without a trial. The billionaire who used the tax shelter has indicated that he will appeal.

Source: Forbes, “Judge Shoots Down Another Forbes 400 Member’s Tax Shelter,” Janet Novack, Sept. 25, 2012

At our San Francisco law office, we represent clients with tax issues including those dealing with tax shelters and IRS disputes such as those mentioned in this post.

Archives

FindLaw Network

Recent Blog Post

Even a fortune can disappear without sound estate planning

Some figures baffle.Like the speed of light. Like the age and size of the universe. And like estimates pegging the personal fortunes of America's richest families.Consider this imagery relevant to the storied Vanderbilt family for a moment: a pile of money equaling...

Remarrying couples unquestionably need to focus on estate planning

Many remarrying California individuals fail to timely consider and update existing estate plans to reflect new realities.Don't be one of them. Many remarrying California individuals fail to timely consider and update existing estate plans to reflect new...

View More Blog Posts