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Distressed Asset Sales 11/05/09 - When billionaires declare their assets for taxation, they also make billion dollar tax deductions. Andrew Beal, the billionaire founder of Beal Bank in Plano, Texas and financier of Donald Trump's Atlantic City casinos made such a deduction based on losses incurred in connection with loans his bank acquired from Chinese companies. Federal court judge Ed Kinkeade ruled on August 18th that Beal's tax deduction of $1.1 billion due to non-performing Chinese loans was not justified because it was based on a 'distressed asset/debt' (DAD) transaction. Such transactions created a false inflation of tax benefits in his investment in the Chinese debts. The practice of a DAD transaction is where a foreign company that is not subject to US taxes sells loss-making debt to US companies for only a fraction of what it is purported to be worth on paper. The US company then claim tax deduction for the losses at the full face value of the debts. This is done to offset the profits made by the company in their other profitable ventures. Beal had calculated his taxes and included a $1.1 billion deduction according to the face value of the Chinese debts he acquired in DAD transactions from 2002 to 2004. The judge ruled that Beal was only entitled to a $10 million deduction since the transaction was mainly carried out to incur personal tax losses for himself. However, the judge also ruled that the IRS has no right to impose penalties on Beal because he acted in good faith when submitting his tax returns and had sought legal advice. Judge Kinkeade's ruling is the first involving a DAD transaction and has set precedents in future hearings of such nature. At present, the IRS is investigating dozens of similar cases involving billions of dollars where taxpayers have made questionable claims for deductions based on tax losses, many of which are connected to the purchases of Brazillian debt. The court case is Southgate Master Fund LLC v United States of America, 06cv2335k, US District Court, Northern District of Texas (Dallas). |
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