In a decision that observers are calling a significant victory in the fight against abusive tax shelters, a federal judge has ruled that Long Term Capital Management used bogus transactions to avoid $40 million in taxes.
Long Term Capital Management, the now-defunct investment firm that received a $3.6 billion bailout, wrongly claimed about $106 million in tax deductions in 1997, Judge Janet Bond Arterton of U.S. District Court in Connecticut ruled Friday.
The Internal Revenue Service was correct to reject the deductions, the judge ruled, because they had no real economic value. The company's transactions involved selling stock and deducting 100 times its value. The back taxes, penalties and interest could bring the fund's tax bill to $75 million, the Washington Post reported.
The judge, in her decision, said the company prepared its tax return in an attempt to hide some losses and “thereby potentially win the audit lottery and evade IRS detection."
Experts told the Post that the government could not “win” the case unless penalties were imposed. Charles P. Hurley, the IRS lawyer who led the government's case and is now in private practice, said in an interview that companies may be discouraged from engaging in complicated, technical transactions that create losses only on paper.
"It's just one decision," he said. "But I think it's a decision that a lot of people were paying attention to and has the potential to influence people on both sides of the fence" on the issue of tax shelters.