I can't tell you how unsympathetic I find the founder of DiTech -- the well-known home mortgage company -- to be here.
Yes, I understand that rich people don't want to pay taxes. Who does? So when John Reddam sells his company to GMAC Mortgage and makes many, many tens of millions of dollars, yes, I get that he does not feel like paying any taxes on it.
I also understand why places like KMPG like to latch on to these desires and invent creative offshore Cayman Islands schemes to "shelter" such gains from taxation. Namely, because KMPG will make a boatload of money off of selling these things.
So everyone's motives are understandable.
But I also can't help but be entirely happy that the Tax Court -- as well as the Ninth Circuit -- frustrate these desires and hold that the relevant tax schemes employed by KMPG and Reddam "lack economic substance" and hence don't work.
Judge Hurwitz writes a really good opinion that explains why. Not why I'm happy, of course. But why these schemes do indeed lack economic substance.
Here's a great snippet from Judge Hurwitz's opinion that's a nutshell of the underlying analysis:
"Put differently, the small percentage chance that Reddam’s OPIS transaction could have created a sizeable economic gain in return for his multi-million dollar investment pales in comparison to the expectation that it would always create a tax loss of $42,000,000 to $50,000,000. No matter how the underlying Deutsche Bank stock performed, the OPIS transaction was designed inevitably to produce a tax loss: the $42,000,000 shift of basis from Cormorant to Reddam would always (even under Reddam’s expert’s calculations) have overshadowed any possible gain. On this record, the Tax Court was correct in concluding that the percentage of likely potential gain did not infuse economic substance into what was clearly a tax loss scheme."
Or, as Judge Hurwitz explains in footnote 10:
"Dr. Miller’s report states that only in highly uncommon circumstances would the OPIS transaction make any kind of profit, but that five percent of the time it could make between $3,450,000 and $6,300,000. It defies belief that an objective investor would risk $6,000,000 on a transaction that was designed to lose money at least seventy-five percent of the time, could make a nominal profit twenty percent of the time, but might, only five percent of the time, have generated profits in that range for any reason other than to garner the eight-figure tax loss the transaction was designed to generate."
Well spoken, sir.
Well spoken indeed.
