DOJ: Tax suit is about abusive tax avoidance scheme

A company’s lawsuit against the U.S. government for alleged erroneous tax adjustments is about an abusive tax avoidance scheme known as a Distressed Asset Debt tax shelter, according to the U.S. Department of Justice.

DOJ trial attorney Andy R. Camacho, counsel for the U.S. government, filed Tuesday a motion for summary judgment in the lawsuit filed by Delaware limited liability company, Claston LLC.

Camacho asked the U.S. District Court for the NMI to rule that Claston cannot prove the debt that allegedly created the tax loss ever existed.

Camacho also asked the court to issue a judgment considering that the undisputed facts show that the contributions to the partnership at issue were disguised sales and, thus, subject to tax.

Claston LLC, through its CNMI managing member and tax matters partner, Sunset Holdings LLC, sued the U.S. government for allegedly making erroneous tax adjustments and assessing penalties over the company’s 2002 tax return.

Claston, through counsel Gregory J. Koebel, asked the federal court to issue a judgment declaring that the company properly reported its 2002 transactions.

In DOJ’s motion, Camacho said the goal of the Distressed Asset Debt tax shelter scheme, also known as DAD, is to create tax losses deductions without economic reality. Camacho said the Internal Revenue Service and Treasury Department became aware in early 2000 that taxpayers were improperly using partnerships to engage in DAD transactions.

In response to this abuse, Congress acted in 2004 through the American Jobs Creation Act of 2004 to eliminate the deductions related to the transactions, effective for transactions entered into after Oct. 22, 2004, Camacho said.

Specifically, he said, Congress amended the Internal Revenue Code to prevent shifting a built-in loss from a tax-indifferent foreign entity to a U.S. taxpayer through the use of a partnership.

Camacho said the DAD transaction at issue in this case follows the pattern of the typical DADs.

“The transaction in this case was co-promoted through Gramercy Advisors (together with other Gramercy-affiliated entities) (jointly referred to as “Gramercy”) and KPMG and involved debt with that had a fair market value of around $85,000, which was used to generate a $6 million loss unrelated to any actual economic loss,” the lawyer alleged.