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February 02, 2007

A marketed tax shelter failed a court test in Texas this week. The New York Times reports:

The shelter, known as Blips, plays a central role in the criminal inquiry of Deutsche Bank over questionable tax shelters and in the pending criminal trial in federal court in Manhattan of 16 former employees of the accounting firm KPMG and two outsiders.

The civil ruling on Tuesday by Judge T. John Ward of Federal District Court for the Eastern District of Texas will probably add ammunition to Manhattan prosecutors’ arguments that Deutsche Bank acted improperly by providing fake loans for Blips and similar shelters. Judge Ware’s is the first major civil ruling on the legitimacy of Blips, or bond-linked issue premium structure.

The opinion says that much of the transaction documentation was a facade, meant to legitimize the shelter by outlining planned events that in real life were never meant to happen.

Interestingly, the U.S. District Court declined to assess penalties on the taxpayers, saying they reasonably relied on their tax advisors and the shelter opinions.


Tax Prof Coverage

Cite: Klamath Strategic Investment Fund, LLC No 5:04-CV-278

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