In Uncategorized on 03/18/2014 at 17:25

Doesn’t save James Haber from the 40% chop. James has been dodging this one for years; see my blogposts “Ironbridge Over Troubled Waters”, 6/5/12, and “Getting Shifty”, 9/20/13, while the US Attorney in the Big Apple havered over prosecuting James or granting him immunity.

But the day of reckoning comes, and Judge Goeke is the man to deliver the reckoning in Humboldt Shelby Holding Corporation and Subsidiaries, 2014 T. C. Memo. 47, filed 3/18/14.

Humboldt Shelby and its progeny figured in my blogpost “Everything Has An End”, 10/10/12, when it jousted with IRS about turning over some tax opinions from the well-known and well-respected NYC law firm Pryor, Cashman, Sherman, and Flynn, LLP. I have friends there, and they’re good guys.

Well, apparently some of James’ legal fees (maybe the ones James paid the Pryor Cashman guys) get disallowed, but that’s not the main story.

The main story is that, even though James doesn’t testify, Judge Goeke says the tussle over whether to shift the burden of proof or the burden of persuasion proved to be meaningless after trial.

“After careful consideration of Mr. Haber’s circumstances, we determined that he could invoke his Fifth Amendment right to avoid testifying, but we declined to shift the burden of persuasion. After trial it is apparent that the burden of persuasion has no bearing on the resolution of this case. The evidence in the record would support our conclusion even if we had shifted the burden and even if Mr. Haber had testified as petitioner claimed in its offer of proof. Considering the significant objective evidence of his intent here, we would have given little weight to his self-serving testimony.” 2014 T. C. Memo. 47, at pp. 12-13.

It’s all about economic substance.

Judge Goeke: “Any seeming business purpose that existed here was merely a facade. The options could have resulted in a $320,000 loss or a $510,000 profit. These economic effects are inconsequential compared to the $25 million tax benefit the options were guaranteed to generate. Although the transaction had some profit potential, that potential was not significant enough to persuade us that petitioner engaged in the transaction for any nontax business reason.” 2014 T. C. Memo. 47, at p. 16.

James peddled mix-and-match shelters, as to which I’ve blogged so many I won’t cite them here. Judge Goeke does give a good explanation of the mechanics, though; see pages 7 through 10. In short, James wanted to do an asset-strip of two corporations with large built-in capital gains. He bought the stock of both at a price such that paying tax would have left him no profit; so he created partnerships which contributed digital options, which almost offset each other, but as to which one option was recognized to build basis, and the other disregarded, based on some juggling with Section 752. Don’t forget the sweet spot, but these were true Bialystoks.

Thus, when the partnerships were unwound after the options expired (never hitting the “sweet spot”, of course, due to jiggery-pokery with Refco, the options vender that later came monumentally unglued amidst allegations of massive fraud), the assets could be stripped with a capital loss to offset the gains.

Too good to be true, and James is a veteran shelter peddler.

So Judge Goeke blows up the whole roundy-rounder, with or without James’ testimony, and gets James the 40% chop. And his deductions disallowed.

He may be immune from prosecution, but from little else.


Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: