Testimony Concludes In LTCM Tax Deduction Case

by Leroy Baker, Tax News.com, New York

24 July 2003

A US District Court in New Haven, Connecticut, finished hearing evidence this week in a case brought by the Justice Department against the Long-Term Capital Management hedge fund, the result of which could have a significant bearing on the tax authorities' ability to pursue 'harmful' tax shelters and tax evasion.

The case centres on a series of complex transactions undertaken by LTCM in 1997, which resulted in $106 million in tax deductions. Justice Department lawyers are reported to be seeking around $75 million in back taxes, interest and penalty payments from the hedge fund, which suffered spectacular losses in 1998 in the wake of the Russian default crisis.

To aid its case, the Justice Department has recruited former Clinton administration economic advisor and Nobel Prize winning economist Joseph E. Stiglitz, who has been pitting his wits against fellow Nobel Prize winners and LTCM co-founders Myron S. Scholes and Robert C. Merton.

The US government has based its argument on the fact that the sheer complexity of the transactions undertaken implied some knowledge on LTCM's part that such tax deductions could be illegal. It has also argued that two law firms advising the hedge fund stood to gain financially from the arrangements, and therefore there was a clear conflict of interest.

Whilst the exact amount is not known, the Senate Finance Committee estimates the government loses in the region of $10 to $14 billion to tax shelters each year.

According to IRS spokesman Don Roberts, the Revenue has completed 207 tax-shelter investigations since the start of 2002 with a further 3,850 cases either already in progress or pending.

A ruling from U.S District Judge Janet Bond Anderton is not expected for some weeks.

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