US Court Says Investors Were Not Mis-Sold Illegal Tax Shelter

by Leroy Baker, Tax-News.com, New York

17 June 2005

A US appeal court has ruled that a group of investors cannot sue an accounting firm over the sale of a tax shelter outlawed by the Internal Revenue Service in 2000. The ruling means that the investors must seek arbitration instead.

The nine plaintiffs, led by Thomas Denney, a New York state property developer in upstate New York claimed that they were misled into buying the illegal tax shelter, known as COBRA, or 'currency options bring reward alternatives', and sued on the grounds of fraud and breach of fiduciary duty.

The COBRA shelter generates artificial losses through offsetting trades of currencies that are channeled through partnerships. The Internal Revenue Service, banned the shelter five years ago and has subsequently assessed the nine investors for millions of dollars in unpaid taxes, plus penalties and interest.

In April 2004, Judge Shira A. Scheindlin of Federal District Court in Manhattan ruled that the investors were not bound by the arbitration agreements they had signed with the accounting firm, because the tax shelters were not valid.

However, this decision was overturned by Judge Jose A. Cabranes of the United States Court of Appeals for the Second Circuit on Tuesday. According to Judge Cabranes, there was no evidence presented that the firms in question, accountants BDO Seidman and Deutsche Bank, had deliberately set out to dupe the investors. Evidence of fraud would have meant that the investors had no need to seek arbitration.

According to the New York Times, David Deary, a lawyer for Mr Denney, stated that he intends to pursue a lawsuit against Deutsche Bank.

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