* Cases detail sales of tax shelters by Citibank, KPMG
* Shelters tied to more than $300 million in sham losses
* Victories for tax authorities highlight corporate schemes
* Wells Fargo a buyer of one disallowed shelter
By Lynnley Browning
Oct. 4 United States prosecutors said on Tuesday they had won three major cases against American clients of questionable tax shelters including ones used by a Dallas billionaire and Wells Fargo Co. and others designed by Citibank and accounting firm KPMG LLP.
The separate cases, the verdicts of which were rendered last Friday, represent a significant victory for the US Justice Department, which was sued by each of the three clients when the Internal Revenue Service denied as improper their claimed deductions that totaled hundreds of millions of dollars.
The rulings also underscore how the two agencies, in the midst of a crackdown on offshore tax evasion by wealthy Americans at Swiss banks, are continuing to pursue corporate tax shelters used by large American companies.
In the first case, the Fifth Circuit appeals court in New Orleans upheld a lower court ruling that D. Andrew Beal, a Dallas, Texas billionaire banker, improperly used a sham shelter to deduct $200 million in federal income taxes stemming from more than $1 billion on sham losses.
A Justice Department statement said the shelter involved Beal acquiring "a portfolio of non-performing Chinese debt for less than $20 million, disposing of the portfolio and generating more than $1 billion in artificial paper losses approximately equivalent to the debt's face value."
Beal is the founder of Beal Bank, a small bank headquartered in Dallas and is No.39 on the Forbes 400 list of wealthiest Americans with a $7 billion personal fortune.
In the second case, a federal judge in Iowa ruled that Principal Life Insurance Co., part of Principal Financial Group in Iowa, a large investment company, could not claim $21 million in foreign tax credits stemming from a $300 million transaction with Bred Banque Populaire and Natexis Banque Populaire, two French banks, from 2000 through 2005.
The judge found that the transaction lacked both economic substance and a business purpose - two key features of questionable tax shelters - and was a loan rather than an investment. The transaction, the judge ruled, was designed solely to generate foreign tax credits and thus violated anti-abuse regulations at the Treasury Department.
The complex transaction involved a Delaware company called Pritired 1 LLC, in which Principal Financial and Citicorp North America, a division of Citigroup, were the sole investors. Pritired, the tax matters partner in the lawsuit, sued the US government - meaning, in this case, the IRS - in 2008 after the agency disallowed its refund claims.
Court papers said that Bruno Rovani and John Buckens, both employees of a London-based division of Citi's Structured Products Group, Citi Capital Structuring Group, designed and carried out the transactions underpinning the shelter.
Principal Financial Group, a member of the Fortune 500 largest American companies, manages nearly $336 billion in assets, mainly retirement plans and investment funds. It manages 10 of the 25 largest pension plans in the world, according to its website.
In his decision, Judge John Jarvey wrote that "the facts of this case are exceedingly complex. American companies sent $300 million to French banks who combined the $300 million with $900 million of their own. The money was used to earn income from low-risk financial instruments. French income taxes were paid on the income from this approximately $1.2 billion investment."
The judge also said "the American companies received some cash from the income on the securities, but, more importantly, were given the ability to claim foreign tax credits on the taxes paid on the entire $1.2 billion pool. Through this transaction, the French banks were able to borrow $300 million at below market rates. The American companies received a very high return on an almost risk-free investment."
In the third decision, a federal judge in Minnesota disallowed a claim by a Wells Fargo subsidiary for more than $82 million in tax refunds.
The claim stemmed from a sham transaction in 1999, improperly valued at nearly $424 million, that involved capital losses stemming from Wells Fargo's transfer of "underwater" commercial leases to a subsidiary in conjunction with a related sale of stock to Lehman Brothers, the defunct investment bank. Wells Fargo had tried to claim the tax refunds on its 1996 corporate tax return.
Court papers show that Wells Fargo bought the shelter from the accounting firm KPMG LLP for $3 million in 1998, part of what court papers said KPMG characterized a "quick hit" tax strategy on the eve of Old Wells Fargo's merger that year with Norwest. Wells Fargo sued the US in 2007 when the IRS denied its refund claims.
Joel Resnick, a former KPMG partner, offered testimony in the case about KPMG having sold Wells Fargo a "tax product" called an "economic liability transaction," according to court papers.
"KPMG employees developing the economic liability transaction product knew that a company needed a non-tax business purpose to justify the transaction," wrote Judge John Tunheim, of Minneapolis, in his decision.
KPMG narrowly averted an indictment in 2005 over its sale of questionable tax shelters to wealthy Americans. It paid a $456 million fine and was put on probation through a deferred-prosecution agreement that has now expired.
(Reporting by Lynnley Browning in Hamden, Conn.; Editing by Matt Driskill)
(Editing by Matthew Driskill)