WASHINGTON (Reuters) - A California businessman and prominent figure in horse racing on Friday lost a multimillion-dollar tax-shelter dispute in an appeals court decision favoring the U.S. Internal Revenue Service.
Canadian-born John Paul Reddam, owner of I’ll Have Another, a horse that won two legs of U.S. racing’s elusive Triple Crown in 2012, was also the founder of DiTech, a home loan business.
Affirming a 2012 U.S. Tax Court ruling, a three-judge 9th Circuit Court of Appeals in Pasadena, California, ruled that Reddam engaged in a “Byzantine” tax and investment strategy that served no business purpose other than to avoid taxes.
Reddam’s lawyer, David Wiechert, said he was evaluating options for an appeal.
The ruling was the latest win for the IRS in a fight against tax transactions promoted by accounting firms in the late 1990s. Reddam engaged in a transaction once marketed by KPMG LLP under the name “Offshore Portfolio Investment Strategy,” or OPIS, the decision said.
In 1999, Reddam sold DiTech to the mortgage-lending division of General Motors for an initial payment of $70 million. He incurred a $48.5 million capital gain, which he attempted to avoid by using the OPIS program, according to the court.
The IRS challenged Reddam’s 1999 tax return, arguing that his OPIS transaction was invalid and that he owed $8 million in federal income taxes.
The IRS said in 2001 that it would not recognize the tax benefits of OPIS transactions and in 2003 the agency opened a settlement process for OPIS users.
But Reddam did not participate and challenged the IRS by filing an action in Tax Court, the decision said.
The IRS has been relying more frequently on arguments about business purpose, or “economic substance,” to challenge corporate and individual tax shelters, lawyers have said.
The economic substance doctrine is a legal strategy that focuses less on particular financial structures and more on their broader purposes and outcomes.
Reddam vaulted to national fame in 2012 when I’ll Have Another was on the verge of becoming just the 12th horse to complete the Triple Crown, a difficult sweep of three legendary races: the Kentucky Derby, the Preakness Stakes and the Belmont Stakes. The last horse to complete it was Affirmed in 1978.
Reddam bought the colt for just $35,000, a bargain price in a sport where top horses change hands for millions of dollars. But I’ll Have Another suffered a freak accident on the eve of the Belmont and Reddam withdrew him, ending his racing career.
The case is John Paul Reddam v Commissioner of Internal Revenue; The 9th Circuit Court of Appeals in Pasadena, No. 12-72135.
Reporting by Patrick Temple-West; Editing by Kevin Drawbaugh