- Someone has a gigantic capital gain, perhaps from selling Ariba sock.
- CARDS deals routinely started at $50 million. That threshold easily weeds out you and me.
- There will be a foreign bank (FB) involved.
- There will be foreign currency involved.
- The promoter forms a limited liability company (LLC) somewhere.
- The FB loans money (let’s say $100 million) to the LLC.
- The LLC deposits around 85% of the money in a bank – probably the same bank (FB) that started this thing.
- The LLC keeps the other 15%.
- The FB wants collateral, so the LLC gives the FB a promissory note.
- That note is special. The bank probably has 85% of its money in an account by this point, but the note is for 100%. Why? It’s part of the BS.
- There is also something crazy about this note. It can stretch out as long as 30 years, although the bank reserves the right to call it early (probably annually).
- We now have an LLC somewhere on the planet with an $85 million CD or savings account, a $15 million checking account, and a $100 million promissory note. Just to remind, this is all happening overseas and in foreign currency.
- Now we leave the rails.
- Someone (say Putanec) assumes joint and several liability for that $100 million loan.
- Remember that $85 million is already sitting in a CD or likewise, so this is not as crazy as it seems.
- The LLC will continue to pay the bank interest on the loan. Said someone is not to be bothered. Goes without saying that the bank (FB) will eventually slide the $85 million to itself and make the loan go away.
- Said someone also takes control of the $15 million parked in that foreign checking account.
- In the tax universe, the conversion of that foreign currency to American dollars is a taxable event. Let’s now add gas to the fire.
- Remember that gain = proceeds – basis.
- Proceeds in this case are $15 million.
- Basis in this case …
- Is $100 million.
- Huh? Yep, because that someone gets to add that $85 million promissory note to his/her $15 million paid in cash.
- The LOSS therefore is $15 million – $100 million = $85 million.
But our someone has a sweet yet nutritiously-balanced $85 million capital loss to offset a capital gain.
If only we could come up with a capital gain…. What to do? What can we …? Visualize severe forehead frown.
Let’s sell that Ariba stock. That will generate the gain to absorb that $85 million loss.
Call me He-Man, Tax Master of the Universe.
Yes folks, that is what the gazillion-dollars-a-year “consultants” were peddling to people to avoid paying taxes on something with a huge, latent capital gain.
Of which Boris Putanec was one.
The Court bounced him with the following flourish:
The deal is the stuff of tax wizardry, while the Code treats us all as mere muggles. The loan he assumed wasn’t all genuine debt, and any potential obligation he had to repay the entire loan was unlikely or at best contingent.”