Just Pay The Tax, Boris

I have no problem with minimizing one’s tax liability.

But then there are people who will go to extremes.

Boris Putanec is one of these. I am skimming over a 34-page Tax Court case about a tax shelter he used.

Let’s travel back in time to the dot-com era.

Putanec was one of the founders of Ariba, a business-to-business software company. The initial idea was simple: let’s replace pencil- and pen-business functions with a computerized solution. There are any number of areas in business accounting - routine, repetitious, high-volume – that were begging for an easier way to get things done.

Enter Ariba.

Which eventually went public. Which meant stock. Which meant big bucks to the founders, including Putanec.

Up to this point I am on his side.

This guy wound-up owning more than 6 million shares in a company valued (at one point) around $40 billion.

How I wish I had those problems.

You can anticipate much of the next stretch of the story.

Most of Putanec’s money was tied-up in Ariba stock. That is generally considered unwise, and just about every financial planner in the world will tell you to diversify. When 90-plus-% of your net worth is held in one stock, “diversify” means “sell.”

Now Putanec acquired his stock when the company was barely a company. That meant that he paid nothing or close to nothing to get the stock. In tax talk, that nothing is his “basis.” Were he to sell his stock, he would subtract his basis from any sales proceeds to calculate his gain. He would pay tax on the gain, of course. Well, when you subtract nothing (-0-) from something, you have the same something left over.

In his case, big something.

Meaning big tax.

Rather than just paying the tax and celebrating his good fortune, Putanec was introduced to a tax shelter nicknamed CARDS.

Sigh.

CARDS stands for “custom adjustable rate debt structure.” Yes, it sounds like BS because it is. Tax shelters tend to have one thing in common: take a tax position, pretzel it into an unrecognizable configuration and then bury the whole thing in a series of transactions so convoluted and complex that it would take a team of tax attorneys and CPAs a half-year to figure out.

Let’s go through an example of a CARDS deal.

1. Someone has a gigantic capital gain, perhaps from selling Ariba sock.
1. CARDS deals routinely started at $50 million. That threshold easily weeds out you and me.
2. There will be a foreign bank (FB) involved. 
3. There will be foreign currency involved. 
4. The promoter forms a limited liability company (LLC) somewhere. 
5. The FB loans money (let’s say $100 million) to the LLC. 
1. The LLC deposits around 85% of the money in a bank – probably the same bank (FB) that started this thing. 
2. The LLC keeps the other 15%. 
3. The FB wants collateral, so the LLC gives the FB a promissory note. 
1. 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. 
2. 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).
6. 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.
2. Now we leave the rails. 
1. Someone (say Putanec) assumes joint and several liability for that $100 million loan. 
1. Remember that $85 million is already sitting in a CD or likewise, so this is not as crazy as it seems.
2. 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.
3. Said someone also takes control of the $15 million parked in that foreign checking account. 
1. 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.
4. Remember that gain = proceeds – basis.
5. Proceeds in this case are $15 million.
6. Basis in this case … 
1. Is $100 million. 
2. Huh? Yep, because that someone gets to add that $85 million promissory note to his/her $15 million paid in cash.
7. The LOSS therefore is $15 million – $100 million = $85 million.

Now, this could make sense – if said someone had to - some day - write a check to the bank for $85 million.

Not going to happen. The bank already has that $85 million tucked-away in a CD or savings account it controls. The bank never has to leave its front door to get its hands on that $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.

Got it!!

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.”

I suppose winning the lottery was not enough.

Just pay the tax, Boris.

Do You File Taxes With South Carolina?

Heads up if you file tax returns with South Carolina.

On October 26 the S.C. Department of Revenue announced that approximately 3.6 million social security numbers and almost 400,000 credit and debit card numbers were compromised.  

Government officials emphasized that no public funds were accessed or put at risk. No word from government officials on your whether your private funds were put at risk, though.

On October 10 the S.C. Division of Information Technology informed the Department of Revenue of a potential cyber attack. On October 16, investigators discovered two attempts to hack the system in early September. They later discovered that a previous attempt was made in late August. Government officials believe they have closed the vulnerability in the system.

If you have filed a South Carolina tax return since 1998, please visit protectmyid.com/scdor or call 1- 866-578-5422 to determine if your information is affected. If so, you can immediately enroll for free in one year of identity protection service with Experian.