COURT RULES AGAINST TAX SHELTER PROMOTER GARY KORNMAN OPINION SAYS SCHEME WAS LIKE ATTEMPT TO CHANGE “LEAD INTO GOLD”

WASHINGTON – The United States Court of Appeals for the Fifth Circuit today agreed with a federal district court that tax shelter promoter Gary Kornman was not entitled to the tax benefits from a tax shelter that he attempted to use to reduce his own tax liability.

Gary Kornman was an attorney who marketed tax shelters to wealthy individuals through his wholly-owned corporation, the Heritage Organization. To reduce his own tax liability, he employed the short-sale variant of the notorious “Son-of-BOSS” abusive tax shelter. His version, like other versions, is designed to manipulate the partnership provisions found in subchapter K of the Internal Revenue Code to generate for the taxpayer an artificially high cost basis in a partnership interest that, in turn, can be transformed into a huge artificial loss upon the disposition of such interest. In Korman’s case, he engineered a short sale of Treasury Securities that produced an economic loss of $200,000, but he claimed on his tax return for 1999 that he incurred a capital loss of $102.5 million.

The Internal Revenue Service disallowed the loss. Kornman challenged this determination before a federal district court. In 2006, the court ruled against him, and he appealed to the United States Court of Appeals for the Fifth Circuit. In rejecting Kornman’s appeal, the court observed that to create a $102.5 million tax loss from transactions that involved the economic loss of only $200,000 is “reminiscent of an alchemist’s attempt to transmute lead into gold.”

“This scheme is an insult to the millions of hard-working Americans who make the sacrifices necessary to meet their tax obligations,” said Deputy Assistant Attorney General Richard T. Morrison of the Justice Department’s Tax Division.

Morrison thanked the Justice Department attorneys who represented the federal government in the case against Kornman. Michelle C. Johns and Thomas M. Herrin of the Tax Division’s Southwestern Region Civil Trial Section handled the case in the federal district court. Richard Farber and Joan I. Oppenheimer of the Tax Division’s Appellate Section represented the government in the Court of Appeals.