Tax

We have extensive experience providing both expert testimony and consulting support in tax related litigation, which typically involves disputes about economic substance. Keys to success involve identifying the right experts in a variety of disciplines and managing and tying the testimony of several experts together. We are especially adept at simplifying the complex business and financial structures that are characteristic of tax disputes and making clear their underlying economics.

Selected Case Experience

Long-Term Capital

Long-Term Capital Holdings, et al. v. United States of America

At one time, Long-Term Capital was the largest hedge fund in history with more than $100 billion in assets. Its partners included legendary bond trader John Meriwether, and Nobel Prize-winning economists Robert Merton and Myron Scholes. Following Long-Term’s demise, its partners sued the U.S. government over a substantial tax dispute. Cambridge Finance Partners was retained by the U.S. Department of Justice to provide economics and finance consulting services in this highly publicized matter. CFP assembled a team of experts, including Nobel Prize winner Joseph Stiglitz, and assisted the government attorneys with all aspects of the case. Following a four and one-half week trial, the Court subsequently ruled in favor of the United States. [Read more about this case.]

“Son of Boss” Tax Shelter

Transactions Involving Exotic Options

The “Son of Boss” tax shelter was one of the most widely used tax shelters of the late 1990s. Cambridge Finance Partners was retained by the Department of Justice to provide consulting support, and to support the expert testimony of Stanford finance professor Steven Grenadier, in a “Son of Boss” case involving two prominent Los Angeles real estate investors. At issue in the case was a package of exotic “Asian-style” options written against a basket of REIT stocks. The taxpayers claimed that the options were intended to shield them against losses from a second terrorist attack in the wake of the 9/11 attacks. Following a four-day trial, U.S. District Judge John F. Walter ruled that the option transactions had no real economic substance and were simply designed to fabricate tax basis in certain partnerships. Among the factors he cited was Professor Grenadier’s “persuasive” testimony that the option package offered virtually no likelihood of a payoff to investors and that investors dramatically overpaid for the transactions.

U.S. Department of Justice Prevails in “Son of Boss” Tax Shelter Case

February 4, 2009

A federal district court in Los Angeles ruled in favor of the U.S. government in a case concerning an abusive tax shelter known as “Son of Boss”. Cambridge Finance Partners was retained by the Department of Justice to provide consulting support and to support the expert testimony of Stanford finance professor Steven Grenadier.

At issue in the case was a package of exotic “Asian-style” options written against a basket of REIT stocks to supposedly shield real estate investors against losses from a second terrorist attack in the wake of the 9/11 attacks. U.S. District Judge John F. Walter ruled that the option transactions had no real economic substance and were simply designed to fabricate tax basis in certain partnerships. Among the factors he cited was Professor Grenadier’s “persuasive” testimony that the option package offered virtually no likelihood of a payoff to investors and that investors dramatically overpaid for the transactions.

This case marked the third time that Cambridge Finance Partners has assisted the Department of Justice with tax shelter cases that have gone to trial. Earlier cases include the widely publicized 2003 trial against the partners of Long-Term Capital. The government has won all three trials.

DOJ Press Release

Corporate Owned Life Insurance (COLI)

Complex Valuation and Risk Analysis

Xcel Energy v. United States of America was slated to become the fifth Corporate Owned Life Insurance (COLI) case to reach trial. Among the hotly contested issues was the pre-tax profitablity and valuation of life insurance policies extending out over 40 years. Finance experts for the taxpayer argued that the policies contributed hundreds of millions in value even absent the contested tax deductions on policy loan interest. Testifying for the United States, CFP’s Dr. Fenn countered that the policies had negative value absent the disputed tax deductions, and that the taxpayer’s experts had employed grossly flawed discount rate and valuation assumptions. CFP also performed complex simulations for Nobel Prize winner Joseph Stiglitz, who testified that there was no aggregate transfer of risk to the life insurance company. The parties settled following the completion of expert and fact discovery.

Procter & Gamble

Procter & Gamble et. al. v. The United States of America

Robert Noah, an expert witness for the United States, was asked to address the purported non-tax business purpose of a series of transactions involving an inter-company transfer payment, pre-payment for goods, and related impacts on risk management and, in particular, foreign currency hedging. Dr. Noah’s analysis addressed valuation, hedging efficiency, hedging costs, and business purpose for transactions related to significant claimed tax reduction. The Court ruled in favor of the United States in summary judgment.