Ray Lane Rode Tech Boom Tax-Shelter Wave Broken by IRS
By Andrew Zajac & Jesse Drucker - Jun 7, 2013 12:00 AM ET
The dot-com boom of the late 1990s has come back to haunt former Hewlett-Packard Co. (HPQ) Chairman Ray Lane.
Lane’s dispute with the Internal Revenue Service opens a window to a mostly bygone era when accounting and law firms conceived and sold tax-dodging strategies to investors seeking to avoid taxes on outsized gains from the still-swelling tech bubble.
A file photo shows Hewlett-Packard Co. former Chairman Ray Lane speaking during the Wall Street Journal ECO:nomics conference in Santa Barbara, California, during March 2011. Photographer: Jonathan Alcorn/Bloomberg
The shelters had memorable nicknames, based on acronyms: Son of BOSS, BLIPS, PICO and COBRA. Lane used one called POPS.
Then the IRS cracked down, triggering the kind of legal battles with the agency Lane is now embroiled in.
“Most of these types of tax shelters have flushed through the system,” said Bryan Skarlatos, a tax attorney at Kostelanetz & Fink LLP in New York. “The ones like you’re seeing with Lane are some of the stragglers.”
“It’s not the very last dinosaur caught in the tar pit, but it’s one of the last,” said Skarlatos, who represents clients in disputes with the IRS over POPS transactions.
Lane, also the former president of Oracle Corp. (ORCL) and partner emeritus at venture-capital firm Kleiner Perkins Caufield & Byers, used POPS in an attempt to shield $250 million of income through what the IRS ruled were “sham” transactions.
Lane, 66, who left Oracle with more than $1 billion in stock and stock options in mid-2000, has agreed to settle with the IRS on a tax bill that could be as much as $100 million, even as he appeals the agency’s ruling in U.S. Tax Court in Washington. He said he fully paid his tax bill on sale of his Oracle options.
“My tax advisers put me into an investment,” he said in an interview. “Somewhere along the way I knew these things were being questioned by the IRS.”
The POPS shelter was assembled for him by Sidley Austin LLP, a Chicago-based law firm, the BDO Seidman consulting firm and Deutsche Bank AG, he said.
No one at the three firms responded immediately to phone and e-mail messages left after business hours seeking comment on Lane’s remarks.
POPS stands for Partnership Option Portfolio Securities.
Though it has multiple variations, a POPS transaction, in general, worked like this: an accounting firm would set up a series of partnerships, which would typically enter into transactions called straddles using foreign currencies.
Straddles involve simultaneously taking long and short positions to offset the investment risks.
The partnership would sell off the position that generates the gain, which would be attributed to a partner that would be indifferent to the tax, such as a tax-exempt entity.
That would leave one of the partnerships with the offsetting loss.
An investor with a big gain somewhere else could then buy into the partnership and thus take advantage of the loss.
The IRS attacked such transactions for separating out the losses from the gains.
The IRS case against Lane’s Vanadium Partners LLC mentions “a series of meaningless steps,” involving a straddle, a tiered partnership structure and a transitory partner that allowed “a tax shelter investor to claim a permanent non-economic loss.”
Lane’s attorney, Charles Hodges, disputed the IRS contention that Vanadium was a sham that “lacked economic substance.”
In addition to the tech boom, conditions were ripe for tax shelters in the 1990s because the IRS had eased off enforcement after agency reform legislation, said Christopher Rizek, a lawyer at Caplin & Drysdale, a Washington-based law firm that specializes in tax matters.
“They spent about two years re-organizing themselves,” he said. “They were intimidated.”
By the mid-2000s more aggressive enforcement resumed.
Wealthy individuals who purchased POPS and other tax shelters were often identified by the IRS and Justice Department in probes of the accounting firms and law firms that sold them.
The uproar in Congress over IRS scrutiny of political groups seeking non-profit status could curb challenges to tax shelters again, Rizek said.
Tax lawyers are watching how the IRS responds to “this month’s use as a pinata by Congress,” he said.
“They could be cowed again,” Rizek said. “We’ll see.”
The case is Vanadium Partners Fund LLC v. IRS, 9970-13, U.S. Tax Court (Washington).
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