Footnotes (137)



COBRA Strikes Back: Anatomy of a Tax Shelter

Karen C. Burke

University of Florida - Levin College of Law

Grayson M. P. McCouch

University of Florida - Levin College of Law

August 7, 2008

Tax Lawyer, Vol. 62, No. 1
San Diego Legal Studies Paper No. 08-23

Paul Daugerdas gained notoriety for himself and his erstwhile firm, Jenkens & Gilchrist, as the designer of a tax shelter that uses contingent liabilities to generate artificial tax losses on a grand scale. The basic shelter transaction is surprisingly simple. In essence, it uses offsetting options to inflate the basis of property that is distributed by a partnership and then contributed to and sold by another partnership, resulting in a large tax loss without any corresponding economic loss. In principle, this type of shelter could be replicated indefinitely and generate unlimited tax losses. Mr. Daugerdas is by no means unique. The transactions that he approved as shelter counsel on behalf of Jenkens & Gilchrist differ only in trivial details from myriad other transactions peddled by other lawyers and accountants.

Contingent-liability tax shelters are a highly risky business. Mr. Daugerdas and others like him reaped enormous rewards for themselves and their clients, but some of the tax shelters they designed for credulous and wealthy clients have backfired spectacularly. Congress and the Treasury have taken remedial action to shut down abusive tax shelters, and several courts have invoked the longstanding judicial doctrines to strike down transactions that lack economic substance and have no real business or investment purpose, despite purported compliance with the literal terms of the tax laws. The proliferation of abusive tax shelters could never have gotten off the ground without the active participation of high-priced counsel. Upon discovering that the anticipated tax benefits failed to materialize, disgruntled clients have rushed to sue the lawyers, accountants, investment advisers, and banks that created and marketed defective shelters.

This article discusses several challenges faced by Congress, the Treasury, and the courts in dealing with contingent-liability tax shelters. The article examines the role of Daugerdas and his firm in creating and marketing contingent-liability shelters, against the broader background of the tax shelter industry. The article explains the basic structure of the offsetting option transaction and its attempt to manipulate the partnership tax provisions. The article analyzes the contrasting rationales of two recent judicial decisions involving defective tax shelters, and argues in favor of applying Treasury regulations retroactively to shut down contingent-liability tax shelters.

Number of Pages in PDF File: 34

Keywords: economic substance, contingent liabilities, partnership, Cemco, Kornman, Stobie Creek, Jade, Sala, Klamath, retroactive, options, abuse, tax shelter, professional responsibility

JEL Classification: K34

Open PDF in Browser Download This Paper

Date posted: June 19, 2008 ; Last revised: September 12, 2015

Suggested Citation

Burke, Karen C. and McCouch, Grayson M. P., COBRA Strikes Back: Anatomy of a Tax Shelter (August 7, 2008). Tax Lawyer, Vol. 62, No. 1; San Diego Legal Studies Paper No. 08-23. Available at SSRN: http://ssrn.com/abstract=1148371

Contact Information

Karen C. Burke (Contact Author)
University of Florida - Levin College of Law ( email )
P.O. Box 117625
Gainesville, FL 32611-7625
United States

Grayson M. P. McCouch
University of Florida - Levin College of Law ( email )
P.O. Box 117625
Gainesville, FL 32611-7625
United States

Feedback to SSRN

Paper statistics
Abstract Views: 3,930
Downloads: 804
Download Rank: 21,190
Footnotes:  137

© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollobot1 in 0.203 seconds