Understanding Long Term Capital

Abstract

This article examines the recent district court decision in Long Term Capital Holdings v. United States, which involved the cloning of an artificial loss that was sold to two different groups of taxpayers for deduction. Professor Warren explains the convoluted transaction and then analyzes the court's decision in favor of the government. Particularly noteworthy, he says, is the court's refusal to let the taxpayers escape penalties on the grounds that they obtained favorable legal opinions from major law firms, when those opinions were, in the court's view, superficial at best. Given the sums of money involved, Warren concludes that such dubious behavior by taxpayers and their professional advisers will change only if the federal courts are willing to sustain penalties in cases such as this.