Southgate Master Fund, LLC v. United States

659 F.3d 466 (2011)

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Southgate Master Fund, LLC v. United States

United States Court of Appeals for the Fifth Circuit
659 F.3d 466 (2011)

  • Written by Heather Whittemore, JD

Facts

D. Andrew Beal (defendant), an investor who dealt in distressed debt, and his accountant, Thomas Montgomery, formed Southgate Master Fund, LLC (Southgate) to hold nonperforming loans (the loans) owned by Cinda, a financial institution. Beal purchased Cinda’s partnership interest in Southgate for $19 million and obtained over $1 billion in losses related to the loans. Beal then built up his outside basis in Southgate, meaning his basis in his partnership interest in Southgate, by transferring Government National Mortgage Association (GNMA) securities from an entity he owned to Southgate. Through this transaction, Beal claimed to have an outside basis in Southgate of $200 million and, using this basis, claimed losses related to the loans on his income-tax return. The United States government (plaintiff) challenged the claimed losses. The district court held that Southgate was a sham partnership created to create tax benefits for Beal and disallowed the losses. Beal appealed.

Rule of Law

Issue

Holding and Reasoning (Higginbotham, J.)

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