(Illustration by James Steidl)
John Paul Reddam has a varied resume: businessman, former college philosophy professor, owner of the 2012 Triple Crown contender I’ll Have Another—and failed tax shelter investor.
The U.S. Court of Appeals for the Ninth Circuit on Friday ruled that Reddam couldn’t claim a $50 million loss generated by a now discredited KPMG tax shelter. Reddam had attempted to use the sham loss to offset a $48 million gain from the sale of his mortgage finance company, DiTech Funding Corp., to GMAC Mortgage Corporation in 1999. The Ninth Circuit agreed with the U.S. Tax Court that the shelter, called the Offshore Portfolio Investment Strategy (OPIS), lacked economic substance.
Ditech was a pioneer in offering 125 percent loans, which allowed borrowers to get more than the property was worth, and it specialized in low-documentation mortgages, known as “liar’s loans,” according to a 2008 New York Times article.
Reddam is represented by David Wiechert of the Law Office of David W. Wiechert in San Clemente, Calif. Judith Hagley argued the case for the U.S. Department of Justice’s Tax Division.
The IRS disallowed OPIS and similar shelters in 2001. The agency settled with more than 90 percent of the taxpayers who used the OPIS scheme, but Reddam and others fought back. Reddam argued that he intended to make a profit on the OPIS transaction.
Writing for a unanimous Ninth Circuit panel, Judge Andrew Hurwitz noted that KPMG’s marketing materials undercut Reddam’s argument. “Those materials forthrightly state that the OPIS transaction ‘minimizes gain, or maximizes loss,’ an anathema to a profit-seeking investor,” Hurwitz wrote.
Last December, the U. S. Court of Appeals for the Tenth Circuit ruled against another taxpayer claiming large losses using OPIS. There, Scott Blum, the founder of Buy.com, unsuccessfully tried to erase the entire $45 million profit he earned on the sale of that company in 1999.
This isn’t the only recent legal setback for Reddam. In December the Consumer Financial Protection Bureau sued him and a company he now owns, CashCall Inc., which collects consumer installment loans. The CFPB accuses CashCall of engaging in unfair, deceptive and abusive practices, including illegally debiting consumer checking accounts for void loans. In the CashCall case, Reddam is represented by Neil Barofsky of Jenner & Block. In June of last year the state of New Hampshire’s Department of Banking issued a cease and desist order against CashCall and Reddam, citing unfair or deceptive practices.
Wiechert told the Litigation Daily that he and his client are disappointed in the ruling and considering their options. “Mr. Reddam thought the [OPIS] transactions were real and if he stayed in them a little longer he would have made a lot of money,” said Wiechert.
After the Internal Revenue Service denied his OPIS deduction, Reddam sued KPMG and Sidley Austin. (Brown & Wood worked on the shelter deal, and the firm was later acquired by Sidley.) That lawsuit settled on confidential terms. KPMG in 2005 settled a criminal probe by the Department of Justice, agreeing to pay $456 million and admitting to criminal wrongdoing for its tax shelter activity.