Opinion ID: 204030
Heading Depth: 1
Heading Rank: 1

Heading: facts

Text: The IRS investigation is focused on transactions that generated losses claimed from writing down the value of distressed debt consisting of consumer accounts receivable obtained from one or more Brazilian retail stores. According to an IRS Coordinated Issue Paper (CIP) [3] issued in April 2007, such distressed asset and debt transactions (known as DAD tax shelters) generate tax losses that are not allowable as deductions. In a DAD shelter, a foreign entity that does not pay United States taxes sells purportedly high-basis, low-value debt (the distressed debt) to a United States entity taxed as a partnership in exchange for a payment that is a very small percentage of the face value of the debt. The United States entity then contributes the distressed debt to other entities taxed as partnerships  partnerships in which interests are sold to tax shelter participants. The shelter participants then claim some or all of the face value of the distressed debt as a loss to offset other earned income. The IRS contends that U.S. taxpayers participating in the Brazilian debt DAD shelters claimed losses of approximately $39 million in 2003 and $119 million in 2004. The IRS is investigating the veracity of these claimed losses by examining the returns filed by the entities that pass on the losses to U.S. taxpayers and those filed by the individual taxpayers.