Long-Term Capital Management - Tax Avoidance

Tax Avoidance

Long Term Capital Management was found to have entered into certain tax avoidance transactions. Approximately $100 million of losses claimed by LTCM were disallowed by United States District Court of Connecticut. An e-mail dated March 10, 1995, to Jan Blaustein Scholes, Myron's girlfriend at the time and general counsel responsible for setting up leasing transactions associated with the disallowed losses, stated : "For our CHIPS III entity let's use a name unrelated to CBB. It makes it just a bit harder for the IRS to link all the deals together." Equally alarming, Myron Scholes stated that he was not an expert on tax law. A textbook, "Taxes & Business Strategy" (principally written by Myron Scholes), contains chapters on both economic substance and step transactions, which are the two concepts under which the tax loss was disallowed by the IRS.

In a memorandum to Long Term's management committee dated November 12, 1996, Myron Scholes wrote: "We must decide in the near future (1) how to allocate these capital losses; (2) how to "trade" them so that they are held in high-valued hands; and (3) how to plan to be able to enjoy the benefits of the use of these losses for the longest period of time. If we are careful, most likely we will never have to pay long-term capital gains on the 'loan' from the Government." He went on, "How should LTCM pay those who brought the Tax Losses to Fruition and allocate the expenses of undertaking the trade?"