Kerry took a loss in tax shelter in 1984 to avoid political fallout
By Brian C. Mooney, Globe Staff, 6/19/2003
Democrats were pushing for tax reform in 1984, and Lieutenant Governor John F. Kerry, candidate for US Senate, had some ideas.
"You need a major overhaul of the tax structure," Kerry told a panel of reporters on a May 6 broadcast of WBZ-TV (Channel 4). "You need to close crazy loopholes that are non-productive."
Though he did not share it at the time, Kerry had recently learned a costly lesson about loopholes in the tax code.
Weeks before that interview, Kerry, by his own account now, had jettisoned an investment of between $25,000 and $30,000 in an exotic tax shelter after his accountant questioned its legitimacy. In an interview with the Globe, Kerry acknowledged that fear of political embarrassment was a factor in his decision to swallow the loss.
Until now, Kerry has never disclosed details of this tax shelter, which utilized offshore companies registered in the Cayman Islands and a "straddle" scheme of forward contracts to buy and sell commodities, apparently worth up to $238,527.
At the time Kerry invested, tax shelters were proliferating as wealthy Americans tried to avoid high marginal tax rates. Separated from his wife, Julia, and raising two daughters, Kerry had been struggling financially. But in 1983, a $225,105 windfall came Kerry's way. He had stopped practicing law when he became lieutenant governor but received a share of proceeds from cases that were settled after he left the law firm of Kerry and Sragow.
Kerry said he wanted to protect some of the money at tax time, and, on advice of some of his fund-raisers, jumped into the commodities investment.
"I thought it was a way to try to minimize tax consequences," he said. "It wasn't, and I learned a hard lesson."
He said his accountant told him: " `Look, I've got bad news for you. I don't think this is something that's advisable for you to take, and my advice is you don't.' And I bit the pill."
Kerry said he abandoned his upfront investment of between $25,000 and $30,000 and did not claim any tax benefit from the loss.
"I did not want to file an income tax return as a public person that I thought could have been subject to question," Kerry said.
He also did not cite the investment in his financial disclosure statements filed with the US Senate, and only a fragment was in his Massachusetts statement of financial interests for calendar year 1983, when Kerry was lieutenant governor.
Kerry and aides who reviewed his holdings at the time of the disclosure filings said he fulfilled all his reporting obligations. Kerry said he had bailed out of the deal before the filing date for the Senate disclosure.
But records obtained by The Globe show a lot went undisclosed about the complex scheme, which he entered six weeks before he became a candidate for US Senate in January 1984, and, by Kerry's account, broke off before May 31, 1984, the date he chose for filing a report on his personal finances to the Senate.
In a heated Senate Democratic primary battle with US Representative James M. Shannon and two other candidates, Kerry sought and received a 16-day extension of the normal May 15 deadline for Senate candidates to file their financial reports.
Kerry said he does not recall why he asked for what he called "the routine extension" but does not believe it was tied to the tax shelter. Under rules for Senate candidates, he was required to disclose all assets and liabilities held at filing time.
For the next year, when Kerry was a sitting senator, he did not report the investment. Unlike candidates, senators must report all financial transactions exceeding $1,000 in the preceding year. Kerry campaign counsel Marc Elias said Kerry's abandonment of his investment did not constitute a reportable transaction -- "purchase, sale, or exchange" of an asset -- under the Senate's guidelines.
"My understanding is that the shares were returned to the promoter; that he was no longer going to take advantage of the investment," Elias said. "He simply unwound the transaction."
The Senate's Select Committee on Ethics oversees the reporting system, and can levy fines for "knowing or willful falsification of information."
Kerry said he did not make an effort to conceal the investment during the Senate campaign.
In two interviews with the Globe, Kerry's recollection of the investment was sketchy. He said he could not recall many details of the deal or what specific steps he took to terminate it, except to say he believes he "canceled" it in March or April 1984. He said he has kept no documentation.
Kerry's only disclosure concerning any aspect of this financial misadventure was in his statement of financial interests, filed with the State Ethics Commission in May 1984, covering calendar year 1983. Kerry said he owned stock that year in a company called Ginvest Inc. An Oct. 26, 1984, story in the Globe described Ginvest as "an investment that failed."
An off-shore tax shelter
Documents obtained by the Globe detail John Kerry's 1983 investment of between $25,000 and $30,000 in offshore companies registered in the Cayman Islands. This document, signed by Kerry, shows his pledge to purchase 2,470 shares of Peabody Commodities Trading Corp. through Sytel Traders, registered in the Caymans.
Read the document
But records kept by a Kerry aide at the time and reviewed by the Globe indicate Kerry also owned stock in another company, Peabody Commodities Trading Corp., as part of the transaction. In an agreement he signed on Dec. 13, 1983, Kerry pledged 2,470 shares he held in Peabody Commodities as collateral for a $238,527.40 promissory note he signed the same day to Sytel Traders Ltd. Sytel was to lend that amount to "Gin Vest Inc." to cover forward contracts to buy and sell unspecified commodities.
Kerry has never reported a stake in Peabody Commodities, which, like Sytel Traders, was registered in the Cayman Islands, according to records of the Register of Companies office in the Caymans, where strict secrecy rules conceal corporate ownership interests. Peabody Commodities was registered eight days before Kerry's transaction, the records show.
Kerry did not dispute the authenticity of the documents, but he dismissed them as "paperwork" that did not reflect real assets, actual debt, or liability arising from the complex scheme.
"There was no real collateral that I was involved in; none whatsoever," Kerry said. "It was paperwork. That's why my accountant said it sucked. . . . I was never, ever on the hook for any number in that note. Nobody ever noticed me to that effect nor was that in fact the legal reality. I completely walked away from my own personal investment. End of issue."
Kerry declined to permit an interview of his accountant, whose advice proved to be sound. In ensuing years, the Internal Revenue Service cracked down on tax shelter abuses, including some involving Sytel and its subsidiaries, designed to avoid what was then a high marginal tax rate of 50 percent on ordinary income by taking advantage of the lower 20 percent rate on income gains from long-term capital investments.
Some Sytel investors who claimed tax deductions were caught in IRS audits and paid steep penalties, according to Joe Vaulx Crockett III, a Nashville lawyer who represented about 30 Sytel clients in US Tax Court. The IRS questioned whether there were assets underlying the options, or forward contracts, being bought and sold, Crockett said.
Lawyers and others familiar with Sytel investments said it worked like this:
Sytel, which has since dissolved, served as broker of forward contracts, which were agreements to buy or sell a certain commodity at different fixed prices, on specific dates in the future. Often, these were mortgage-backed securities issued by the Government National Mortgage Association (Ginnie Mae), and the investor would pay a small up-front amount, at least 10 percent of the total value.
At some point, contracts that were declining in value because of market fluctuations would be canceled, resulting in a loss, and the contracts that were rising in value would be exercised, creating a gain.
For tax purposes, the loss from the cancellation would be deducted, dollar for dollar, against ordinary income. Profits would be declared as long-term capital gain income, which was taxed at a much lower rate. The spread between the two was supposed to produce a net after-tax gain, though profits or losses could vary depending on market trends.
As a senator, Kerry voted for the Tax Reform Act of 1986 that eliminated most tax shelters and the disparity in tax rates that produced the incentive to create them.
Although two of the companies involved were based offshore, Kerry said he was unaware of a Cayman connection. The first sentence of the pledge agreement that Kerry signed, however, describes Sytel Traders as "a corporation duly organised (sic) and existing under the laws of the Cayman Islands."
"I didn't look at it. I honestly didn't," he said. "[I was] never aware of that, and I would have opposed that."
Asked if Ginvest was created specifically for his investment, he replied: "I think that's correct. I think they created some entity that became called whatever, you know, name they gave it, which became the conduit or the holding company for whatever transactions were that generated the `loss,' income, depending when and how they bought what they did, and they were the ones who knew how to do it."
"It wasn't legit," said Kerry. "And thank God my accountant looked at me and said, `Don't do this,' and thank God, I think, that I had the good judgment to listen to him and not want to create something that I would pay the price for down the road."
This story ran in the Boston Globe on 6/19/2003.
© Copyright 2003 Globe Newspaper Company.