Bank Seeks to Dismiss Suit by U. of Arizona Foundation

October 25, 2013

A major bank is seeking to dismiss a lawsuit filed against it by the University of Arizona Foundation and a major university donor that blame the bank for its role in an offshore tax shelter they all had stake in and the federal government later cracked down on.

The foundation and Karl Eller, a major donor who is the namesake of the university’s business school, claim in federal court they were duped by a number of financial advisers, including UBS, into investing in a “sham tax shelter.”

Eller and his wife invested more than $30 million in Cayman Island’s tax shelters and then donated part of their stake to the university foundation. Now, the Ellers and the foundation are seeking unspecified damages from UBS after the I.R.S. cracked down on the deal. Tax documents introduced into the court file by UBS show federal tax officials sought a tax adjustment from the foundation, but it's unclear what the foundation lost in the deal, if anything, because the foundation earlier this month declined to comment or to specify what sort of monetary damages it is claiming to have suffered.

In a federal court filing Thursday, UBS said the lawsuit should be dismissed because, among other things, the Ellers have failed to make their case. UBS also notes that the Ellers were told there was a 30 percent chance the I.R.S. would frown on the deal before the Ellers made their multimillion-dollar investment.

UBS's court filing also said the University of Arizona Foundation has failed to make any claim against UBS in the litigation. 

At the heart of the deal is the a complex financial instrument known as a contingent deferred swap, which the Ellers opted to use in an effort to reduce their tax liability and free up money they could turn over to the university foundation. A U.S. Senate investigation described the swaps as ways to generate “phony paper losses for taxpayers, using a series of complex, orchestrated transactions, structured finance, and investments with little or no profit potential.” The “phony paper losses” could then be used to reduce an investor’s tax burden.

The Ellers have given university or the foundation more than $23 million over the years. 

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