Two financial firms have settled charges by the Internal Revenue Service that they improperly sold the noneconomic residual interests in real estate mortgage investment conduit securities.The resolution of the disputed transactions requires The Diversified Group Inc., New York, and AVM LP, West Palm Beach, Fla., to disgorge their profits to the IRS, plus penalties and interest. The IRS indicated that the settlement is in the tens of millions of dollars. AVM and an affiliate of Diversified reportedly purchased the noneconomic residual interests (NERIs) from Wall Street underwriters and sold the residuals to a Wyoming limited liability company that is owned by two Irish companies not subject to U.S. taxes. IRS guidelines stress that NERIs must be sold to U.S. taxpayers. The settlement "pre-emptively shuts down the deduction of over $1 billion in phantom tax losses arising from the NERIs," the IRS said. AVM chief executive officer Bill McCauley said it is an "old matter" and that he is pleased it has finally been resolved. AVM has not brokered NERIs since the late 1990s, he said. Diversified could not be reached for comment.
