Monday, June 9, 2008
WSJ: IRS Targets Billionaire's Variable Prepaid Forward Contract Tax Strategy
Front page story in today's Wall Street Journal: IRS Targets Billionaire's Lucrative Tax Strategy, by Jesse Drucker, which discusses the IRS's attack on Variable Prepaid Forward Contracts:
The IRS is fighting with billionaire Philip Anschutz to force the Denver-based mogul to pay back taxes totaling $143.6 million. The court battle is part of a broad attempt by tax authorities to crack down on complex transactions used to defer paying capital-gains taxes.
The imbroglio stems from transactions that Mr. Anschutz entered into involving shares he owned in Union Pacific Corp. and Anadarko Petroleum Corp. in 2000 and 2001. The deals netted him cash, as well as a share of any future rise in the stock price, with a total value of roughly $429 million. The arrangement is also set up to protect him against losses if the stock price falls.
He contends the deals technically weren't completed sales for tax purposes, and thus didn't trigger tax obligations, according to filings in U.S. Tax Court in Washington. As a result he hasn't paid capital-gains taxes on the transactions.
Mr. Anschutz -- an oil, railroad and media investor identified as the 41st-richest man in the U.S. by Forbes -- isn't the only person to use such an arrangement. Executives at companies including Starbucks Corp., Costco Wholesale Corp., Tyson Foods Inc., IAC/InterActive Corp., Cablevision Systems Corp. and Apollo Group Inc. have all used similar "variable prepaid forward contracts" to cash in shares in these companies and related entities, according to securities filings.
The tax treatment of these executives' arrangements isn't public, so it isn't clear whether the transactions involved deferral of taxes of the type the IRS is targeting. Experts say tax deferral is a typical component of such arrangements. ...
In transactions like the one used by Mr. Anschutz, an executive agrees to turn over his shares to an investment bank on a specific date in the future, and meanwhile loans the bank the same amount of stock. The bank gives the executive cash up front, generally equal to as much as 80% of the shares' fair market value.
Investors argue they don't owe taxes until they conclude the transaction fully, by delivering the shares for good. Several tax experts disagree. "You've got all the elements of a completed sale: One guy's got the money, and the other guy's got the stock," said Robert Willens, a former Wall Street tax analyst who runs his own corporate-tax advisory firm in New York. "What more do you need for a sale?"
Joe Kristan has more here.