Sunday, February 10, 2013


Wednesday, July 25, 2012

Bankruptcy, Page-by-Page, Line-by Tedious-Line

July 25, 2012

Monday, November 21, 2011

Billionaires Duck Buffett 17% Tax Target Avoiding Reporting Cash to IRS

When billionaire Billy Joe “Red” McCombs, co-founder of Clear Channel Communications Inc., reported a $9.8 million loss on his tax return, he failed to include about $259 million from a lucrative stock transaction.After an audit, the Internal Revenue Service ordered him to pay $44.7 million in back taxes. McCombs, who is worth an estimated $1.4 billion and is a former owner of the Minnesota Vikings, Denver Nuggets and San Antonio Spurs sports franchises, sued the IRS, settling the case in March for about half the disputed amount.McCombs’s fight with the IRS illustrates an overlooked facet in the debate over tax rates paid by the nation’s wealthiest. Billionaires -- from McCombs to Philip Anschutz to Ronald S. Lauder -- who derive the bulk of their wealth from stock appreciation are using strategies that reap hundreds of millions of dollars from those valuable shares in ways the IRS often doesn’t classify as taxable income, securities filings and tax court records show.“The 800-pound gorilla is unrealized appreciation,” said Edward J. McCaffery, a professor of law, economics and political science at the University of Southern California in Los Angeles.While Warren Buffett has generated attention with his complaints that he and his fellow billionaires pay federal income taxes at a lower rate than his secretary -- about 17 percent -- the real figure is often smaller, said David S. Miller, former chair of the tax section of the New York State Bar Association and a partner at Cadwalader, Wickersham & Taft LLP in New York.“The problem is not that people like Warren Buffett pay tax at a 17 percent rate, it’s that they can use complex transactions not available to most Americans to get cash from their appreciated stock without paying any taxes at all,” Miller said.Tip of IcebergThe rate at which the 400 U.S. taxpayers with the highest adjusted gross income actually paid federal income taxes --their so-called effective tax rate -- fell to about 18 percent in 2008 from almost 30 percent in 1995, IRS data show. That’s the tip of the iceberg, since much of their wealth never converts into income on a tax return, McCaffery said.In the McCombs case, the billionaire entered into transactions known as variable prepaid forward contracts. He received about $259 million for lending an investment bank his Clear Channel shares with a promise to deliver the stock for good a few years later. The arrangement enabled McCombs to defer paying capital gains tax because he hadn’t sold his shares, lawyers for the billionaire said. The IRS deemed the transaction a sale since the bank paid McCombs cash and got the use of his stock almost immediately.Taxes on MillionairesTransactions like these may complicate plans by U.S. President Barack Obama to help close the federal deficit by increasing taxes on millionaires. Obama has said the tax code should contain a “Buffett Rule” to ensure that millionaires pay taxes at least at the same rate as middle-class Americans. Republicans have said they prefer lowering tax rates for businesses and the wealthy. Buffett declined to comment.In the past two years, some of the wealthiest executives in the U.S. have used deals similar to McCombs’s to reap returns while deferring the taxes without running afoul of IRS rules, securities filings show.Dole Food Co. Chairman David H. Murdock received about $228.6 million in 2009 against his Dole shares -- tax-free until he is scheduled to deliver shares in November 2012, a filing shows.Starr InternationalStarr International Co., the investment vehicle run by Maurice “Hank” Greenberg -- forced from his position as chairman and chief executive officer of American International Group Inc. (AIG) in 2005 -- utilized a prepaid forward agreement last year to receive $278.2 million from an investment bank, according to a March 2010 regulatory filing. The investment vehicle isn’t slated to deliver the AIG stock until 2013.Lauder received $72.9 million in June as part of a variable prepaid forward sale and is scheduled to deliver the Estee Lauder Cos. shares in June 2014, according to a filing with the U.S. Securities and Exchange Commission.Spokespersons for Lauder, Murdock and Starr International declined to comment.Realized GainsWhile the tax treatment of these plans isn’t disclosed in the filings, “there’s no other reason to enter into such a convoluted arrangement,” said Robert Willens, an independent tax accounting analyst in New York. These arrangements can cost several million dollars in fees, according to tax planners.Taxes on capital gains are triggered when assets like appreciated shares are sold -- a process called realization. What constitutes a realized, taxable sale is a frequent bone of contention between the IRS and the clients of tax planners.Transactions intended to pull cash out of appreciated assets tax-free aren’t limited to stock. Boston real estate developer Arthur M. Winn exited his interest in a piece of real estate by converting his stake into a share of a partnership free of any capital gains tax, court filings show.The IRS objected and claimed Winn and his partner should have reported a $12 million taxable gain. A U.S. Tax Court judge sided with Winn on one aspect of the deal; others were settled with the government. The details haven’t been disclosed.Winn, who earlier this month pleaded guilty to making illegal campaign contributions, has retired from WinnCompanies. He did not respond to messages left with his attorney and with the company.Mark-to-MarketMiller, the former chair of the tax section of the New York State Bar Association, has proposed a so-called mark-to-market system to tax the annual appreciation in the stock holdings of the top 1/10th of 1 percent of taxpayers. That would essentially tax gains in a given year regardless of whether the shares are sold. In a 2005 article in the journal Tax Notes he estimated this approach would raise between $490 billion and $750 billion over a decade.Borrowing against appreciated stock and real estate is a popular tax deferral strategy particularly as interest rates plummet, said Randy Beeman, a private wealth manager at The Wise Investor Group in Reston, Virginia, a unit of Robert W. Baird & Co. The interest rate on loans to some wealthy individuals has hovered around 1 percent.Vikings PurchaseMcCombs, ranked 312 on the most recent Forbes 400 list of the richest Americans, made his fortune in automobiles, real estate, and then by building Clear Channel into a large radio station operator and outdoor advertising business. He is now the chairman of Xe Services LLC, the military security contractor formerly called Blackwater Worldwide.In the late 1990s, McCombs borrowed about $300 million to finance the purchase of the National Football League’s Minnesota Vikings. By 2002, the Clear Channel shares pledged as collateral were falling in value and McCombs faced margin calls from lenders. He didn’t want to sell his shares, partly because of “a strong emotional attachment to his ownership in the company,” according to a filing by his lawyers in U.S. Tax Court.Instead, he entered into a series of variable prepaid forward contracts, receiving about $259 million from JPMorgan Chase & Co. (JPM) in exchange for an agreement to deliver his Clear Channel stock in one to three years. The transaction was structured to limit his potential losses by varying how many shares he would deliver at the end of the transaction.He loaned those shares to JPMorgan in the interim. That allowed the New York-based bank to short the stock -- selling the borrowed shares to hedge against any decline in the price of the stock it would eventually receive from McCombs.Lawyers said the cash received up front didn’t have to be reported as income because it wasn’t a taxable sale until McCombs turned over those shares for good.The IRS said the transaction was a cash sale of the shares, generating taxable income of as much as $213 million.Benefits and BurdensOver the years, the IRS has tried to crack down on such deals. In 2006, the agency declared that including a share loan meant these types of transactions were sales, triggering an immediate income tax obligation. In McCombs’s case, his lawyers contended that the share loan was separate from the first part of the transaction, and thus didn’t transfer the so-called “benefits and burdens” of owning the stock. He settled his case for $23 million in back taxes plus interest.In 2010, a U.S. Tax Court judge found Philip Anschutz, the entertainment, oil and media investor, owed $94 million in taxes after he used transactions similar to the ones used by McCombs. Anschutz, identified by Forbes as the 39th richest man in the U.S., is appealing the decision.‘More Hostile’“The IRS shifted its view and threatened a legitimate business practice and that will have a dampening effect on investment,” said a spokesman for Anschutz.The IRS has “gotten more hostile toward these transactions over the years,” through its various technical pronouncements and litigation, said Willens, the accounting analyst. Since 2006, such transactions haven’t included the interim loan of shares to the investment bank, he said.“It’s still desirable to defer the tax and wind up with an interest free loan from the government,” he said. “Chances are you don’t get audited and if it does get challenged the odds are good you’ll have a settlement for some fraction of the amount you saved. Who wouldn’t want that?”To contact the reporter on this story: Jesse Drucker in New York at

Wednesday, February 23, 2011

Big Law's $1,000-Plus an Hour Club

Leading attorneys in the U.S. are asking as much as $1,250 an hour, significantly more than in previous years, taking advantage of big clients' willingness to pay top dollar for certain types of services.

A few pioneers had raised their fees to more than $1,000 an hour about five years ago, at the peak of the economic boom. But after the recession hit, many of the rest of the industry's elite were hesitant, until recently, to charge more than $990 an hour.

Thursday, September 16, 2010

JPMorgan Brings Foreclosure Case In Mortgage In Which It Was Just A Servicer, Court Finds Bank Committed Fraud

An interesting development out of Jean Johnson, Circuit Judge in Duval Country, Florida, where in a case filed by JPMorgan/WaMu, as Plaintiff, and law firm of Shapiro and Fishman, attempted to evict defendants Hank and Marilyn Pocopanni. As basis for the legal case, WaMu had submitted an assignment of mortgage, which however the court just found never actually belonged to WaMu, and instead was carried on the books of Fannie Mae. Once this was uncovered is where this case gets really interesting: In point 5 of the filing we read that the "plaintiff predecessor counsel made "clerical errors" when it represented to the Court that the plaintiff was the owner and holder of the note and mortgage rather than the servicer for the owner." Which means that only Fannie had the right to foreclose upon the Pocopannis, yet JPM, as servicer, decided to take that liberty itself. And here the Judge got really angry: "The court finds WAMU, with the assistance of its previous counsel, Shapiro and Fishman, submitted the assignment when [they] knew that only Fannie Mae was entitled to foreclose on the Mortgage, and that WAMU never owned or held the note and Mortgage." And, oops, "the Court finds by clear and convincing evidence that WAMU, Chase and Shapiro & Fishman committed fraud on this Court" and that these "acts committed by WAMU, Chase and Shapiro amount to a "knowing deception intended to prevent the defendants from discovery essential to defending the claim" and are therefore fraud. While the Judge in this case did not also find declaratory damages against the plaintiff, and while the case of the defendants is unclear (we would expect Fannie to file a foreclosure act on its own soon enough), the question of just how pervasive this form of "fraud" in the judicial system is certainly relevant. Because if JPM takes the liberty of foreclosing on mortgages as merely servicer, when it has no legal ground for such an action, who knows how many such cases the legal system is currently clogged up with. The implications for the REO and foreclosures track for banks could be dire as a result of this ruling, as this could severely impact the ongoing attempt by banks to hide as much excess inventory in their books in the quietest way possible.

Our advice to any party caught in a foreclosure process is to immediately go to and use the Lookup Tool to see if Fannie is still mortgage owner of record, if a foreclosure suit has been brought up by a plaintiff other than the GSE.

We are confident quite a few other such cases will promptly appear.

Pocopanni Order Dismissing With Prejudice

Sunday, May 02, 2010

Who Knew Bankruptcy Paid So Well?

MORE than $263,000 for photocopies in four months. Over $2,100 in limousine rides by one partner in one month. And $48 just to leave a message. Explanations for these charges? Priceless. To date, Weil, Gotshal & Manges the lead law firm representing Lehman, has billed the Lehman estate for more than $164 million. With first- and second-year associates charging more than $500 an hour in some of these bankruptcy cases, according to court records, that can amount to some pretty expensive downtime. At several firms, including Weil and Milbank, Tweed, Hadley & McCloy, partners now charge $1,000 an hour or more for their bankruptcy services.

ON the evening of Sunday, Sept. 14, 2008, Mr. Marsal was sitting in his study in Westchester County, N.Y., when the phone rang.

Calling was Mark Shapiro, who ran Lehman’s restructuring practice. He told him that Lehman’s lawyers were preparing a bankruptcy filing and that the board wanted Mr. Marsal’s firm to oversee the bankruptcy and eventual liquidation after Barclays and others bought pieces of the firm.

Since receiving that call, Mr. Marsal’s firm has been billing $13 million to $18 million a month in fees and expenses for its work on Lehman, a 160-year-old name on Wall Street.

Mr. Marsal says the firm will most likely bill at $13 million a month through October, just after the second anniversary of Lehman’s collapse. After that, rates will begin to decrease, although Alvarez & Marsal will also earn an incentive fee at the end of the case, which could total more than $50 million.

“The size of this case justifies the size of the fees,” says Mr. Marsal, shrugging as he sits in a conference room at Lehman’s headquarters in Midtown Manhattan. Mr. Marsal and Mr. Suckow estimate that they have increased the potential recovery value for Lehman creditors by $4 billion to $5 billion in the last year.

IF anyone is a master of getting to yes, it’s Kenneth Feinberg. As a mediator, he brokered settlements in long-running product liability suits brought by those who said they were victimized by Agent Orange, asbestos and the Dalkon Shield. More recently, he managed to win praise on delicate assignments like determining how much the Sept. 11 Victim Compensation Fund should pay out — or what is an appropriate salary for an executive at a financial institution that the government propped up with taxpayer funds.

Mr. Feinberg is perplexed by why fees keep rising in the Lehman case, even though it’s no longer the chaotic affair it was in the weeks and months after the bankruptcy filing. “Now the emergency is over; it is more like a traditional bankruptcy,” he says. “Yet the fees are higher than ever.”

On a rainy summer day last year, Mr. Feinberg journeyed to the plush offices of Mr. Miller in the General Motors building in Manhattan. His pitch was simple: Cut 10 percent to 15 percent right off the top of the fees being billed.

Among the new fee rules being enforced are these: Air travel must be in coach class only. Ground transportation is limited to $100 a day, and only after 8 p.m. Hotel rooms are capped at $500 a night. Photocopy charges are limited to 10 cents a page. Late meals can’t be more than $20 each.

Thursday, April 08, 2010

Lawsuit Targets Mobile Real Estate Apps

Mobile real estate applications company Smarter Agent has filed a federal class-action lawsuit alleging patent infringement by major real estate companies including Move, Zillow and Trulia, among others.

In the complaint, filed in the U.S. District Court for the District of Delaware, Smarter Agent alleges that the companies named in the suit violated three of its technology patents, all of which allow users to access real estate information via a mobile device. The suit alleges infringement by "making, using, importing, providing, offering to sell, and selling (directly or through intermediaries), infringing products and/or services."

The suit names the following companies as defendants: Boopsie Inc., Classified Ventures LLC, HotPads Inc., IDX Inc., Move Inc. and subsidiary RealSelect Inc., Multifamily Technology Solutions Inc. (owner of, Primedia Inc. and subsidiary Consumer Source Inc., TRSoft Inc. (owner of, Trulia Inc., Zillow Inc. and ZipRealty Inc. The complaint was filed March 26.