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Dispute with IRS could cost Anschutz millions
Issue hinges on whether a loan is sometimes a sale

By David Milstead
Rocky Mountain News
Tuesday, June 10, 2008

Phil Anschutz is citing an IRS ruling to back his case.

Denver financier Phil Anschutz's tussle with the taxman is an academic exercise with at least $113 million at stake.

Anschutz is challenging an Internal Revenue Service view that he owes additional taxes for 2000 and 2001 on capital gains of nearly $430 million.  He's citing one of the agency's own rulings as evidence.

"The Anschutz Co. consulted with highly skilled attorneys and it had every reason to believe the transactions were within the guidelines previously established by the IRS," said spokesman Jim Monaghan.

IRS spokeswoman Jean Carl declined to comment, citing rules on taxpayer privacy.

The disagreement hinges on whether a loan can sometimes really be a sale.

The IRS says Anschutz effectively sold shares in Union Pacific Resources and Anadarko Petroleum, creating the gain.

That is not clear, since Anschutz didn't call a broker and sell shares in the open market.

Instead, he used a complex transaction called a "variable prepaid forward sales contract."

Anschutz struck a deal with investment bank Donaldson Lufkin Jenrette, promising to sell the shares several years in the future.  Anschutz got much of the market value of the shares upfront.  The exact number of shares DLJ would ultimately get depended on the stock price when the deal closed.

Generally, the shares aren't truly sold until the contract is closed.  So Anschutz got liquidity and portfolio diversity while deferring taxes.

Many others in corporate America have used similar techniques.  The Wall Street Journal, which first reported Anschutz's IRS dispute Monday, said executives at several companies, including Starbucks, Costco, Tyson Foods, IAC/Interactive, Cablevision and Apollo Group, have also used the technique.

Anschutz's dispute is not necessarily limited to the sales enumerated in the IRS case, currently being heard in U.S. Tax Court. Anschutz has used forward contracts to sell hundreds of millions of dollars of stock in Qwest, Union Pacific and Forest Oil.

Not all may contain an element that's causing the problems with the IRS.  In 2003, the agency initially issued a ruling saying these types of tax-deferring forward contracts were acceptable -- the shares were not truly being sold.

However, that ruling did not address whether it was OK for the "seller" to loan the shares to the other party before the contract ended.  The investment banks entering into these deals with executives often borrowed the sales and sold them, a practice known as shorting.  By betting the shares would fall in value and could be repurchased later, the investment banks mitigated their risk.

The IRS is looking back to the 1970s, citing the case Hope vs. Commissioner.  Tax analyst Robert Willens said the case didn't deal with forward contracts like the ones Anschutz and others used, but it found that lending shares as part of a transaction effectively made it a sale.

Willens said the sales by Anschutz and others "conformed to the IRS guidelines" in the 2003 memo, but he agrees with the agency that if the investment bank had the right to sell the shares it borrowed from Anschutz, "that's sufficient to complete the sale."

Anschutz notes, though, it had the right to demand the return the shares at any time.

Finance Editor David Milstead can be reached at or 303-954-2648.