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.
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
IRS spokeswoman Jean Carl declined to comment, citing rules on
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
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
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
Anschutz notes, though, it had the right to demand the return
the shares at any time.
Finance Editor David Milstead can be reached at
milstead@RockyMountainNews.com or 303-954-2648.