September 30, 2002
Kinky Tax Tricks
BYLINE: Janet Novack
SECTION: Pg. 50
LENGTH: 359 words
HIGHLIGHT:
Is the IRS shutting down a tax trick?
The Lauders did it. So did Craig McCaw and Ronald Perelman.In
January 1998 Merrill Lynch paid Ciber Inc. Chief Executive Bobby G. Stevenson
$82 million in cash for his agreement to deliver a chunk of his Ciber shares by
Feb. 1, 2001. It was a sweet deal for Stevenson, whose stock is off 80% since he
got the cash. He locked in gains before the tech market tanked, but would not be
taxed on his gains until he handed over the shares in 2001--or so he believed.
The Internal Revenue Service is now demanding Stevenson pay 1998 taxes on his
$82 million gain. Stevenson is fighting the claim in U.S. Tax Court, but if the
IRS sticks by its position and is upheld, it threatens a strategy apparently
used by many wealthy individuals to raise cash and hedge risk while deferring
taxes. "If this is the IRS' official litigating position, people will be
shocked,'' says Lehman Brothers tax expert Robert Willens.Stevenson's
deal with Merrill was essentially a prepaid variable forward contract--a "kinky
forward," it's been called. In these contracts, selling stockholders,
such as Stevenson, get cash upfront but retain some exposure in a stock. Tax is
supposedly deferred until the contract is settled. After all, how can you pay
tax before you know exactly how much your gain is?Merrill used Stevenson's stock
pledge to issue a type of convertible security it calls Strypes, which other
firms market with acronyms such as Decs and Traces. Strypes purchasers get fixed
interest payments plus a large share of any gains in the underlying stock while
assuming all or almost all the risk of loss. Others who have been on the selling
side of Strypes include the families of Dollar General Chief Cal Turner Jr. and
Washington Redskins owner Daniel Snyder. The Lauder clan did two Traces deals
with Estee Lauder stock.Wall Street has also been churning out private prepaid
variable forward deals. According to SEC filings, both Craig McCaw and Ronald
Perelman have used them.Does the Stevenson case signal a wider crackdown? The
IRS declines to say. But other wealthy taxpayers are also being challenged on
this issue, our sources say.