Wednesday, January 7, 2009

Manulife involved in "blatantly abusive tax shelter"



Manulife in hot water over tax shelter


Eoin Callan, Financial Post
January 06, 2009


Manulife Financial Corp. is attempting to take advantage of the credit crisis to cash in early on a complex financial transaction that lawmakers view as a "tax shelter scam" and were due to shut down.

Canada's largest insurer on Monday turned to a U.S. court to force a rural electricity cooperative in Indiana to make an immediate US$120-million payment under the tax avoidance scheme in a move that would force the non-profit utility into bankruptcy.

The windfall would provide Manulife with a cash injection at a time when its U.S. subsidiary, John Hancock Financial, is draining capital from the parent company because of heavy exposures to volatile financial markets and is being claimed early because of a slip in the credit rating of one of the parties to the controversial transaction.

But the aggressive move is inciting fury on Capitol Hill, where influential members of Congress say the company is exploiting a legal loop hole to claim money it is not legitimately entitled to given recent findings that the underlying tax scheme is abusive.

Spurred on by Manulife's court action, a Democratic Senator is drawing up a new law that would apply a punitive excise tax on the Canadian insurer and any other financial institution that took similar steps, according to congressional aides.

At the heart of the fractious dispute that could jeopardize the power supply to 350,000 homes in the U.S. heartland is an opaque tax scheme that briefly gained popularity a few years ago among accountants working on behalf of insurers and banks with an appetite for risk.

Under the complex structure, financial investors entered into deals with non-profit utilities in the United States in which they acquired generating stations and train tracks and then immediately leased the assets backed to the co-operatives.

The exchanges of assets only took place on paper and had no underlying economic substance, but allowed financial companies to claim tax benefits the non-profit groups had no use for. But the deals have since been deemed abusive by U.S. authorities and were described as "shady tax shelters" and a "tax shelter scam" in Congress last month by Montana Senator Max Baucus.

While it is not clear how many of these transactions Manulife is involved in, public records suggest it is party to at least three similar deals.

The Internal Revenue Service is understood to be probing these transactions and pursuing a settlement with the Canadian insurer along the lines of earlier deals in which financial companies surrendered 80% of the withheld taxes.

The probe is understood to include the deal initiated in 2002 by Manulife's U.S. subsidiary, John Hancock, with the Hoosier Energy Rural Electric Cooperative, which led to the Toronto-based insurer owning parts of an electricity generator on the Wabash River in Indiana's corn belt.

As things stood before the credit crisis struck, that deal looked set to be wound down along with the others targeted by the IRS.

"The IRS will certainly deny the benefits that John Hancock is claiming," according to Joseph Bankman, a Stanford law professor whose opinion was submitted to a U.S. court on Monday.

But in the fine print of the 4,000-page agreement detailing the original transaction with the non-profit group is a clause that required the deal to be backed up by a financial guarantor with a triple-A credit rating in case the utility defaulted on its lease payments.

While Hoosier has never faltered in its commitments to Manulife under the deal, the financial guarantor -- Ambac -- has seen its credit rating downgraded amid the credit crisis along with many backers of so-called credit default swaps.

Manulife has seized on the change in the credit rating to claim a $120-million payment under the credit default swap for "early termination," allowing it to collect the tax benefits upfront.

Lawmakers and a lower Indiana court have dismissed this as a technical default given the guarantor is still backing the deal and Manulife could not reasonably expect to enjoy the tax benefits anticipated when the original deal was struck.

Hoosier argued before an appeal court on Monday that the claim by Manulife combined "some of the worst aspects of modern finance" that "combines the sometimes toxic intricacies of credit default swaps and investment derivatives with a blatantly abusive tax shelter."

Manulife declined to comment.

6 comments:

Red Tory said...

Heh. As a Manulife investor I can't say that I'm altogether displeased by this news.

Anonymous said...

Ray Loewen of Loewen Group was ruined in the US court system, it could happen to D'Allesandro if he is not careful.

The Yanks don't take kindly to this kind of stuff and now the regulatory issues are red hot. Dominic should be very careful. Maybe Manulife is a short.

HL

Anonymous said...

I guess Dominic D'Alessandro is an expert on economic abuse:

Financial Post January 30, 2007:

"Not is everyone in the financial industry automatically opposed to the government's action. Manulife Financial president and CEO Dominic D'Alessandro, scheduled to appear on Thursday, has described Flaherty's decision as "the right thing. ? We can't income trust our entire economic sector. It makes no sense." The trust idea was becoming abused, he said
********************************************************************************
Financial Post January 6, 2009:

"Lawmakers and a lower Indiana court have dismissed this as a technical default given the guarantor is still backing the deal and Manulife could not reasonably expect to enjoy the tax benefits anticipated when the original deal was struck.

Hoosier argued before an appeal court on Monday that the claim by Manulife combined "some of the worst aspects of modern finance" that "combines the sometimes toxic intricacies of credit default swaps and investment derivatives with a blatantly abusive tax shelter."

Manulife declined to comment."

GL

Anonymous said...

Michael Ignatieff, John McCallum, Scott Brison:

Dear sirs:

Here is some information on the wonderful company Manulife, that reportedly encouraged you to end the Income trusts prior to
Halloween night 2006, then magically launched their "Income Plus" a mere few days after, to a host of investment advisors at Roy Thompson Hall in Toronto.

I would point out the irony that income trusts were shut down by yourselves, on the false argument that they are tax abuses and this measure was applauded by Manulife - and meanwhile we have Manulife engaged in these abusive tax scams.

Do I understand too that us poor Taxpayers helped bail out Manulife lately when their "guarantee never to lose your money" program ran into difficulties. Now I may be wrong here honourable Gentlemen, but don't you think you should avoid being seen in public with Manulife bigwigs? and certainly not help this shoddy company with taxpayer's hard earned money to overcome Manulife's poor business practices?

Why not help average Canadians for a change, I mean really help!
Is it not time gentlemen, to admit a mistake was made in ending the Income tax structure and to candidly admit so, and restore the income Trust structure so that Canadians can once again provide for their own retirement with a business structure that despite 18 pages of blacked out documents, is tested and proven to be a sound business model that actually increased income to both Senior Citizens, (the very same one's who's nest-eggs you swore never to raid,) and increase the Government of Canada Revenues at the same time?

Please give this some careful consideration I beseech you, and act in the interest of all Canadians, not just Manulife and or Power Corp.

Sincerely,
Paul M, Senior Citizen,

Anonymous said...

Corporations will do anything because their DNA states: Pay No Tax.

I think the effective tax rate on MFC (Manulife) was 11% in 2007.

JC

Anonymous said...

That's rich, these deals are exactly the same as the library books and hospital deals that Newcourt and others like Barclays did back in the mid '80s!

NT