William Kilpatrick reorganizes his tax shelters
by Alyssa A. Lappen
Forbes | Feb. 9, 1987
Vol. 140, No. 3, pp. 60-61
Question: What do bad marriages and bad investments have in common? They’re easier to get into than to get out of. Just ask the 1,000 or so luckless souls who invested upwards of $120 million in various tax shelter schemes promoted several years ago by a Denver businessman named William A. Kilpatrick, a prominent target of the Internal Revenue Service’s campaign to stamp out abusive tax shelters.
Tax reform has largely closed down tax shelters of all sorts, including 4-to-1 writeoffs like those Kilpatrick promoted through his United Financial Operations Inc. Those unlucky enough to have invested in Kilpatrick’s limited partnerships have suffered, as the Internal Revenue Service is still fighting to deny investors their promised writeoffs on his deals–assessing them instead with hefty back taxes, penalties and interest charges.
One dazed investor pumped $165,000 into a Kilpatrick deal five years ago and, to stop his tax bill from mounting, recently decided to pay out $580,000 in back taxes and interest. Chastened, he now says: “Businessmen should pay their taxes and hope that next year they owe more.’
As for the investors’ quandary: Kilpatrick insists that his investors pay up on hundreds of limited partnership contracts they signed years ago but which now have little value.
In 1977 Kilpatrick began putting together $700 million worth of convoluted deals involving investments in proposed coal mining and synthetic fuel ventures. In the partnerships, the deals provided that each investor pay $12,500 in cash, as well as sign a promissory note for $37,500 from one of several foreign banks.
Kilpatrick’s operating company promised to invest the resulting funds with a Cayman Islands firm. That company, in turn, would use the money for research and development on synthetic fuel plants, thus giving the investors a total of $50,000 in first-year tax deductions. Investors also signed yet more notes, this time not from the banks but directly from two Cayman Islands research and construction companies.
A lot of supposedly smart people went for the deals, but the IRS considered the whole arrangement just a tax dodge, and Kilpatrick was charged with masterminding $120 million in phony deductions. The court threw out all the fraud charges, ruling that the indictment had “failed to state a crime.’ Overzealous IRS investigators also contaminated the case by manipulating evidence before a grand jury, and the final charge–obstruction of justice–was dismissed in September 1984.
Kilpatrick proclaims himself fully exonerated. But the Justice Department has appealed to have all charges reinstated. Meanwhile, without awaiting the decision, Kilpatrick has come back with another scheme. Without consulting the limited partners, he has consolidated the partnerships from United Financial into a new corporation–Green Mountain Herbs Inc., a spice distributor that was in Chapter 11. It had gone public over-the-counter in the late 1970s, rose to a high of $2 a share, and was languishing at 2 cents a share before United merged with it in late 1986.
Through a complex reorganization plan involving the swap of stock and assets, Kilpatrick arranged to get back $140 million in investor promissory notes from the Cayman Islands research and construction firms that held them, in exchange for 4.4% of Green Mountain stock. Kilpatrick himself took 32% of the stock.
The paper shuffle, in effect a tax-free exchange of “like assets,’ had two other important benefits for Kilpatrick. First, it gave Green Mountain the appearance of a fresh infusion of capital in the form of the Cayman Islands promissory notes and other new assets–primarily a coal-cleaning technology of unproved value. Second, by making United Financial in operating subsidiary of Green Mountain, Kilpatrick could continue arguing with the IRS that United’s investors were indeed entitled to claim their tax deductions, since United remained a going concern.
And now comes the kicker: Kilpatrick has gone back to his original investors and is insisting that they make good on the notes they signed to the Grand Cayman outfit. If they pay, the limited partners are promised a 29% block of Green Mountain stock. But that is hardly a powerful enticement, since the stock now trades at 25 cents bid. It seems unlikely to grow in value by more than whatever cash the investors choose to pay on their promissory notes.
Kilpatrick says that he will use what funds he collects to build up the business. In hopes of bolstering the stock price, he is now busy talking up Green Mountain to brokers nationwide. But many investors are skeptical of his plans, and collecting the money won’t be easy. “This is going to be a real dogfight,’ gripes Howard Moon, a Houston investor who sank at least $50,000 into Kilpatrick deals. Adds John Cook, a Texas oilman who put in $98,000 and now faces tax penalties that could bankrupt him, “Nothing he has ever done has worked out. He says, “Trust me again.’ But we will not.’
Undaunted, Kilpatrick now even wants to acquire the assets of seven other tax shelter promoters, holding a total of $40 million in uncollected notes from deals that also have soured. Kilpatrick says he intends to collect on those debts, too. In ice hockey, they’d call that a hat trick. If there were an annual award for the nerviest dealster around, we’d nominate Bill Kilpatrick for the honor.
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