Company's offshore tax strategy led to financial woes

Associated Press

Investment in an offshore tax shelter that was later disallowed became a key factor in sending Metropolitan Mortgage & Securities into a financial tailspin, a newspaper reported.

Using the offshore investment strategy advised by its accountants, Metropolitan cut its 1999 income taxes by $17.9 million. That helped it post a $16.3 million profit that year, The Spokesman-Review reported this week.

Metropolitan, which on Feb. 4 filed for protection under Chapter 11 of the federal bankruptcy code, was able to turn a $3.2 million investment into a $28 million income-tax credit, the newspaper said.

Metropolitan got into the deal on the advice of its outside accounting firm, PricewaterhouseCoopers LLP, and Seattle financial adviser Quellos Group Ltd., the paper reported.

Metropolitan needed to be profitable — or at least appear profitable — to begin marketing tens of millions of dollars of unsecured bonds, called debentures, on the Pacific Stock Exchange.

The buyers of those debentures would be thousands of Northwest residents attracted to Metropolitan's advertised appeal as a rising local company with a solid reputation.

When the IRS spied Metropolitan's tax shelter, it moved to disallow the tax credits. Metropolitan fought the IRS decision, but lost.

That set in motion a chain of events that sent the company's insurance subsidiary, Western United Life Assurance Co., into receivership and threatened Metropolitan's very existence, the newspaper reported.

Metropolitan had moved a large piece of the tax credit created by the offshore investment into Western in violation of state rules, said James Odiorne, deputy insurance commissioner overseeing receiverships.

Western was not allowed to invest in foreign securities where it was not registered to do business. Also, Odiorne was concerned that the insurance company was involved in an investment that lost huge amounts of money on paper while not disclosing all the details.

The IRS's negative ruling forced Western to take an $18.4 million write-down earlier this year.

Odiorne said one unpleasant surprise after another regarding Western and Metropolitan finally triggered the receivership.

One of those surprises included the resignation of its outside auditor, Ernst & Young LLP, which disavowed three years of Metropolitan's financial reports and said the company's senior management had misrepresented facts.

Metropolitan's current executives, who were hired long after the tax shelter was used, declined to be interviewed for the story.

In a written statement, Metropolitan Chief Financial Officer William Smith said the company has been negotiating with the IRS and other parties and remains hopeful of reaching a settlement on taxes due.

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Source: The Spokesman-Review