IRS Says Olen Owes $148M in Taxes, Penalties
By JERRY MOSKAL
What builder Olen Properties Corp. developed with some overseas entities apparently includes a $148 million tax headache.
The Internal Revenue Service has demanded that much in back taxes and penalties from Newport Beach-based Olen Properties and its Olen Residential Realty Corp. The IRS charges among other things that Olen transactions with companies in the Bahamas and Iran were a “sham,” not arms-length and lacked economic substance, according to documents filed in Washington, D.C.
Olen took tax deductions for claimed losses, interest payments and foreign income in connection with the deals, according to the filings.
The Olen companies denied the IRS allegations in petitions they filed asking the U.S. Tax Court in Washington to overturn the agency’s demands for $125.2 million in back taxes and penalties for 1993 to 1996 from Olen Properties and $22.57 million from Olen Residential for 1994 to 1996.
An IRS spokesman said the agency does not comment on pending tax cases.
Tax attorneys at Houston’s Fulbright & Jaworski, which represents Olen, did not return phone calls placed over several days seeking comment.
Company officials also declined to comment on the case.
“Sorry, we can’t help you,” said Andre Olenicoff, Olen Properties’ vice president of asset management, last week. Olenicoff is the son of Igor Olenicoff, Olen’s president and founder of the four-state real estate empire.
Igor Olenicoff also did not return a phone call seeking comment.
Since their founding in 1973, the Olen companies’ reach of office, industrial and apartment developments spread from California into Nevada, Arizona and Florida. A company statement on its Web site said it has $1.5 billion in assets.
“The past 28 years have been very personally rewarding,” Igor Olenicoff said in a statement posted last year on the Web site. “I have seen a company of substantial stature and a dedicated staff rise from a personal dream.”
The company reported that it owns and operates 4.5 million square of feet of industrial and office space, more than 10,000 apartment units and has involvement in 33 subdivisions in the four states.
The firm’s two petitions, which total 123 pages, accused the IRS of making numerous errors in concluding that additional taxes and penalties are owed.
According to the company filings, the IRS erred when it ruled that Olen Properties had almost $80 million more in additional taxable income than reported in 1993-96; had more than $17 million in taxable interest income; and had an $86.7 million deferred taxable capital gain.
Besides failing to allow those deductions, the petitions said, the IRS erroneously reduced the claimed debt from a bankrupt subsidiary, Prudential Group Inc., to $62.95 million from the $156.2 million that was reported, and slashed deductions for operating losses in prior years by $30 million.
The $125.2 million the IRS seeks from Olen Properties includes $38.77 million in penalties. The IRS ordered Olen Residential to pay $18.7 million in additional taxes plus $3.85 million in penalties.
The IRS notices were issued Sept. 28, and the agency has 60 days to answer the petitions filed Dec. 21 by the two companies. If the IRS and the Olen companies fail to negotiate a settlement, the cases could go to trial before a tax court judge. n
Moskal is a Washington, D.C.-based freelance writer.
Tangled Web?
The filings in U.S. Tax Court by the Internal Revenue Service and Olen Properties Corp. provide some interesting glimpses into the byzantine business empire of Igor Olenicoff. But they raise more questions then they answer.
Most surprising perhaps is Olen Properties Corp.’s assertion that it is a subsidiary of National Depository Co. of the Bahamas, which, in turn, is part of National Depository Co. of Iran.
The Olen petition goes on to state, “No officer or employee of (Olen Properties), nor any related person or entity owned any direct or indirect interest in, or had any right to exercise control over, either NDC or NDC Bahamas.”
That suggests that neither Olenicoff nor his son, Andre Olenicoff, have any interest in the parent.
The relationship is key because the IRS says a $60 million transfer from Olen to National Depository in the Bahamas was a loan on which Olen did not report receiving interest income.
The IRS is charging that Olen owes back taxes on interest income.
Another dispute centers on Sov-ereign Bancorp Ltd., of the Bahamas, from which Olen says it received $80 million in loans at a 2.86% interest rate.
The Olen petition said the IRS erred when it wouldn’t allow a $14.7 million interest deduction on the loans.
According to the petition, Sov-ereign was formed in 1990 by the Vozrozhdeniye Fund, an agency created by former Russian President Boris Yeltsin to manage the privatization of Russia’s industries and properties.
The IRS notice of deficiency ruled that the interest paid on the Sovereign loans were “disallowed because you have not substantiated that the amounts were actually paid, nor that the amounts paid, if any, constitute interest on bona fide indebtedness.”
In its notice to Olen Residential, the IRS further ruled that a bank analysis showed that the source of the $79.6 million ostensibly obtained from Sovereign was not substantiated and that therefore the firm’s taxable income was being increased by that amount.
“It has been determined that the line of credit you allegedly received from Sovereign Bancorp Ltd. was a sham transaction and not a bona fide arms length transaction, nor did this transaction have any economic substance,” the notice to Olen Residential said.
Olen’s petition took pains to note that the Newport Beach-based company has no connection to Sovereign and “the lack of a relationship between petitioners and Sovereign and the terms of the financial arrangement between petitioners and Sovereign demonstrate that petitioners and Sovereign dealt at ‘arm’s length.'”
The petition argued that the Olen companies “consistently treated the loans at issue as debt and documented the transactions in this fashion.”
,Jerry Moskal
