The IRS Claims Texas Billionaire Red McCombs Owes $45 Million

The Internal Revenue Service (IRS) filed suit against San Antonio billionaire Billy Joe “Red” McCombs, alleging he owes $45 million in back taxes for his use of a disputed tax strategy in 2002 and 2003. The agency claims that McCombs should have reported capital gains for transactions involving his shares of Clear Channel Communications, Inc. and a variable prepaid forward contract.

In a variable prepaid forward contract, the owner of many shares of highly-appreciated stock receives cash up-front from an investment firm, usually for 75 to 85 percent of the value of the shares. In exchange, the stockholder agrees to deliver a variable number of shares or cash in the future to equal an amount between a minimum and maximum figure agreed upon at the time of the initial payment.

Such a contract is a complicated plan used to raise cash while deferring capital gains tax. Parties to these contracts claim that capital gains taxes are not due until the contracts are settled, which is often 10 or more years after the arrangements are made.

In July 2002, McCombs entered into a variable prepaid forward contract with JPMorgan Chase. In August 2002, McCombs also agreed to lend 11.3 million shares of Clear Channel Communications stock with title and voting rights to JPMorgan Chase.

The IRS claims that the two transactions were fundamentally just one, comprising a taxable sale. Consequently, McCombs should have reported $213.4 million in capital gains from the 2002 exchange and a related 2003 transaction. The agency asserts that McCombs had $245 million of taxable income instead of the $18 million he reported, and that he owed $52 million in income tax, not the $8 million he paid.

McCombs argues that the variable prepaid forward contract and the stock loan were separate arrangements and he did not sell any stock, for tax purposes, in 2002.

McCombs was born in 1927 in Spur, a small town in western Texas. He dropped out of business school and law school at the University of Texas after a friend convinced him to try selling cars. He was an immediately successful salesman and had his first car dealership at age 25.

McCombs has been or is now involved with several Texas businesses, including:

• Red McCombs Automotive Group
• Clear Channel Communications
• Koontz McCombs
• McCombs Energy
• Corpus Christi Texas Clippers
• San Antonio Spurs

If the IRS is threatening you or your business with allegations of tax fraud it is important to contact a lawyer experienced with advocating clients’ rights to the IRS. A knowledgeable legal advocate can effectively aid you with any proactive or reactive measures you wish to take involving the IRS.