(Adds that resort group declined to comment in eighth paragraph.)
By Joseph Checkler
The U.S. has a $331 million problem with the sale of a group of luxury resorts to the government of Singapore.
Preet Bharara, U.S. Attorney for the Southern District of New York, said in court papers that MSR Resort Golf Course LLC's plan to sell its resorts to the real-estate arm of Singapore's sovereign wealth fund creates $331 million in tax liabilities that should be owed to the Internal Revenue Service but can't be collected.
Mr. Bharara added in the Wednesday bankruptcy-court filing that the resort group didn't notify the IRS about the tax issue before a key "disclosure statement" hearing, even though the resort group told a judge otherwise.
"Debtors' counsel reached out to the Department of Justice on or around the day after the Disclosure Statement hearing," Mr. Bharara said in his filing. The U.S. is the second entity to go after the tax issue.
Mr. Bharara's argument is that MSR's $1.5 billion sale of four resorts to the Singapore fund, GIC RE, creates $331 million in taxable gains that should be automatically owed to the IRS. The problem, though, is that the documentation surrounding the purchase agreement contains wording that would stop the IRS from collecting on the taxes.
"Seeking such an injunction purporting to limit the IRS's ability to pursue any liabilities stemming from the Purchase Agreement is particularly disingenuous given that, at the same time, Debtors concede that 'the law is unclear'" when multiple taxpayers are involved, Mr. Bharara said. The sale document also concedes the IRS could win if it goes after the money. Mr. Bharara argues that a bankruptcy judge does not have the authority to decide on tax liabilities for any party other than the one in bankruptcy.
Mr. Bharara's filing comes on the heels of a similar objection by investment firm Five Mile Capital Partners LLC, a key adversary of MSR throughout the bankruptcy case. Five Mile, a junior lender that stands to recover none of its money in the case, said the liability could "infect" the entire bankruptcy.
A spokesman for the resort group, controlled by hedge-fund manager John Paulson, declined to comment.
In his filing, Mr. Bharara asked Judge Sean H. Lane to postpone a Jan. 15 hearing at which he will consider signing off on the resorts' bankruptcy plan. The U.S. attorney adds that MSR's attorneys declined a similar request of adjourning that hearing.
In December, no one bid against Singapore at a scheduled auction of the resort group's properties: Maui's Grand Wailea Resort Hotel & Spa, the La Quinta Resort & Club in La Quinta, Calif.; the Arizona Biltmore in Phoenix; and the Claremont in Berkeley, Calif.
The deal also includes the Great White Course, a Greg Norman-designed golf course adjacent to the Doral Golf Resort & Spa in Miami. A company controlled by Donald Trump in June bought the Doral from Paulson for $150 million.
The $1.5 billion deal includes a $1.1 billion cash payment for the properties and $360 million in debt forgiveness. The resort owner will pay 100% of the claims of Hilton Worldwide and Marriott International Inc. (>> Marriott International, Inc.), which have managed several of the resorts. The owners of some of the resorts' so-called "mezzanine" debt will get 100% of their money back, while another tier of those lenders will get between 8% and 68%. Five Mile stands to get nothing for its junior mezzanine loan.
The resorts' trip through bankruptcy began in February 2011, when Paulson teamed with Michael Ashner's Winthrop Realty Trust (>> Winthrop Realty Trust) to seize the properties through a foreclosure proceeding. Days later, the group put the resorts into Chapter 11 to avoid paying more than $1.5 billion in senior debt.
Since the filing, the company has made several structural changes, reshaping contracts with property managers Hilton and Marriott, before preparing its resorts for the sale so it can repay creditors.
(Dow Jones Daily Bankruptcy Review covers news about distressed companies and those under bankruptcy protection. Go to http://dbr.dowjones.com)
Write to Joseph Checkler at [email protected]
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