Caesars Examiner Analyzes Tax Refunds and Tax Attributes as Potential Fraudulent Transfers

katelynjoly Bankruptcy Tax, Financial Management, Fraud & Forensics

The long awaited examiner report in the Caesars Entertainment Operating Company (“CEOC”) case was issued on March 15, 2016 (the “Report”).1 The Examiner found over $5 billion in potential recoveries due CEOC, and among them was $55 million in tax refunds and a potential future claim for the use of CEOC tax attributes by other members of the consolidated group.2

The income tax refund issue was fairly straight forward – the Parent received $276.7 million in tax refunds due to an NOL carryback which was mostly generated by CEOC, and credited $220.8 million to CEOC. The Examiner found that an additional $55.8 million should have been credited to CEOC.3

There is no current Tax Sharing Agreement (“TSA”) between CEOC and CEC, nor did the Examiner find that there ever has been one. The Examiner concluded that there is no provision in the Internal Revenue Code and the related Regulations (particularly those under section 1502) to dictate how members of a consolidated group should settle up the use of each others’ tax attributes.4

The Examiner based this conclusion on the legal doctrine of “unjust enrichment”. He suggested that the parent was unjustly enriched by not crediting the subsidiary for the entirety of the tax refund received as a result of carrying back that subsidiary’s NOLs.5

The Examiner also found that, while CEOC has generated tax attributes not used by the consolidated group yet, particularly NOL carryforwards, those attributes may or may not be used by the group in the future, so therefore results in no current claim.6

That there is no current quantifiable claim is not so surprising, (although this could be a future blog post topic), what is interesting is that the Examiner’s analysis concludes that the attributes generated by CEOC are CEOC’s property, and should remain the property of CEOC indefinitely. Ultimately when that property is used by another member of the group CEOC has a reasonable basis to be compensated for such use absent a TSA.7

 

References:

  1. The author, while at Mesirow Financial Consulting LLC, worked on the initial stages of this investigation, however, she left Mesirow at the end of 2015, and was not involved in any of the analysis presented in the conclusions of the Report. The Report can be found in its entirety here
  2. Report, Volume 1, Section H.
  3. Report, Volume 1, Section H.
  4. Report, Volume 16, page 14 of 42, also page 902 of full Report.
  5. Report, Volume 16, page 14 of 42, also page 902 of full Report.
  6. Report, Volume 1, Section H “As to the second issue, there is a reasonable argument that as a result of the use by non- Debtors of NOLs attributable to CEOC losses that CEOC might in the future have a claim should CEOC in future years have income which could have been offset by such NOLs. That is not, however, a claim that can likely be pursued today.”
  7. Report, Volume 16, page 16 of 42, also page 904 of full Report.