WASHINGTON — Texas' Hunt brothers did the best they could in an "atmosphere of panic" after the silver market collapse in 1980, their attorney said Monday, denying at the start of their tax-claim trial that they had set up "a colossal sham" partnership.
However, Internal Revenue Service attorney Deborah Butler told the judge that the partnership was created to provide "financial relief to the petitioners at a time when they needed it very badly" and was subject to taxes when it was dissolved in 1982.
Michael Henke, in opening arguments in what is expected to be a lengthy trial, said the complex partnership created to repay huge Hunt debts was not subject to $300 million in taxes, as the IRS says.
Two Hunt brothers, Nelson Bunker and William Herbert, are each contesting about $150 million in 1982 taxes, while Lamar Hunt is contesting about $500,000 in taxes. The case, being tried without a jury, is expected to last up to a month.
While the 1982 tax year is the sole subject of the trial, government attorneys have said the outcome could affect other IRS claims against Bunker and Herbert in other tax years. Those claims, totaling $1 billion in taxes and interest, are greater than the assets the brothers have listed in U.S. Bankruptcy Court filings.
Because the IRS is a priority creditor in Bankruptcy Court, the outcome of the tax trial also could determine the size of Hunt settlements with other creditors in their reorganization under bankruptcy law.
The Key Issue
In opening arguments Monday, Henke, representing Bunker and Herbert Hunt, argued that the brothers created the partnership with Placid Oil Co., which is owned by six Hunt family trusts, to cover massive debts from the March, 1980, silver price collapse.
"The principal issue that this court will be called upon to decide is whether the Placid Investments Limited partnership, formed in 1980, was in fact a bona fide partnership, as petitioners contend, or merely a colossal sham, as the (IRS) commissioner in effect asserts," he said.
The brothers' silver problems came to a head, Henke said, at the end of March, 1980, when they were unable to pay $434 million to Engelhard Corp., a New Jersey-based precious metals dealer and chemical manufacturer. They owed the money for silver they had agreed to purchase the previous January.
"You will hear testimony from petitioner Herbert Hunt and from his cousin, Tom Hunt, trustee of one of the trusts owning Placid, that Engelhard threatened a lawsuit to pierce the six trusts owning Placid in order to collect the amount owing to them out of Placid's assets," Henke told the judge.
"You will also hear Tom Hunt's testimony that he told the Engelhard representatives the Hunt brothers would go into bankruptcy before they would allow the trusts to be pierced," Henke said.
Since the silver price collapse, Placid, as well as Bunker and Herbert Hunt, has filed for reorganization under bankruptcy law.
Placid, the flagship company of the Hunts' holdings, was established by their father, the legendary oil wildcatter H. L. Hunt, in 1935.
Under the disputed partnership agreement, Placid contributed cash and notes totaling $824 million, obtained through a $1.1-billion loan from a consortium of banks.
The Hunts contributed silver, gold stocks, coal properties and other assets that Henke said had an "aggregate gross value of more than $1 billion and a net contribution value of about $408 million."
While Henke claims that the Hunts contributed coal properties worth $294 million in 1980, the IRS claims that those properties were worth $16 million. And when the partnership was dissolved, the IRS claims that the coal properties were worth $6 million, compared to Hunt claims that the coal properties were worth $262 million.
Henke said the issue for the court to decide is not the precise fair market value of the coal properties in 1980, but whether the value assigned them was reasonable--"whether that value reflected the sort of attention and care in valuation that the parties to a billion-dollar partnership would have been expected to exercise, given the atmosphere of panic and resulting very short time frame with which they were faced."
Henke said after the court session that the brothers were in a "rush-rush" atmosphere to repay their debts because brokerage houses faced huge problems and the price of silver could have fallen further, with the markets going into "a state of flux."