Downey Financial trustee looks to enter $373 million tax settlement

By Caroline Salls

Pittsburgh, March 20 - Downey Financial Corp. Chapter 7 trustee Matthew A. Cantor requested court approval to enter into a revised settlement agreement in connection with his tax refund suit pending in the U.S. Court of Federal Claims, according to a Wednesday filing with the U.S. Bankruptcy Court for the District of Delaware.

Cantor said the Downey bankruptcy estate's potential entitlement to more than $373 million in federal tax refunds is one of the largest potential assets of the estate.

Under the lawsuit resolution, the trustee, the Federal Deposit Insurance Corp., as receiver for Downey Savings and Loan Association, FA, and the United States would fix the Downey Financial consolidated tax group loss in income tax year 2008 in the amount of $1,085,330,325.

That amount, when carried back to the previous five income tax years from the consolidated tax group, establishes a tax overpayment of $373.79 million.

According to the motion, that amount will be refunded to the Downey Financial consolidated tax group as long as the United States does not assert a valid offset against the overpayment.

To date, Cantor said the parties are not aware of any offset, and the United States has not filed any claim in Downey's case.

In June 2013, the court granted the trustee's original motion for approval to enter into a settlement of the tax suit, but one of the required approval levels at the Department of Justice and other agencies raised concerns about a provision in the settlement regarding the United States' inability to assess a tax.

That provision was revised so that the revised agreement provides that the 2008 loss is in an amount sufficient to generate not only the overpayments, but also to offset any statutory interest on the overpayments.

Rather than waiving its right to assess a tax on statutory interest on the overpayments, the trustee said the United States agreed that the loss is large enough that no tax will accrue on any interest.

Cantor said the economic terms of the settlement have not changed.

A hearing is scheduled for April 9.

Newport Beach, Calif.-based Downey Financial filed for bankruptcy on Nov. 26, 2008. Its Chapter 7 case number is 08-13041.

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