Illinois Republican Party

Giannoulias family could walk away from Broadway Bank collapse with $15 million tax refund
3/9/2010

By Steve Daniels - Crain's

The family of Democratic U.S. Senate nominee Alexi Giannoulias stands to collect more than $10 million in federal tax refunds even if its Broadway Bank fails, which Mr. Giannoulias said last week is likely.

A $75-million loss at the struggling lender last year generated tax benefits potentially worth between $12 million and $15 million to Mr. Giannoulias, his two brothers and his mother. As the sole owners of a subchapter S corporation that controls $1.2-billion-asset Broadway, they pay the taxes on the bank's income and reap tax deductions on its losses.

The possibility of family members pocketing millions in tax refunds as Broadway slides toward insolvency and federal receivership is likely to fuel more controversy for Mr. Giannoulias, who already is under fire for his role in the bank's woes. In an interview last week, he took some responsibility for a disastrous expansion of real estate lending when he was senior lender at Broadway in the mid-2000s, before winning election as Illinois treasurer in 2006.

Asked whether he would advise his family to put the tax refunds back into the bank to help recapitalize it, Mr. Giannoulias said, "We'll do everything we can to keep the bank going. . . . You'll have to ask management of the bank what the best course of action is."

In an e-mailed statement, CEO Demetris Giannoulias, the Senate candidate's older brother, said, "If the amount of capital at our disposal were enough to meet the full amount outlined by the (Federal Deposit Insurance Corp.), we would gladly supply it because we believe in the assets and long-term prospects of the bank. Importantly, we have told all potential investors that we are willing to contribute funds alongside their investment."

But the tax refunds won't be nearly enough to keep Broadway solvent. Demetris Giannoulias has said Broadway needs at least $85 million to survive and that the family would be willing to provide 10% to 20% of that total in cash, or $8.5 million to $17 million. Add a $15-million refund to the top end of that range, and the combined $32 million isn't even half the amount Broadway needs.

If, as Alexi Giannoulias said last week, the bank is likely to fail, the family could walk away with millions in tax refunds while the FDIC's insurance fund absorbs what likely would be hundreds of millions in losses from Broadway's collapse. That fund is backed by premiums levied on banks but can tap taxpayers for help if it runs short of funds. Its reserves are dwindling as real estate losses bring down banks across the country, including 14 in the Chicago area since 2008.

The expected tax refund comes on top of $70 million in dividends the family took from Broadway's holding company in 2007 and 2008. Alexi Giannoulias says $40 million of that went to pay taxes and the rest was invested, partly in real estate assets and a New York bank. He says the family took the dividends to diversify its wealth and didn't foresee the depth of the financial crisis to come.

Similar scenarios are likely to play out at numerous other closely held banks felled by the real estate collapse. "We're going to see more situations like this. These losses will be flowing back to the shareholders," says Richard Lieberman, tax partner at Burke Warren MacKay & Serritella P.C. in Chicago.

The actual amount of any tax refund due Giannoulias family members won't be determined until the IRS reviews their tax returns. On paper, they appear to be eligible for $24 million to $31 million in refunds, based on rules that permit banks to recover taxes paid over the previous five years to compensate for current losses, says Tim Kosiek, a partner at accounting firm Baker Tilly LLP in Chicago who specializes in banks.

But trusts established to hold much of the family's Broadway stock after the 2006 death of founder Alexis Giannoulias will reduce the refund, according to Demetris Giannoulias. "Tax laws restrict the availability of carry-back provisions for the trusts set up in mid-2007, after my father's death," he says. "Any tax refund is likely to be approximately half of what would be available to a corporation not owned by these trusts."

SOURCE: Crain's

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