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BLIPS

BLIPS

Bond Linked Issue Premium

Bond Linked Issue Premium

Structure

Structure

Prepared by U.S. Senate Permanent

Prepared by U.S. Senate Permanent

Subcommittee on Investigations,

Subcommittee on Investigations,

Subcommittee Staff of Senator Carl Levin,

Subcommittee Staff of Senator Carl Levin,

November 2003

November 2003

Embargoed

(2)

Taxpayer Transfers Funds to

Taxpayer Transfers Funds to

Shell Corp. (LLC)

Shell Corp. (LLC)

LLC

$1.4 million

(7% of planned loss – “premium”)

(3)

Bank “Loan” To LLC

Bank “Loan” To LLC

(

(

Collateralized by US Dollars or Euros)

Collateralized by US Dollars or Euros)

LLC

$1.4 million

T

Face Value: $50 million

Premium: $20 million

$71.4 million

Bank

7 yr “Loan”

@ Above Market

Rate 16%

(4)

Presidio

Presidio

LLC

$1.4 million

T

Face Value: $50 million

Premium: $20 million

$71.4 million

Bank

7 yr “Loan”

@ Above Market

Rate 16%

P

Co-Designer and Implementor of Shelter

P

(5)

Creation of Strategic Investment

Creation of Strategic Investment

Fund

Fund

LLC

$1.4 million

T

Face Value: $50 million

Premium: $20 million

$71.4 million

Bank

7 yr “Loan”

@ Above Market

Rate 16%

P

P.G.

P.R.

SIF

$71.5 million

$15,556 1%

$140,000

9%

90%

(6)

“Loan” Assumption and

“Loan” Assumption and

Interest Rate Wash “Swap”

Interest Rate Wash “Swap”

LLC

$1.4 million

T

Face Value: $50 million

Premium: $20 million

$71.4 million

Bank

7 yr “Loan”

@ Above Market

Rate 16%

P

P.G.

P.R.

SIF

$71.5 million

$15,556 1%

$140,000

9%

Wash Swap

LLC Now Repays as

7 year “Loan” of $70 million

at Market Rate

90%

Assignment of Loan

Obligation

(7)

Investment “Scheme”

Investment “Scheme”

LLC

$1.4 million

T

Face Value: $50 million

Premium: $20 million

$71.4 million

Bank

7 yr “Loan”

@ Above Market

Rate 16%

P

P.G.

P.R.

SIF

$71.5 million

$15,556 1%

$140,000

9%

Wash Swap

90%

Assignment of Loan

Obligation

Emerging Mkt. Currencies (Foreign Currencies)

Stage I – 60 Days (Apparently Terminates) Stage II – 120 Days

Stage III – 6.5 Years

LLC Now Repays as

7 year “Loan” of $70

million at Market Rate

(8)

Unwind/Termination

Unwind/Termination

Emerging Mkt. Currencies (Foreign Currencies)

Stage I – 60 Days (Apparently Terminates) Stage II – 120 Days

Stage III – 6.5 Years

T

SIF

$71.5 million

P.G.

$

$

P

LLC

(20 million

Basis)

Bank

Distribution if any Distribution if any

$

Investment Program Terminated (Usually at Stage I)

Repay Loan

$

Taxpayer Claimed Loss: $20 million basis (equal to premium) plus capital contribution

($1.4 million) plus or minus any loss or gain from sale of assets

(9)

SC

SC

Prepared by U.S. Senate Permanent

Prepared by U.S. Senate Permanent

Subcommittee on Investigations,

Subcommittee on Investigations,

Subcommittee Staff of Senator Carl Levin,

Subcommittee Staff of Senator Carl Levin,

November 2003

November 2003

2

Embargoed

(10)

Step 1

Step 1

S

S-

-

Corp. Creates and Transfers to the Shareholder an Additional

Corp. Creates and Transfers to the Shareholder an Additional

900 Voting Shares and 7,000 Warrants

900 Voting Shares and 7,000 Warrants

Shareholder “Donates” Non

Shareholder “Donates” Non

-Voting Stock to a Charitable Entity

-

Voting Stock to a Charitable Entity

Shareholder

100 Shares

Common

Stock

S-Corp

7,000

Warrants

900

Non-Voting

Shares

Charitable

Entity

Redemption right not exercisable until two or three years after

contribution

Shareholder guarantees redemption price at no less

than FMV on date of donation

(11)

Step 2

Step 2

2

2

-

-

3 Year Period When Charity is Shareholder

3 Year Period When Charity is Shareholder

in S

in S

-

-

Corporation

Corporation

Shareholder

100 Shares

Common

Stock

S-Corp

7,000

Warrants

900

Non-Voting

Shares

Charitable

Entity

Redemption right not exercisable until two or three years after

contribution

Shareholder guarantees redemption price at no less

than FMV on date of donation

Step 1

Step 1

S

S

-

-

Corp. Creates and Transfers to the Shareholder an

Corp. Creates and Transfers to the Shareholder an

Additional 900 Voting Shares and 7,000 Warrants

Additional 900 Voting Shares and 7,000 Warrants

Shareholder “Donates” Non

Shareholder “Donates” Non

-

-

Voting Stock to a Charitable Entity

Voting Stock to a Charitable Entity

S-Corp

Shareholder

100 Shares

Common

Stock

Charitable

Entity

Allocation of Net income* 10% 90%

*Net income is allocated on a pro

rata basis for tax purposes, but the

distribution is suspended or

limited as a result of amendments

to S-Corp. Articles and By-laws.

(12)

Step 2

Step 2

2

2

-

-

3 Year Period When Charity is Shareholder in

3 Year Period When Charity is Shareholder in

S

S

-

-

Corporation

Corporation

Shareholder

100 Shares

Common

Stock

S-Corp

7,000

Warrants

900

Non-Voting

Shares

Charitable

Entity

Redemption right not exercisable until two or three years after

contribution

Shareholder guarantees redemption price at no less

than FMV on date of donation

Step 1

Step 1

S

S

-

-

Corp. Creates and Transfers to the Shareholder an Additional 900

Corp. Creates and Transfers to the Shareholder an Additional 900

Voting Shares and 7,000 Warrants

Voting Shares and 7,000 Warrants

Shareholder “Donates” Non

Shareholder “Donates” Non

-

-

Voting Stock to a Charitable Entity

Voting Stock to a Charitable Entity

S-Corp

Shareholder

100 Shares

Common

Stock

Charitable

Entity

Allocation of Net income* 10% 90%

*Net income is allocated on a pro rata basis for tax purposes, but the distribution is suspended or limited as a result of amendments to S-Corp. Articles and By -laws.

Step 3

Redemption

S-Corp

Shareholder

100 Shares

Common

Stock

Charitable

Entity

The Greater of FMV at Contribution or FMV at Redemption Exercise Redemption 900

Non-voting Shares

(13)

Step 2

Step 2

2

2

-

-

3 Year Period When Charity is Shareholder in

3 Year Period When Charity is Shareholder in

S

S

-

-

Corporation

Corporation

Shareholder

100 Shares

Common

Stock

S-Corp

7,000

Warrants

900

Non-Voting

Shares

Charitable

Entity

Redemption right not exercisable until two or three years after

contribution

Shareholder guarantees redemption price at no less

than FMV on date of donation

Step 1

Step 1

S

S

-

-

Corp. Creates and Transfers to the Shareholder an Additional 900

Corp. Creates and Transfers to the Shareholder an Additional 900

Voting Shares and 7,000 Warrants

Voting Shares and 7,000 Warrants

Shareholder “Donates” Non

Shareholder “Donates” Non

-

-

Voting Stock to a Charitable Entity

Voting Stock to a Charitable Entity

S-Corp

Shareholder

100 Shares

Common

Stock

Charitable

Entity

Allocation of Net income* 10% 90%

*Net income is allocated on a pro rata basis for tax purposes, but the distribution is suspended or limited as a result of amendments to S-Corp. Articles and By -laws.

Step 3

Redemption

Redemption

S-Corp

Shareholder

100 Shares

Common

Stock

Charitable

Entity

The Greater of FMV at Contribution or FMV at Redemption Exercise Redemption 900 Non-voting Shares

Step 4

Distributions Reinstated

S-Corp

Shareholder

100 Shares

Common

Stock

Distribution of

income built up in

corp. for 2-3 years

(income taxed at

preferential capital

gains rate rather

than ordinary

income)

References

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