Triumphs to Remember: Price Manford Reflects on a Decade-Long Tax Battle
The Houston Bar Association recently caught up with V&E’s legendary litigator and former managing partner Harry Reasoner for its “Living History” video series. The project features conversations with senior members of the city’s legal community, giving them a chance to look back and reflect on career highlights.
Inspired by this example, we’ve reached out to the firm’s senior partners to talk about their careers and insights on law (and life). For the first of these discussions, we spoke to L. Price Manford, who in his more than 40 years with V&E has helped build the firm’s national tax practice.
You’ve said that V&E’s tax group has been proactive with clients over the years. What do you mean by that?
Our tax group has always focused on business development and solving problems. So, we would be on the lookout for interesting and creative ways to help our clients (and potential clients) engage in tax efficient transactions.
One example is that Congress often wants to encourage certain activity with tax incentives. But the problem is that much of the activity can be extremely capital intensive, and the encouraged activity does not take place. So there is a gap where these large tax benefits go uncollected. Gaps like these are where we might find opportunities for certain clients.
Over your long career, what stands out as a highlight, in terms of seizing these kinds of opportunities for clients?
One matter stands out because, in addition to challenging us to do our best lawyering, it also brought a number of practice groups of the firm together over the long period in which it played out. I’ve always felt that being part of a successful team is really a wonderful achievement in an individual career, and this was certainly a time when that was the case.
It involved a federal tax incentive for producing synthetic fuel. If you produced synthetic fuel from coal that passed a regulatory test of having undergone “significant chemical change,” then as a producer you were entitled to significant tax credits under the law—$26 per ton of synthetic fuel produced. That’s a large sum.
But it’s a tax credit, not just a check for $26 per ton. That means that the producer has to be someone with stable, predictable, and substantial taxable income to use those credits, like a major blue chip financial institution. If they could develop a facility to produce synthetic fuel that’s undergone “significant chemical change,” then suddenly, something that had little value becomes extremely valuable. These synthetic fuel facilities could be worth hundreds of millions of dollars.
This sounds like you have creative lawyers helping clients apply cutting edge science to produce the synthetic fuel for a credit that proves extremely valuable. I picture investment bankers in pinstripe suits working at the chemical factory.
Well, it was a bit like that. Of course the clients were following the letter of the law. And we advised them with that in mind. But yes, essentially, you have finance people getting into the synthetic fuel business to make what was a dormant federal tax credit lucrative. Wall Street bankers were running synthetic fuel plants across Appalachia.
We figured if our clients could buy these machines and maybe alter them in such a way that they could produce something both commercially feasible and eligible for the tax credit, they’d be in business. Clients bought half a dozen of the machines and relocated and refurbished them. It was a large endeavor.
I can’t imagine that the federal government, the IRS, smiled upon these arrangements?
Not completely. There were a few folks in the government who didn’t like the government’s own tax policy and used their positions to challenge our clients’ tax positions. But that’s where it got interesting and also drew in serious firepower from across V&E.
Because now, in addition to the lawyering that helped our clients get up and running with these tax credits, we had to help them weather scrutiny from regulatory agencies. Throughout this time, we won every battle for our clients. The agencies attacked our science—and if we had lost those hearings, well you’re dead. So, having helped our clients seize a big opportunity involving very complex transactions and science, here we are now defending them.
These transactions and subsequent battles with the IRS unfolded over nearly a decade, with multiple clients and individual matters and investigations, and at the peak, with 120 to 140 lawyers (plus retained experts) working on them. In addition to the taw lawyers, many others played critical roles—litigators, M&A and corporate securities lawyers, finance experts, the top expert coal scientists in the country, and even white collar criminal defense lawyers—because the Senate Permanent Subcommittee on Investigation launched its own investigation into the synthetic fuel industry.
If you’re being ethical and honest—and we and our clients were—and if the clients are willing to invest the funds and apply the resources to secure and defend the tax credits worth billions of dollars and win, then you go out and help them win. It was a full scale operation for a number of years. And again, bringing together all of the diverse talents and capabilities of V&E from start to finish. None of this would have been possible without critical contributions from many groups within the Firm.
How was the battle joined?
When we started we had private letter rulings from the IRS National Office, certifying in each case that the clients were entitled to the tax credits under the law. Despite the rulings, IRS auditors came after our clients. It didn’t matter to them that the clients had advance rulings. Admittedly, reasonable people could disagree about whether the federal government’s policy on the tax credits was sound tax policy—perhaps the incentives were off. But that’s not our job. Nor should it be the job of the auditors. Our job is to see that our clients receive what they are entitled to under the law.
The IRS started a multi-year audit cycle that we battled through. George Gerachis, who was a tax litigator and the head of the tax group, led all of the IRS tax controversy matters. At one point, we had many of the top coal scientists in the country on retainer, in part to see that the scientific issues in dispute were properly explained. This culminated in a huge presentation in front of the IRS Chief Counsel and twenty plus senior executives of the IRS. At that “hearing,” we encouraged the IRS to grill our coal experts about the science behind the clients’ synthetic fuel production process without any interference or objection from the lawyers. The experts satisfied the IRS that the process met the requirements of the law. And so our clients won—or so we thought.
But the government didn’t stop there?
Nope. After they lost, someone in the government turned over taxpayer information about our clients—they’re not supposed to disclose that information, ever—to the U.S. Senate Permanent Subcommittee on Investigations. That is the subcommittee that Bobby Kennedy, as a young Senate staffer, used to investigate the role of organized crime in labor unions, and later it held famous hearings on the role of the Italian Mafia in the United States.
Now our white collar criminal defense practice is involved. And we showed the subcommittee our private letter rulings and explained what they meant – meaning we had given the IRS all of the relevant facts about the clients’ synthetic fuel production and the IRS had granted favorable legal rulings in advance. So the clients won again. And I think the subcommittee, frankly, was so surprised and possibly embarrassed about the situation that it refrained from issuing some type of critical report which is what had been expected.
We could have pursued the breach of confidentiality issues, but when you win all the significant battles, you should stop. And that’s what we did.
Really a suspenseful, epic decade of experience
And it was an experience that never quite seemed to end. Just before we closed the case, a lawyer for one of the investors in one of the projects insisted that our client make additional disclosures to the IRS which in our opinion had already been made and were completely unnecessary. We thought this completely unnecessary disclosure could somehow derail our extremely favorable resolution of the audit. I decided to go see Harry Reasoner, and after I told him about this request, I remember him looking at me and saying, “Price, I’ve never heard of a lawyer that spent five years on a trial, won the case, and then petitioned the judge for a rehearing for the other side.” Fortunately the disclosure issue went away.
So that was it. Having won, we moved on.
That must have been a great feeling
Sure, and it came at good time, too. You know, this all transpired from the late 90s through 2006. That was a time of struggle for many companies in the energy space. But I think our dedicated work on their behalf, for so long, involving so many talented lawyers, reminded us of our great strengths as a firm.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.