HP’s Lane Faces $100 Million Bill on Tax Shelter Denial
Ray Lane, former chairman of Hewlett-Packard Co. (HPQ) and partner emeritus at venture-capital firm Kleiner Perkins Caufield & Byers, is in a dispute with the U.S. Internal Revenue Service that has left him with a $100 million tax bill.
In December, the IRS found Lane, 66, participated in a “sham” tax shelter, generating improperly claimed losses of $251 million to offset income, according to appeal papers filed May 6 in U.S. Tax Court in Washington. Lane argued that the IRS was wrong to say that his partnership, Vanadium Partners Fund LLC, lacked “legitimate business purpose.”
The Tax Court wrangling comes amid a series of career setbacks for him. He stepped down as Hewlett-Packard’s chairman in April after less than three years. Investors were dismayed with his oversight of the computer maker’s $10.3 billion purchase of software maker Autonomy Corp. The acquisition later had to be written down.
“It’s a very difficult position to be in,” said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “As a director, you are being elected for your judgment, and investors have to evaluate how you apply that judgment. If you’re a public company director, your entire financial life is fair game.”
Also in April, Lane scaled back his role at Kleiner Perkins, becoming a partner emeritus. The following month, he left the board of Fisker Automotive Inc., the struggling electric luxury carmaker he backed while at Kleiner Perkins.
Lane’s financial and professional woes add to challenges for a onetime Silicon Valley high-flier who is credited with orchestrating a turnaround at Redwood City, California-based Oracle (ORCL) Corp., where he worked for much of the 1990s. He also spent a dozen years helping pick startup investment targets for Menlo Park, California-based Kleiner Perkins.
Lane, the former president of Oracle, walked away with more than $1 billion in stock and stock options when he left the company in mid-2000.
In a telephone interview, Lane said his advisers counseled him in 2000 to invest $25 million of his own money in a fund that backed technology startups and could be used to offset his income.
“My tax advisers put me into an investment,” he said. “Somewhere along the way I knew these things were being questioned by the IRS.”
He said that he hasn’t discussed the tax matter with Hewlett-Packard or Kleiner Perkins.
“The amount of taxes I pay are staggering, and this is the only transaction I’ve been audited on,” Lane said. He said he has paid between 32 percent and 38 percent of his income in net taxes in the past 15 years.
Lane said he signed a settlement letter with the IRS in May regarding the taxes he owes. Lane has the means to satisfy the obligation, according to a person familiar with his finances, who asked not to be identified because the matter is confidential.
“This is a personal matter for Mr. Lane that does not involve HP,” Henry Gomez, a spokesman for Palo Alto, California-based Hewlett-Packard, said in an e-mailed statement. “The company has no further comment.”
Lane remains a director on Hewlett-Packard’s board.
Christina Lee, a spokeswoman for Kleiner Perkins, declined to comment. A representative of Fisker had no immediate comment.
The petitioners in the Tax Court appeal are Vanadium and R. Lane, described only as a partner in the company. The petition doesn’t use Lane’s full name or home address, which can be found in court papers in related cases.
In 2004, Lane was among petitioners who sought to keep their names as tax-shelter clients private in a Justice Department investigation of accounting firm BDO Seidman LLP, court papers show.
In separate Tax Court filings, Ray Lane is listed as owning 99 percent of Plano, Texas-based Vanadium through another partnership, Velocity Partners Fund LLC.
The petition is among at least four cases filed in Tax Court since May 2012 that challenge the IRS’s disallowing of losses by Vanadium and related companies.
Lane is described in court filings as “an investor in an abusive tax shelter” that generated tax losses to offset income from unspecified stock options in 2000. Lane said his IRS dispute is unrelated to options on Oracle shares.
The cases turn on investments made by Velocity Partners Fund LLC, a company that was 99 percent owned by Lane, according to an IRS filing.
Velocity made payments to other funds, including Veritas Cambridge Fund LLC and Vector Calculus Fund, that were designed to disguise fees paid to tax-shelter promoters and tax professionals, the IRS said in court papers. Lane used a strategy, dubbed POPS, to improperly claim the $250 million “non-economic loss,” the IRS said. That loss pertains to the 2000 tax year, filings show.
POPS were part of a larger family of tax shelters popular with investors in the late 1990s seeking to eliminate tax bills on large capital gains. In general, the shelters involved transactions that the government alleged had little economic substance yet generated huge paper losses to offset taxable profits. POPS, or Partnership Option Portfolio Securities, have fallen out of use in the past decade because of various government attacks.
Charles Hodges, an attorney who filed the Vanadium case, said in papers filed at the Tax Court that the losses were legitimate.
“No one told the investors that the monies lost somehow represented disguised fees,” Hodges wrote.
In a telephone interview, Hodges said that Vanadium Partners actually generated a profit and that the dispute centers on the allocation of gains and losses to investors.
Lane’s settlement aside, appeals in the tax cases involving him were filed because of deadlines for challenging IRS decisions and because other investors have claims that may not be resolved through negotiations, Hodges said.
Vanadium is no longer in operation, he said.
Lane grew up far from the pricey suburbs south of San Francisco that he’s called home for decades. The son of an engineer who designed rolling equipment for a steel mill, Lane was born in McKeesport, Pennsylvania, a blue-collar town near Pittsburgh, and educated at West Virginia University, where he earned a math degree in 1968.
Lane owns two properties across the street from one another, together worth about $30 million, in tony Atherton, California, according to the person familiar with his finances. He has a home in Manhattan Beach, California, worth about $20 million, and a farm in Oregon worth $4 million. Lane also owns two properties in Palm Desert, California, worth a combined $10 million. Those two are for sale, this person said.
Before leaving Oracle, he purchased an automobile from the company for $100,000, according to Oracle’s 2000 proxy.
He has made generous contributions to nonprofits, including a $5 million donation in 2007 to Carnegie Mellon University, where Lane heads the board of trustees. Lane also supported the 2010 run by Hewlett-Packard Chief Executive Officer Meg Whitman for California governor, as well as other political campaigns.
Lane worked at International Business Machines Corp. (IBM) for a decade, then at Electronic Data Systems, running a small division that provided services to manufacturing companies. He later led Booz Allen Hamilton Inc.’s information-systems consulting practice in Dallas.
His chance to amass wealth and become a multimillionaire came in 1992, when he was recruited as an Oracle executive by co-founder and CEO Larry Ellison, later rising to president and chief operating officer of the world’s largest database-software maker.
To lure Lane west from Texas, Ellison increased the number of options he offered to 300,000 from 100,000, Lane told the San Francisco Chronicle in 1997.
Lane helped tame Oracle’s sales culture, where staff were rewarded for cutting deals yet had a reputation for neglecting customers’ needs. He introduced rigor and built bridges to big clients. Oracle posted a loss of $12 million on $1.03 billion in revenue for fiscal 1991, the year before Lane arrived.
By 2000, the year Lane was forced out amid differences with Ellison over strategy, Oracle’s profit had surged to $6.3 billion on $10.1 billion in sales.
As Ellison became more involved in Oracle’s day-to-day operations and led its charge onto the Internet and away from Lane’s focus on client-server software, Lane’s status and visibility declined. Lane left abruptly at the end of June 2000.
In the months before his departure, Lane exercised options on 4.04 million Oracle shares, valued at $230.7 million, according to the company’s proxy statement dated Sept. 11, 2000.
He also had $729.2 million in unexercised options and other equity-related compensation at the end of that fiscal year, according to the filing. Adjusted for splits, the stock surged more than 200-fold to $42.03 on June 30, 2000, from $0.19 at the end of fiscal 1991.
Lane’s career since leaving Oracle has been marked by ups and downs. He joined Kleiner Perkins shortly after leaving Oracle, in the summer of 2000. During more than a dozen years there, he backed 13 companies, according to Kleiner’s website. Four went public or were acquired, according to the site.
Besides information-technology deals, Lane invested in green technology companies, including Luca Technologies, Great Point Energy and Acquion Energy. That field has been less successful for Kleiner.
His tenure as Hewlett-Packard chairman was marked by management tumult, strategy shifts and slowing growth that dragged down shares and made it harder for CEO Whitman to orchestrate a turnaround. He was re-elected as chairman in March with only 59 percent of votes cast by shareholders, an unusually narrow majority that set the stage for his departure as chairman two weeks later.
Lane also got burned by Fisker. He put his own money into the company, people familiar with the matter said.
Fisker, which made the Karma electric-hybrid luxury-sport sedan that sold for more than $100,000, raised $1.2 billion in venture capital, according to data compiled by Bloomberg. The company was plagued by quality issues, an Energy Department loan it couldn’t repay, the bankruptcy of its battery supplier and the destruction of hundreds of Karmas in Hurricane Sandy.
Lane became a partner emeritus at Kleiner Perkins in April, and he is not a participant in its most recent fund.
The case is Vanadium Partners Fund LLC v. IRS, 9970-13, U.S. Tax Court, Washington.
To contact the reporters on this story: Aaron Ricadela in San Francisco at firstname.lastname@example.org; Andrew Zajac in Washington at email@example.com; Carol Hymowitz in New York at firstname.lastname@example.org