It's Showtime For Lehman's Tax Man

It's tax time for Corporate America, too. And to Robert Willens, this is a joyous season indeed. For Willens, the tax savant of Lehman Brothers Inc., has made a thriving career out of helping companies avoid the clutches of the Internal Revenue Service. His craft's most visible practitioner on Wall Street, Willens is an extra selling point for underdog Lehman.

Willens, a tax accountant by trade, likes to bedazzle Lehman staffers with his ability to reel off tax rules and figure out how clients can use them--in plain English. Traditionally, Wall Street houses have farmed out IRS questions to tax attorneys. During the dealmania days of the 1980s, however, firms added in-house tax specialists to dream up ideas for deals that lessen tax loads. Bear Stearns, Morgan Stanley, and J.P. Morgan are among them.

MOST-QUOTED. But Willens has achieved a formidable stature among these folks as a result of his public exposure. A prolific writer, he churns out easily understandable analyses of deals that are widely read. He has authored over 200 articles in accounting journals. And for the past three years, CPA Review has named him one of America's 25 most-quoted accountants. This has caused grumbling among lesser-known tax experts. Still, he has many fans. Willens, says tax attorney Daniel M. Shefter of Skadden, Arps, Slate, Meagher & Flom, is the most "knowledgeable tax commentator and analyst in the business."

The lanky and affable Willens, 48, admits that his job is about "testing the limits of the law." He has helped set up several Lehman deals that turned on minimizing the tax bite (table). Consider AMR Corp., parent of American Airlines Inc. Last year, AMR wanted to replace its convertible preferred shares with debt, which is cheaper capital since its interest is a deductible expense. Savings: $12 million yearly. But more leverage on the company would displease ratings agencies. Lehman mollified the agencies by structuring a convertible debt security that eased the burden on AMR in hard times--the company can delay paying interest for up to five years.

Similarly, Willens had a hand in reshaping Ford Motor Co.'s corporate structure so it would not be penalized by a tax-code change meant to punish high leverage. Ford's dilemma was that it couldn't use all of its overseas tax credits, which reduce its IRS bill by giving it a break for levies the company pays to foreign governments on its offshore operations. Reason: In the 1986 Tax Reform Act, Congress placed a limit on the overseas tax credits a debt-heavy company could use. Ford's balance sheet carried a handful of high-debt subsidiaries--car leasing, insurance, land development, and banking. Answer: In 1989, the carmaker followed Lehman's advice to place all of the subs in a new entity called Ford Holdings Inc. This was tricky. Under the tax code, parent Ford couldn't own the whole thing. That's why Ford Holdings issued preferred stock to the public representing 25% of its voting power.

SHORT CUT. Or check out the predicament of Sensormatic Electronics Corp., which makes those security devices that detect shoplifters sneaking out a store's door. In December, it sought to merge with a similar company, Knogo Corp., but it wanted only Knogo's foreign operations, because growth and profit potential are better. Also, Sensormatic feared that, with Knogo's U.S. operations, it would dominate the domestic market and attract an antitrust challenge. Yet it didn't want to go through the hassle of absorbing all of Knogo and then selling off its U.S. assets, since the proceeds would be taxable. Under Lehman's guidance, Knogo spun off the U.S. business to its stockholders, then merged with Sensormatic by swapping shares. Both maneuvers were tax-free.

An accountant's son, Willens acquired his tax expertise at what is now KPMG Peat Marwick, where he advised dealmeisters at then-powerhouse Drexel Burnham Lambert Inc. Hired in 1987 by Lehman, Willens floundered for a while. "No one knew what I was supposed to do," he recalls. Willens fixed that by bombarding the firm's investment bankers with E-mail memos suggesting tax-free mergers-and-acquisitions options.

Willens, since promoted to managing director, is a very busy man. He gets to the office at 6 a.m. to rummage through tax publications. Aside from planning M&A tax angles and writing reports, Willens advises Lehman's institutional clients on trading strategies and teaches a tax class at Columbia University Business School. Says Willens: "I'm hooked on taxes" --other people's presumbably.

Playing the Tax Angle



Plan to replace costly equity with tax-deductible debt disliked by leverage leery ratings agencies


Exchange equity for convertible debt that allowsissuer to postpone interest payments



Because of debt-heavy units, IRS frowns on the auto maker's use of all its foreign tax credits


Units placed in separate, 75% Ford-owned, company, removing limit on tax credits



Merged store-security out-fit would have to sell Knogo's domestic assets, paying taxes on proceeds


Right before merger, Knogo spins off domestic operations to its share-holders, tax-free


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