Doral’s Puerto Rico Tax Negotiations Snag Over Voucher Dispute

Doral Financial Corp.’s breakdown in talks with Puerto Rico’s government over a tax dispute this week was triggered by arguments over which side should issue vouchers for future tax deductions.

Doral, which has been seeking a tax refund of about $230 million, fell as much as 20 percent yesterday after discussions with the island’s Treasury Department failed. Puerto Rico’s Court of First Instance set a trial to start Sept. 16 because negotiators couldn’t reach a definitive accord, San Juan-based Doral said yesterday in a regulatory filing.

Doral and the Treasury had reached a preliminary deal this month that included tax-deduction vouchers that could be sold for cash. Disagreements arose over which side would issue the vouchers. The government proposed Doral issue them because they represent a bank asset, according to a statement yesterday from the Treasury. Doral wanted the government to issue them because it would be easier to find buyers, according to a person familiar with the talks.

Doral, which hasn’t posted an annual profit since 2005, has been under pressure to collect a tax refund that the firm says it’s due under a 2012 agreement. Puerto Rico’s government has said it doesn’t owe the money, and the Federal Reserve Bank of New York told the company in May to write it off. The firm’s stock plunged 19 percent yesterday to $6.76 in New York, extending the year’s decline to 57 percent.

Casting Blame

Doral had been preparing to accept $700 million in vouchers that grant users tax deductions on as much as $100 million of income annually, according to the person. The maximum amount of revenue the commonwealth would have forgone was estimated to be about $273 million using a tax rate of 39 percent, the person said, requesting anonymity because the talks were confidential.

Each side faulted the other for the breakdown.

The preliminary agreement “did not contemplate the issuance of vouchers or securities by the commonwealth,” which Doral later sought in a contract, the Treasury said in a statement. “The issuance of securities by the commonwealth requires legislative approval, which Doral knew.”

“It was agreed that Treasury would give Doral $700 million of tax vouchers,” Doral’s chief legal counsel, Matthew D. McGill, said in a statement. “The Puerto Rican government can’t walk away from that agreement and then blame Doral for its decision to do so.”

Doral said in May it was revising its capital plan to remain in compliance with U.S. regulators after the Federal Deposit Insurance Corp. advised the bank it may no longer include Puerto Rican tax receivables in its calculation of Tier 1 capital. Earlier this month, the bank said it also got a Securities and Exchange Commission subpoena regarding tax receivables, compliance with a consent order and allowances for loan and lease losses.

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