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Judge Postpones Trial Over Back Taxes

June 20, 1991

NEW YORK (AP) _ A federal judge has postponed a trial on whether the collapsed Wall Street firm Drexel Burnham Lambert Inc. owes the government billions of dollars in back taxes, officials said today.

U.S. District Judge Milton Pollack, who is overseeing the Drexel case, has given the two sides until July 26 to settle a matter that has threatened to unravel a complex settlement of the Drexel bankruptcy.

Pollock has sought to ensure that the 16-month-old Drexel bankruptcy is settled to avoid long delays and curtail legal expenses. The tax issue was the last stumbling block to the case.

Judge Pollack entered the case at Drexel’s request late last year. Federal district court judges have the right to take control of bankruptcy court cases.

Attorneys for Drexel and the Internal Revenue Service have been holding settlement talks in an attempt to avoid a trial at which U.S. Bankruptcy Judge Francis Conrad would estimate how much of a $5.3 billion claim for back taxes is valid.

That would allow Drexel to move forward and seek approval of reorganization plan under Chapter 11 of federal bankruptcy laws. Drexel sought bankruptcy protection from creditors in February 1990.

If the amount Drexel must pay the IRS exceeds a specific level, Drexel creditors are prepared to scrap the bankruptcy plan. Under federal law, tax claims take precedence in bankruptcy payouts.

A spokeswoman for the U.S. Attorney’s Office, Deborah Corley Guzman, said Judge Pollack had postponed the IRS case until Aug. 5. Pollack gave the parties until July 26 to get approval for a settlement from the Justice and Treasury departments.

Individuals involved in the case said the judge wanted to give the parties more time to settle to avoid the risk of the bankruptcy collapsing.

The main unresolved issue is whether Drexel legally deducted $1.4 billion in compensation to seven top executives from 1981 to 1989, including about $500 million of the $550 million paid to financier Michael Milken in 1987.

The IRS argues that the payouts were too large and in fact constituted dividend payments to shareholders, which are not deductible as a business expense. Drexel says the compensation was reasonable and legal.

Other tax-related disputes between the parties have been settled, lawyers in the case said.

Drexel and its creditors last month announced a complex agreement to divide the firm’s $2.6 billion in assets and allow it to emerge from Chapter 11 bankruptcy protection as an adviser to financially troubled companies.

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