Doral Financial Corp. (DRL), the holding company for Puerto Rico's No. 2 mortgage lender, may soon find out whether a San Juan judge agrees it's owed a $229.9 million tax refund the government has refused to pay.

Superior Court Judge Laureana Perez Perez began hearing testimony yesterday in the bank's lawsuit against the Puerto Rico Department of Treasury after settlement talks collapsed last month. Doral's claim relates to a restatement of earnings from 1998 to 2004. The lender is trying to recover some taxes paid on overstated financials.

The judge told lawyers gathered for the brief nonjury trial that whatever her decision, an appeal is likely.

Doral's case centers on what it claims was the government's 2012 agreement to pay, which it says the treasury department later voided. Former Treasury Secretary Xenia Velez Silva testified today that restatement of tax liability amounts depended on interpretation of contract wording.

Another witness, Juan Zaragoza, a certified public accountant, told the judge that a "discrepancy" in tax filings represented a false statement and misrepresentation of fact, voiding the agreement.

Doral fell 2.3 percent to $7.09 at 11 a.m. today in New York. The company hasn't posted an annual profit since 2005 and has been under pressure to collect the refund.
The tax case coincides with a slowdown in Puerto Rico's economy, with the government and the San Juan-based lender beset by financial difficulties as the U.S. commonwealth and its agencies struggle with $73 billion in debt.

Doral said in September 2005 that it would restate earnings and cut shareholder equity by $720 million because of overvalued assets. In 2006, it agreed to pay a $25 million fine to settle a U.S. Securities and Exchange Commission probe.

The Puerto Rican government maintains it doesn't owe the money.

The case is Doral Financial Corp. v. Commonwealth of Puerto Rico, KAC2014-0533, Civil Court of First Instance, San Juan Superior Division.

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