Lehman Brothers Holdings Inc. and its brokerage unit Lehman Brothers Inc. face a tax liability of as much as $283 million if they retain residual interests in real estate mortgage investment conduits.
The companies filed a motion in the U.S. Bankruptcy Court for the Southern District of New York in Manhattan asking for authority to pay Citigroup Inc.'s Citibank unit $24 million to assume the tax liability.
The joint motion by the Lehman holding company and the trustee for the brokerage, filed on July 28, explains how the owner of the residual interests incurs so-called phantom income, which gives rise to a tax liability even though there is no actual income.
Moreover, the phantom income can't be offset by operating losses. It can be offset only by specified tax credits, which the Lehman companies lack.
The motion for offloading the tax liabilities will come to bankruptcy court for approval on Aug. 18.
At that hearing, Lehman will also seek authorization for a third time to let insurance companies honor policies providing director and officer liability insurance.
For the policy year May 2007 to May 2008, Lehman had $250 million in director and officer insurance.
Claims on the policies soon will have eaten through the first two layers providing the initial $35 million of coverage.
The new motion, Lehman's third, is seeking authority for payments by insurance companies providing the next layers of coverage.
The Lehman holding company and its nonbrokerage subsidiaries filed a revised Chapter 11 plan and disclosure statement in April. The Lehman holding company filed under Chapter 11 in New York on Sept. 15, 2008, and sold the North American investment-banking business to Barclays PLC of London one week later.