Panic Is Told to Prove He Helped Run Investments

COSTA MESA —  Controversial Milan Panic will have to prove he spent more than 500 hours a year operating his private investments during the late 1980s to get out of back taxes and penalties totaling $951,000.

The chairman of ICN Pharmaceuticals Inc. contends in a U.S. Tax Court petition filed May 3 that he actively participated in operating two Budget Motels of America in San Diego and other investments, and is therefore entitled to write off greater losses and reduce his tax liability.

But the Internal Revenue Service asserts he and his wife, Sally, were nothing more than passive investors in the hotels and an energy partnership and, as a result, aren’t entitled to the huge losses--and lower taxes--they took on income tax returns.

His participation in the couple’s private business affairs is at the heart of an IRS controversy that goes back to their 1982 income tax return and covers five other years since then.

“This has been a long, ongoing audit,” said John Shaeffer, one of the couple’s tax lawyers. “It’s complicated because it all relates back to previous years.”

For instance, by disallowing $3.3 million in operating losses for the motel operations for 1988 through 1990, the IRS increased the Panics’ income by the same amount, changing calculations and deductions in other years.

“The issue is whether he had material participations in the businesses,” Shaeffer said. “We weren’t able to resolve it with the IRS, but we believe we will prevail in Tax Court.”

The lawyer emphasized that the companies were not tax shelters, as an ICN executive said Friday, but investments that Panic managed.

Panic was unavailable for comment.

The threshold for determining whether a taxpayer is actively participating in an investment is 500 hours. As an active participant in a private company, a taxpayer can take full advantage of such deductions to overall income as operating losses.

As passive investors, however, the Panics wouldn’t be able to use all the operating losses of the motel operation to offset other income. The IRS, for instance, limited their losses in 1988 and 1989 to a total of $815,000, less than a third of the $2.7 million in losses they took.

Mark Taylor, an ICN vice president who is also Sally Panic’s son by a prior marriage, said Friday that Panic purchased the hotels as a tax shelter but that their value went down as occupancy fell off.

Taylor said the hotels’ financial troubles also led to Panic’s alleged insider sale of $1.24 million of company stock in November 1994.

A few months before that sale, Taylor said, Panic was notified that he had to pay a multimillion-dollar legal judgment involving his financially troubled hotel business.

Taylor said the judgment came as a “substantial blow” to Panic, who tried hard to find other ways to meet the demand before resorting to selling the stock.

Besides owning the motels, the Panics also hold a stake in Altech Energy III, a partnership involved in equipment leasing for alternative energy projects.

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Milan Panic (pronounced PAN-eesh) has been embroiled in controversy since at least the late 1980s when he pushed ICN’s prize product, Virazole, as an antiviral drug that can combat the AIDS virus. The company lost a bitter battle with the Food and Drug Administration to get Virazole, the brand name for ribavirin, approved to treat the AIDS virus.

Early last year, ICN revealed that the agency directed it to halt Virazole testing on hepatitis C, a highly contagious and potentially fatal liver disease. But lawsuits soon accused Panic of withholding details on the FDA’s rejection while selling his ICN stock three months earlier. The company’s value plunged 42% in six days.

Since then, a federal grand jury criminal investigation and a Securities and Exchange Commission probe have been launched.