(Dow Jones) Another shoe may be dropping on a troubled strategy used by scores of executives to avoid big capital gains taxes.

Texas billionaire Billy Joe "Red" McCombs is now in U.S. Tax Court over his use of the strategy, known as a variable prepaid forward contract.

The case against McCombs, and a tax court decision last week against another billionaire, Philip Anschutz, has tax advisors worried that similar transactions could face challenges. Variable prepaid forward contracts have been a popular technique, often used to diversify out of concentrated stock positions, for at least the past decade.

The court ruled that Anschutz's use of the technique, designed to avoid outright sales, actually produced them instead. No tax would have been owed if the transactions hadn't been classified as sales. The ruling left him owing an estimated $110 million in taxes, plus interest of perhaps $40 million.

The case involving McCombs, first reported by Forbes, was confirmed by his lawyer, Gary Woods. He acknowledged that the case against the former owner of the Minnesota Vikings involves a variable prepaid contract, but said he thought the facts are "considerably different" than those in the Anschutz case. The McCombs case is still awaiting a decision.

Tax advisors frequently recommended variable prepaid forward contracts or "confirmed they would work from the tax point of view," said tax analyst Robert Willens. Now, with the recent Anschutz decision and the emergence of the McCombs case, some who used the contracts may "look to their advisors and wonder why they gave that advice," he added.

In 2003, the Internal Revenue Service issued a ruling that essentially blessed the contract, assuming taxpayers followed its guidelines. A boomlet followed. Then, according to Willens, "people got a little greedy" by going beyond the guidelines and adding a share-lending component that turned out to be trouble. In 2006, the IRS issues a memo warning against share lending.

In Anschutz, the transactions took place in 2000 and 2001, and included more than 4 million shares of Union Pacific Resources Group and Anadarko Petroleum Corp. (APC), some with a cost basis of less than $1. Anschutz received $375 million in upfront payments, according to the court. His broker was Donaldson, Lufkin & Jenrette, which has since been bought by Credit Suisse Group (CS).

In transactions like these, an executive agrees to turn over his shares to an investment bank on a specific date in the future, and meanwhile lends the bank the same amount of stock. The bank gives the executive cash upfront, generally equal to as much as 80% of the shares' fair market value.

George M. Clarke, an attorney at Miller & Chevalier, said tax court decisions on variable prepaid forward contracts could have an impact on other financial products, and that his firm is watching to see how that might play out.

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