Garamendi Will Seek IRS Break for Exec Life : Taxes: The state insurance commissioner will warn that a tax lien against the insurer could cripple efforts to save the company and prevent massive losses to its policyholders.

California Insurance Commissioner John Garamendi is appealing for help from Treasury officials and Congress, warning that an IRS lien against Executive Life Insurance Co. could cripple efforts to save the company and prevent massive losses to its policyholders.

If the Internal Revenue Service enforces its claims for $643 million in back taxes and penalties, there is no hope of saving the company, Garamendi will tell a congressional hearing today.

“There is something terribly wrong with our system . . . when the (IRS) gets in the front of the line, frustrating any possibility of saving some of the livelihoods of thousands of pensioners,” Garamendi will say in testimony prepared for the House Ways and Means revenue subcommittee.

Before the hearing, he will meet with Assistant Treasury Secretary Kenneth W. Gideon, the top official in charge of federal tax policy. Garamendi will ask for understanding from the IRS, a unit of the Treasury Department, noting that it has the discretion of taking a hard line against Executive Life or being sympathetic to the plight of policyholders.

“In the name of elemental fairness, the IRS should move back in the line,” Garamendi says in his prepared congressional testimony, a copy of which was provided to The Times. “Its claims, however legitimate, should be subordinated to the claims of the absolutely innocent, unknowing victims of what to them will look like a Draconian system of accounting games and legal niceties.”

Garamendi previously has said he was concerned that the IRS lien could force the liquidation of Executive Life and cause its 400,000 customers to lose a large portion of their investment. But this marks the first time that he has made a direct appeal to federal officials for constraint.

Los Angeles-based Executive Life, the largest life insurer ever to fail, was seized by state regulators on April 11 as its losses from junk bonds grew and customers sought to cash in their policies.

On Tuesday, Garamendi unveiled a tentative plan to rehabilitate Executive Life by creating a new insurance company and placing many of the old firm’s troubled assets in a liquidating trust. He hopes to sell the new company in a bidding process, thus salvaging most of the investment of policyholders.

In Washington, the insurance commissioner hopes to persuade the IRS to stop short of a seizure of Executive Life’s assets that could end any rescue attempt.

“We are not out for combat,” a Garamendi aide said. “We want to have a series of conversations with the IRS and the Treasury.”

Garamendi is fully aware of the immense powers of the IRS, which has wide-ranging discretion in tax cases. Sometimes the IRS bill can be overwhelming.

The agency filed a claim in February against Drexel Burnham Lambert Inc. for more than $5 billion in back taxes, interest and penalties. The claim against Drexel covers the decade of the 1980s, and includes employment and income taxes.

The company identified with the rise and fall of junk bonds is now in Chapter 11 bankruptcy. Drexel has assets of about $2.8 billion but faces demands of $16 billion from federal agencies, along with an uncounted total from 13,000 private lawsuits.

The IRS tax claim against Drexel has threatened to scuttle a negotiated reorganization for the company that would give most of its assets to creditors and other claimants and allow it to emerge from bankruptcy. Lawyers for Drexel said the reorganization will be approved only if the IRS will settle for a much smaller amount than its $5-billion claim.

Agency officials refuse to discuss particular cases, such as Executive Life or Drexel.

The lien against Executive Life says the audits show taxes and penalties of $115.2 million for 1981; $133.5 million for 1982, and $394.6 million for 1983. The assessments were dated April 18, a week after the state seized Executive Life. The IRS did not explain why it had waited until 1991 to file claims for taxes allegedly unpaid for as long as 10 years.

Under federal law, IRS claims are satisfied before those of any other agency, business or individual. But the federal agency has considerable leeway in handling a case. It may accept full payment, agree to settle for partial payment, or take enforcement action, seizing bank accounts, cars, buildings and furniture.

“The IRS can decide on its own to step to the back of the line behind the wheelchairs and the pensioners,” said the Garamendi aide, speaking hopefully of the Executive Life case.

The IRS sometimes does give some consideration to the impact beyond pure tax collection, spokesman Don Roberts said Tuesday.

If a hospital failed to turn over taxes withheld from its employees paychecks, and “it is the only medical facility within 50 miles, that may have an impact on resolving the (tax) case,” according to an IRS spokesman. RELATED STORY: A1