NO. D-1-GV THE STATE OF TEXAS IN THE DISTRICT COURT OF VS. TRAVIS COUNTY, TEXAS

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1 NO. D-1-GV Filed 08 December 22 P4:06 Amalia Rodriguez-Mendoza District Clerk Travis District THE STATE OF TEXAS IN THE DISTRICT COURT OF VS. TRAVIS COUNTY, TEXAS UNIVERSAL INSURANCE EXCHANGE and UNIVERSAL PARATRANSIT INSURANCE SERVICE, CORP. 345TH JUDICIAL DISTRICT APPLICATION FOR AUTHORITY TO SETTLE (Internal Revenue Service) COMES NOW, DKJ Group, Inc., Special Deputy Receiver of Universal Insurance Exchange in Rehabilitation under contract to the Permanent Rehabilitator of Universal Insurance Exchange ("UIE") and Universal Paratransit Insurance Service, Corp. ("Paratransit"), and files this Application for Authority to Settle (Internal Revenue Service) and in support would respectfully show the Court as follows: AUTHORITY 1. On January 26, 2006, this Court entered its Agreed Order Appointing Rehabilitator and Permanent Injunction ("Permanent Injunction") placing UIE and Paratransit permanent receivership for the purpose of rehabilitation and appointing the Texas Commissioner as Permanent Rehabilitator of UIE and Paratransit ("Receiver"). The Receiver appointed H. Koehler Company, Inc. as Special Deputy Receiver on April 13, The Commissioner of Insurance as Rehabilitator terminated the designation of H. Koehler Company, Inc., as the Special Deputy Receiver on October 31, 2007 and designated DKJ Group, Inc., as the Special Deputy Receiver ("SDR") on December 20, The SDR is authorized to file this application under TEX. INS. CODE (y). 2. The subject matter of this Application has been referred to the Special Master appointed in this proceeding in accordance with Section III of the Order of Reference to Master entered on April 13, U:\3400\PL\Application - Settle (IRS).doc Page 1

2 BACKGROUND 3. In the course of administrating the UIE estate, the SDR's investigation discovered that UIE charged and collected approximately $3 million from certain policyholders for the years 2001 through 2005, that these funds were diverted from UIE, and that UIE s records had been altered in an effort to hide these activities. As a result, UIE had understated its federal taxable income for the years 2001 through The Internal Revenue Service ("IRS") was informed of the discovery and a meeting was held with IRS representatives on June 3, Following this meeting, the IRS initiated an examination. 5. In the course of the examination, the IRS formally requested information and the SDR responded in a timely fashion. 6. In September 2008, the IRS completed its examination and informed the SDR of its conclusions. First, the IRS would not take action on the understatement of taxable income based on the collection and diversion of the approximate $3 million having concluded that UIE could take a fraud loss deduction offsetting the tax liability. Second, the IRS determined that UIE; however, had incorrectly reported income for the years 2003 and 2004 because of an accounting practice error that double booked year end changes in unpaid loss adjustment expense. As a result of their findings, the IRS proposes to assess additional taxes due for UIE for the tax periods ending December 31, 2003 of $18,435 plus interest and December 31, 2004 of $122,300 plus interest. The SDR estimates that interest will not exceed $25,000. PROPOSED SETTLEMENT AND RECOMMENDATION 7. The SDR proposes to accept the IRS determination of additional tax due, which upon payment would fully and finally settle and close the tax years 2003 and The SDR would show that acceptance of this IRS determination is in the best interest of the receivership U:\3400\PL\Application - Settle (IRS).doc Page 2

3 estate, its policyholders, creditors and claimants. Copies of the notices from the IRS are attached to the Special Deputy Receiver s affidavit as Exhibits 1 and 2. NOTICE 8. Notice of this Application has been provided to all known parties of interest in the manner shown on the Certificate of Service. The Application will also be posted on the SDR's website. PRAYER WHEREFORE, PREMISES CONSIDERED, the SDR respectfully prays that the Court accept and approve this Application in all respects. The SDR further prays that the Court enter an order: 1. Authorizing the SDR to accept the IRS determinations as described herein; 2. Authorizing the SDR to pay to the IRS $18,435 plus interest for additional taxes assessed for the tax period ending December 31, 2003 and $122,300 plus interest for additional taxes assessed for the tax period ending December 31, 2004; and 3. Authorizing the SDR to execute any other documents and adjust the estate's records as necessary to effectuate this payment. Respectfully submitted, BRIAN E. RIEWE, P.C Spicewood Springs Rd., Suite 101 Austin, Texas Telephone: 512/ Facsimile: 512/ State Bar No By: Attorneys for the Special Deputy Receiver U:\3400\PL\Application - Settle (IRS).doc Page 3

4 APPLICANT'S NOTICE OF SUBMISSION Pursuant to the terms of the Amended Order of Reference to Master entered by the District Court in this cause, the Application for Authority to Settle (Internal Revenue Service) is hereby set for written submission before the Special Master, Tom Collins, on Monday, January 5, The Special Master has asked that the following rules be provided you: 1. Any objection must be filed with the Travis County District Clerk at least three (3) calendar days before the submission date. 2. A copy of any objection shall be served by such date on: (a) The Special Master's Docket Clerk, Ms. Jean Sustaita, Texas Department of Insurance, (Hand Delivery) 333 Guadalupe, Hobby Tower 3, Room 550, Austin, Texas; or (Mail To) P. O. Box , Austin, Texas (b) All interested parties, including those listed on the Applicant's Certificate of Service. 3. The written objection must specifically list all reasons for objection with supporting references to and discussion of statutory and case authorities. Reasons not stated in writing will not be considered orally. 4. If a matter is set for submission, an objecting party shall expeditiously coordinate with Applicant s counsel and the master s docket clerk [(512) ] to obtain an oral hearing, unless the master determines that an oral hearing is not necessary. The objecting party shall serve a Notice of Oral Hearing on applicant s counsel and all interested parties, including those listed on the Applicant s Certificate of Service. 5. Failure to file timely a written objection before the Special Master constitutes a waiver of the right to object to the Special Master's recommendation to the District Court. 6. Any Acknowledgment of Notice and Waiver to be filed by the Guaranty Association or other interested party should be filed at least three (3) calendar days before the submission or hearing date. U:\3400\PL\Application - Settle (IRS).doc Page 4

5 CERTIFICATE OF SERVICE I hereby certify that a true and correct copy of the foregoing document has been served on all interested parties in accordance with the Texas Rules of Civil Procedure and TEX. INS. CODE ANN (d) this 22nd day of December Mr. Tom Collins, Special Master by serving his Docket Clerk, Ms. Jean Sustaita Texas Department of Insurance 333 Guadalupe, Tower III, 5th Fl., MC-305-1D Austin, Texas jean.sustaita@tdi.state.tx.us Ms. Leanne Layne Ms. Rachel Giani Ms. Angel Garrett Mr. Kathy Gartner Texas Department of Insurance P.O. Box Austin, Texas leanne.layne@tdi.state.tx.us rachel.giani@tdi.state.tx.us angel.broussard@tdi.state.tx.us kathy.gartner@tdi.state.tx.us Ms. Linda Shaunessy, Asst. Attorney General Attorney General's Office P.O. Box Austin, Texas linda.shaunessy@oag.state.tx.us Mr., P.C Spicewood Springs Rd., Suite 101 Austin, Texas briewe@riewelaw.com Mr. Robert Nunnally Wisener * Nunnally * Gold, L.L.P. 625 W. Centerville Rd., Suite 110 Garland, Texas gurdonark@aol.com Mr. Bogdan Rentea (Atty for Kourosh A. Hemyari) Rentea & Associates 1002 Rio Grande Street Austin, Texas brentea@rentealaw.com Mr. Jon E. Arsenault, General Counsel Connecticut Insurance Department P.O. Box 816 Hartford Connecticut jon.arsenault@po.state.ct.us Ms. Belinda Miller, Deputy General Counsel Florida Office of Insurance Regulation 200 East Gaines Street Tallahassee, Florida belinda.miller@fldfs.com Ms. Arlene Knighten, Supervising Attorney Legal Services Division Louisiana Department of Insurance Post Office Box Baton Rouge, Louisiana aknighten@ldi.state.la.us Mr. Mark Haire, Director of Legal Division Mississippi Insurance Department 1001 Woolfolk State Office Building 501 North West St Jackson, Mississippi mark.haire@mid.state.ms.us Mr. David Woolsey, Supervisor Department of Banking and Insurance P. O. Box 325 Trenton, New Jersey david.woolsey@dobi.state.nj.us Mr. Todd Dewey 2111 Skylark Drive Arlington, Texas goodguy222001@yahoo.com Mr. John Werner Reaud, Morgan & Quinn, L.L.P. P.O. Box Beaumont, Texas jwerner@rmqlawfirm.com U:\3400\Cert of Serv - IRS.doc Page 1

6 Mr. Dan Lair 2 Springcrest Court Allen, Texas dlair@sbcglobal.net Mr. Edward M. Lavin (Atty-Bill Hall Jr. Trucking) Attorney at Law 8918 Tesoro Dr. #418 San Antonio, Texas elavin@satx.rr.com Mr. Harry Sivley, Jr. (Rep. for Richard W. O'Dom) Regulatory Technologies, Inc. 645 Hembree Parkway, Suite A Roswell, GA sivley@regtech.net Mr. Stan Broome (Atty-Fletcher, Polete, et al) Broome & Bobo, LLP 105 Decker Court, Suite 850 Irving, Texas SBroome@LawHBB.com Ms. Amber Walker Texas Property & Casualty Insurance Guaranty Association 9120 Burnet Road Austin, Texas awalker@tpciga.org Mr. Mark A. Weitz (Atty-Annecy Investments) Weitz Morgan PLLC 100 Congress Ave., Suite 2000 Austin, Texas mweitz@weitzmorgan.com Mr. Harold Koehler H. Koehler Co., Inc Wandering Trail San Antonio, Texas haroldkoehler@yahoo.com Mr. Don S. Nixon Paradise Intermediaries, Inc. 705 W. Avenue B., Suite 312 Garland, Texas donnixon@paradiseintermediaries.com briewe@riewelaw.com U:\3400\Cert of Serv - IRS.doc Page 2

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