When billionaire Billy Joe “Red” McCombs, co-founder of ClearChannel Communications Inc., reported a $9.8 million loss on histax return, he failed to include about $259 million from alucrative stock transaction.

After an audit, the Internal Revenue Service ordered him to pay$44.7 million in back taxes. McCombs, who is worth an estimated$1.4 billion and is a former owner of the Minnesota Vikings, DenverNuggets and San Antonio Spurs sports franchises, sued the IRS,settling the case in March for about half the disputed amount.

McCombs's fight with the IRS illustrates an overlooked facet inthe debate over tax rates paid by the nation's wealthiest.Billionaires — from McCombs to Philip Anschutz to Ronald S. Lauder— who derive the bulk of their wealth from stock appreciation areusing strategies that reap hundreds of millions of dollars fromthose valuable shares in ways the IRS often doesn't classify astaxable income, securities filings and tax court records show.

“The 800-pound gorilla is unrealized appreciation,” said EdwardJ. McCaffery, a professor of law, economics and political scienceat the University of Southern California in Los Angeles.

While Warren Buffett has generated attention with his complaintsthat he and his fellow billionaires pay federal income taxes at alower rate than his secretary — about 17 percent — the real figureis often smaller, said David S. Miller, former chair of the taxsection of the New York State Bar Association and a partner atCadwalader, Wickersham & Taft LLP in New York.

“The problem is not that people like Warren Buffett pay tax at a17 percent rate, it's that they can use complex transactions notavailable to most Americans to get cash from their appreciatedstock without paying any taxes at all,” Miller said.

The rate at which the 400 U.S. taxpayers with the highestadjusted gross income actually paid federal income taxes –theirso-called effective tax rate — fell to about 18 percent in 2008from almost 30 percent in 1995, IRS data show. That's the tip ofthe iceberg, since much of their wealth never converts into incomeon a tax return, McCaffery said.

In the McCombs case, the billionaire entered into transactionsknown as variable prepaid forward contracts. He received about $259million for lending an investment bank his Clear Channel shareswith a promise to deliver the stock for good a few years later. Thearrangement enabled McCombs to defer paying capital gains taxbecause he hadn't sold his shares, lawyers for the billionairesaid. The IRS deemed the transaction a sale since the bank paidMcCombs cash and got the use of his stock almost immediately.

Transactions like these may complicate plans by U.S. PresidentBarack Obama to help close the federal deficit by increasing taxeson millionaires. Obama has said the tax code should contain a“Buffett Rule” to ensure that millionaires pay taxes at least atthe same rate as middle-class Americans. Republicans have said theyprefer lowering tax rates for businesses and the wealthy. Buffettdeclined to comment.

In the past two years, some of the wealthiest executives in theU.S. have used deals similar to McCombs's to reap returns whiledeferring the taxes without running afoul of IRS rules, securitiesfilings show.

Dole Food Co. Chairman David H. Murdock received about $228.6million in 2009 against his Dole shares — tax-free until he isscheduled to deliver shares in November 2012, a filing shows.

Starr International Co., the investment vehicle run by Maurice“Hank” Greenberg — forced from his position as chairman and chiefexecutive officer of American International Group Inc. in 2005 —utilized a prepaid forward agreement last year to receive $278.2million from an investment bank, according to a March 2010regulatory filing. The investment vehicle isn't slated to deliverthe AIG stock until 2013.

Lauder received $72.9 million in June as part of a variableprepaid forward sale and is scheduled to deliver the Estee LauderCos. shares in June 2014, according to a filing with the U.S.Securities and Exchange Commission.

Spokespersons for Lauder, Murdock and Starr Internationaldeclined to comment.

While the tax treatment of these plans isn't disclosed in thefilings, “there's no other reason to enter into such a convolutedarrangement,” said Robert Willens, an independent tax accountinganalyst in New York. These arrangements can cost several milliondollars in fees, according to tax planners.

Taxes on capital gains are triggered when assets likeappreciated shares are sold — a process called realization. Whatconstitutes a realized, taxable sale is a frequent bone ofcontention between the IRS and the clients of tax planners.

Transactions intended to pull cash out of appreciated assetstax-free aren't limited to stock. Boston real estate developerArthur M. Winn exited his interest in a piece of real estate byconverting his stake into a share of a partnership free of anycapital gains tax, court filings show.

The IRS objected and claimed Winn and his partner should havereported a $12 million taxable gain. A U.S. Tax Court judge sidedwith Winn on one aspect of the deal; others were settled with thegovernment. The details haven't been disclosed.

Winn, who earlier this month pleaded guilty to making illegalcampaign contributions, has retired from WinnCompanies. He did notrespond to messages left with his attorney and with thecompany.

Miller, the former chair of the tax section of the New YorkState Bar Association, has proposed a so-called mark-to-marketsystem to tax the annual appreciation in the stock holdings of thetop 1/10th of 1 percent of taxpayers. That would essentially taxgains in a given year regardless of whether the shares are sold. Ina 2005 article in the journal Tax Notes he estimated this approachwould raise between $490 billion and $750 billion over adecade.

Borrowing against appreciated stock and real estate is a populartax deferral strategy particularly as interest rates plummet, saidRandy Beeman, a private wealth manager at The Wise Investor Groupin Reston, Virginia, a unit of Robert W. Baird & Co. Theinterest rate on loans to some wealthy individuals has hoveredaround 1 percent.

McCombs, ranked 312 on the most recent Forbes 400 list of therichest Americans, made his fortune in automobiles, real estate,and then by building Clear Channel into a large radio stationoperator and outdoor advertising business. He is now the chairmanof Xe Services LLC, the military security contractor formerlycalled Blackwater Worldwide.

In the late 1990s, McCombs borrowed about $300 million tofinance the purchase of the National Football League's MinnesotaVikings. By 2002, the Clear Channel shares pledged as collateralwere falling in value and McCombs faced margin calls from lenders.He didn't want to sell his shares, partly because of “a strongemotional attachment to his ownership in the company,” according toa filing by his lawyers in U.S. Tax Court.

Instead, he entered into a series of variable prepaid forwardcontracts, receiving about $259 million from JPMorgan Chase &Co. in exchange for an agreement to deliver his Clear Channel stockin one to three years. The transaction was structured to limit hispotential losses by varying how many shares he would deliver at theend of the transaction.

He loaned those shares to JPMorgan in the interim. That allowedthe New York-based bank to short the stock — selling the borrowedshares to hedge against any decline in the price of the stock itwould eventually receive from McCombs.

Lawyers said the cash received up front didn't have to bereported as income because it wasn't a taxable sale until McCombsturned over those shares for good.

The IRS said the transaction was a cash sale of the shares,generating taxable income of as much as $213 million.

Over the years, the IRS has tried to crack down on such deals.In 2006, the agency declared that including a share loan meantthese types of transactions were sales, triggering an immediateincome tax obligation. In McCombs's case, his lawyers contendedthat the share loan was separate from the first part of thetransaction, and thus didn't transfer the so-called “benefits andburdens” of owning the stock. He settled his case for $23 millionin back taxes plus interest.

In 2010, a U.S. Tax Court judge found Philip Anschutz, theentertainment, oil and media investor, owed $94 million in taxesafter he used transactions similar to the ones used by McCombs.Anschutz, identified by Forbes as the 39th richest man in the U.S.,is appealing the decision.

“The IRS shifted its view and threatened a legitimate businesspractice and that will have a dampening effect on investment,” saida spokesman for Anschutz.

The IRS has “gotten more hostile toward these transactions overthe years,” through its various technical pronouncements andlitigation, said Willens, the accounting analyst. Since 2006, suchtransactions haven't included the interim loan of shares to theinvestment bank, he said.

“It's still desirable to defer the tax and wind up with aninterest free loan from the government,” he said. “Chances are youdon't get audited and if it does get challenged the odds are goodyou'll have a settlement for some fraction of the amount you saved.Who wouldn't want that?”

Bloomberg