By Andrew Scurria

A defunct Puerto Rico bank that closed its doors in 2015 over a bitter tax dispute isn't done battling the local government yet.

Doral Financial Group, which shut down in chapter 11 two years ago, is preparing to bring claims against Puerto Rico as the U.S. territory embarks on what amounts to the largest U.S. municipal bankruptcy ever, said Brian Pfeiffer, a lawyer representing what remains of the company.

The collapse of Doral's banking unit was the costliest U.S. bank failure since 2010, but the company's struggles went back a decade earlier and included an accounting scandal, a failed recapitalization and a ruinous tax battle that tanked its stock, costing Wall Street shareholders hundreds of millions of dollars.

While most of Doral's assets were sold off to repay creditors, its bankruptcy plan preserved certain tax attributes in the hope they could eventually be monetized. The remnants of Doral are now asserting the right to $296 million in Puerto Rico tax deductions, plus a roughly $34 million tax refund, Mr. Pfeiffer said.

The tax deductions, which can allow their holder to avoid paying taxes on income, could represent a valuable asset for creditors, provided Doral can find a buyer who is confident they would be honored.

Puerto Rico, though, is in a financial free fall of its own, and swaths of its debt stack are at risk of being wiped out, leaving the value of those tax assets in flux. Federal oversight officials placed Puerto Rico under a court-supervised restructuring proceeding this month, beginning what is expected to be a long and painful process of rehabilitating its tattered finances. The territory owes roughly $73 billion to bondholders, accumulated through years of borrowing to finance budget deficits against a tax base sapped by poverty and out-migration. Pension benefits are also underfunded by an estimated $45 billion, and government vendors are owed another $1.3 billion.

A spokesman for Puerto Rico's fiscal agency, which is leading restructuring negotiations, didn't immediately respond to a request for comment.

Doral had long battled Puerto Rico over past tax overpayments, but the situation changed dramatically in 2014 when the local Treasury Department refused to honor a $229 million tax refund the company had negotiated under the prior gubernatorial administration.

The company hit back by hiring Washington public-relations firm DCI Group to mount a campaign to pressure former Gov. Alejandro Garcia Padilla to pay up, foreshadowing the intense lobbying campaign in Congress last year over the terms of Puerto Rico's federal rescue package. Doral ran out of time and money when a Puerto Rico court nixed the refund in February 2015, and days later federal regulators shut down the bank.

Doral's investors suffered repeated setbacks in the 2000s amid turmoil at the company and a downturn in Puerto Rico's economy. Improper accounting forced the company to restate earnings in 2006 with a 56% cut to profits, and a recapitalization the following year failed to stabilize its balance sheet. The local legislature also launched an investigation into Doral's hiring of Puerto Rico's former Treasury Secretary months after the tax refund was negotiated in 2012.

More recently, Puerto Rico taxpayers have been pushed back in the payment line as local finance officials sought to conserve cash and keep essential services funded. Refunds worth $144 million were "claimed, processed and unpaid" as of November 30, according to a financial report filed last year. A 10-year fiscal framework approved by the board calls for reducing and eventually eliminating the practice of deferring refunds.

The U.S. government's bankruptcy watchdog said Friday it would appoint a committee of unsecured creditors in Puerto Rico's restructuring proceeding, and Doral wants a seat at the table to advocate for "fair treatment" of tax claimants, Mr. Pfeiffer said.

Write to Andrew Scurria at Andrew.Scurria@wsj.com

(END) Dow Jones Newswires

May 22, 2017 12:14 ET (16:14 GMT)

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