By: Todd Shields
Three years ago, the Times Mirror Co. engineered what it called a tax-free disposal of two specialty publishing subsidiaries. Reed Elsevier PLC got the companies, Times Mirror got $1.1 billion, and the U.S. taxpayer got nothing.
Now, the Internal Revenue Service (IRS) is signaling it disagrees with Times Mirror’s accounting. As a result, the Tribune Co., which purchased Times Mirror last year, could face a whopping bill of $600 million or more for back taxes, interest, and penalties stemming from that transaction and a similar deal.
Tribune spokesman Gary Weitman said the company could not issue detailed comments because the dispute with the IRS is not settled. But in filings with the U.S. Securities and Exchange Commission early this year, Tribune estimated federal and state taxes for the deals could amount to $600 million and said it had set aside a $180-million reserve. “The company intends to vigorously defend its position in this matter,” Tribune wrote in the March filing — a statement Weitman said still reflects the company’s position.
Tribune’s tax travail began in March 1998, when Times Mirror disposed of law-products publisher Matthew Bender & Co. Inc. and Times Mirror’s 50% stake in legal-citation publisher Shepard’s Co. Times Mirror said it realized a $1.1-billion gain from the deal with Reed Elsevier, but the transaction was far from straightforward. According to Times Mirror filings, some $222 million went to pay down debt. In addition, Times Mirror said it “became the sole manager” of Eagle New Media Investments LLC.
Another transaction later in the year, in which Times Mirror sent medical publisher Mosby Inc. to educational publisher Harcourt General Inc., also bore the earmarks of a so-called “nonsale sale.”
It is unclear from Times Mirror filings whether Eagle New Media was formed to carry out the divestitures. Times Mirror said it intended to use Eagle to buy its own stock and to finance investments.
On Oct. 18, the IRS chief counsel’s office issued a directive that mentioned neither Times Mirror nor Tribune, but the eight-page document concluded that taxes are owed in some deals “wherein corporations are nominally disposed of in a reorganization … but are in substance sold.” A sign of such a transaction, it said, is when a company disposes of a subsidiary and ends up with control over a limited liability company.
Kevin Lavalla, managing director with the New York-based media merchant bank Veronis Suhler, called the IRS directive a clarification rather than a change to rules governing divestitures.
The IRS does not disclose whether it is seeking penalties from taxpayers, but the agency can seek back taxes and interest, said spokesman Don Roberts in Washington. In its October directive covering nonsale sales, the agency said it may impose penalties equal to 20% of the tax underpayment.