Tax-phobic restructuring companies are closely monitoring Tribune Co.’s appeal of a U.S. Tax Court setback that could cost it around $1 billion in federal taxes and penalties for a 1998 divestiture. Tax pros generally don’t believe that the media giant can erase that huge bill in appealing the decision to the Seventh Circuit U.S. Court of Appeals, but they are keeping track for possible clues on how far businesses can go in engineering deal structures to sidestep taxes on often-huge sell-off profits. The general belief among tax advisers is that the bewilderingly complex format devised for Times Mirror Co., acquired by Tribune in 2000, pushed the envelope and was bound to draw fire from the IRS. They suggest that the clear defeat for Tribune, which inherited the tax bill when it bought Times Mirror, may have scuppered virtually all creatively engineered structures while acknowledging that the final chapter can’t be written until the case is concluded. Robert Willens, a Managing director and corporate tax expert at Lehman Brothers, says that in the wake of Tax Court ruling, he knows of no structures that can be devised to avoid taxes when cash figures heavily in the seller’s take. The best sheltering alternatives, he says, seem to be straightforward spin-offs or cash-rich split-offs in which the divesting parent takes cash out of a subsidiary prior to the divorce. In the Tribune case, Tax Court Judge Mary Ann Cohen determined in a September opinion that Times Mirror essentially received cash for the sale of its Matthew Bender Publishing Co. subsidiary and not the stock envisioned in the designed structure. Times Mirror did not receive the cash directly in selling Bender to Reed Elsevier PLC for $1.4 billion but set up a middleman vehicle, MB Parent, to funnel the money to the seller. Times Mirror owned the common stock of MB Parent, with 20% of the voting power, and Reed Elsevier the preferred stock, with 80% of the votes. Bender was actually sold to MB Parent, which resulted in Reed Elsevier’s controlling the operating assets and Times Mirror controlling the cash. Times Mirror claimed that its stock in MB Parent entitled it to book the deal as a tax-free reorganization, but the IRS sharply disagreed, clouting the company for a $551 million tax bill based a sharp appreciation in the value of Bender under the Times Mirror wing. According to Cohen, the “consideration” was not common stock in MB Parent but “control over the cash deposited in” an affiliated limited liability company (LLC). Nevertheless, the case was decided on technically oriented narrow grounds. For the arrangement to fly as tax-free, the stock in MB Parent would have had to be worth at least $1.1 billion, or 80% of the total price. Cohen noted that valuation evidence at the trial showed the stock to be worth far less than $1.1 billion. “The factual analysis of the transaction compels the conclusion that the management authority over the cash in the LLC had far more value to Times Mirror than the MB Parent stock and thus represented the bulk of the consideration,” she wrote. Willens says that the ruling was a very “narrowly drawn decision,” which indicates that it’ll be tough for Tribune to win at the appellate level. Taxes figure heavily in sell-offs and other restructurings because sellers want to maximize the proceeds that often are earmarked for investments and stock buybacks. Times Mirror, for example, had an aggressive repurchase program going when it shed Bender and other units in its professional information division. In early November, Liberty Media Corp. stunned investors by disclosing that it was considering a tax-favored move to create a separate tracking stock for its interactive operations, which form the heart of the media company. Tracking stocks, representing rights to share in earnings and dividends of assets still owned by a parent company, have been poorly received by investors and most were later retired by their issuers. Liberty’s interactive properties include the QVC shopping channel and stakes in InterActiveCorp and Expedia Inc. Despite the stigma on tracking stocks, Willens see a tax-shelter motive behind Liberty’s plan. He notes that Liberty has owned the interactive assets less than the five years required to qualify for a tax-free spin-off, and believes the tracking stock may be an interim move while Liberty waits for the businesses to “age.” (c) 2005 Mergers and Acquisitions Journal and SourceMedia, Inc. All Rights Reserved. http://www.majournal.com http://www.sourcemedia.com

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