Bramwell’s Lunch Beat: Media General’s Got Deal-Making Down

Was delaying the employer mandate legal? Did the IRS even check?
Jonathan H. Adler, who teaches courses in constitutional, administrative, and environmental law at the Case Western University School of Law, wrote a blog for the Washington Post on March 22 about the delays in the Patient Protection and Affordable Care Act (PPACA) employer mandate.

The Obama administration recently announced that the mandate would be delayed until 2016 for firms with fewer than 100 employees, while those with more than 100 employees would only have to provide qualifying insurance to 70 percent of their full-time employees in 2015.

“Given the clear language of the PPACA, it was fair to wonder whether the administration had the legal authority to make this move (and what effects it would have),” Adler wrote. “The Treasury Department claimed this was an ordinary exercise of its ‘longstanding authority to grant transition relief when implementing new legislation,’ yet Treasury has yet to identify an applicable precedent that would justify waiving a tax liability prospectively as the administration is purporting to do. Treasury has noted cases in which the IRS waived potentially applicable penalties or allowed deferred payment of tax liabilities, but these are easily distinguishable. Congress expressly provided that the mandate was to take effect this year. Further, if the mandate penalty is a tax – as the administration currently maintains in various PPACA-related cases pending in federal court – then the employer mandate delay constitutes more than deferring payments or declining to seek penalties. Rather it constitutes a unilateral decision by the executive branch to waive an accrued tax liability.

“The legal justification for the employer mandate delay offered by the Treasury Department has been exceedingly weak,” he continued. “Perhaps this is because the Treasury Department never considered whether it had legal authority to delay the employer mandate until after it made the decision to delay it.”

Forget about profits, just do deals!
Richmond, Virgina-based Media General Inc. recently agreed to buy LIN Media LLC, another owner of TV stations, for $1.6 billion in cash and stock. But, as Bloomberg View columnist Jonathan Weil wrote on March 21, this story isn’t about Media General’s latest deal, but the one it completed last quarter when it swallowed closely held TV station owner New Young Broadcasting Holding Co.

Last year when Media General reported 2012 results, it showed a net loss of $193.4 million, which was its fifth consecutive annual loss, and a shareholder deficit of $176.2 million as of December 31, 2012, the article stated. But in Media General’s latest annual report, filed this month, it posted $36 million of net income for 2012 and, instead of a deficit, the company showed shareholder equity of $287 million as of December 31, 2012.

“Neat trick, huh? Here's what happened. When Media General bought New Young in November for $434 million in stock, it treated the transaction as a reverse merger for accounting purposes,” Weil explained. “In all other respects, Media General was the acquirer, even though New Young shareholders received most of the surviving company's shares. The company kept the Media General name and headquarters, for instance.

“So now when investors look at Media General's financial statements, the historical results they see for prior periods are those of New Young – not Media General,” he added. “Unlike Media General, which had been showing losses before the deal, New Young had been earning money. And just like that, history was rewritten, and Media General's string of losses disappeared.”

Stop using “audit failure” term in PCAOB reports, Hanson says
During a speech in Philadelphia last Wednesday, Public Company Accounting Oversight Board (PCAOB) member Jay Hanson said the use of the term “audit failure” by the PCAOB in its inspection reports of audit firms appears to have caused confusion and misunderstanding about the severity of inspection findings among investors, audit committees, and others, Ken Tysiac, senior editor of the Journal of Accountancy, reported on March 21.

The PCAOB uses the term to identify cases in which the auditing firm failed to obtain sufficient appropriate evidence to support its audit opinion, Hanson said. This does not necessarily mean that the financial statements are misstated, he added. Instead, it means that the auditor did not do enough work to know whether they are misstated, Tysiac wrote.

“I don’t believe it is necessary or appropriate for us to deviate from this more commonly understood definition of ‘audit failure’ by using the term to refer to our inspection findings – which are deficiencies in the firm’s work but not necessarily representative of problems in the audit client’s financial statements or internal controls,” Hanson said, according to the article.

Click here to read a transcript of Hanson’s speech.

US IRS audited fewer wealthy Americans in 2013
The IRS said on March 21 that it audited fewer high-income Americans in 2013 than it did in 2012 or 2011, while it conducted more audits of people with no income, Reuters reported.

For the fiscal year that ended September 30, 2013, the IRS said it audited 24.2 percent of individual tax returns with adjusted gross income of $10 million or more. That was down from 27 percent in 2012 and 30 percent in 2011.

There were also fewer individual tax returns audited in the $5 million to $10 million gross income band, the IRS said, according to the article.

Wall Street’s warning shot to Ryan
The banking industry’s vigorous pushback against the tax reform plan released by House Ways and Means Committee Chairman Dave Camp (R-MI) last month is a warning shot for his likely successor, Representative Paul Ryan (R-WI), Peter Schroeder and Bernie Becker of The Hill wrote on March 22.

The financial industry fears that Camp’s proposal to tax the nation’s biggest banks could someday make a comeback when lawmakers seek revenue generators for legislation. With Ryan expected to be Camp’s replacement, the industry wants him to hear their opposition to the tax loud and clear.

“This is so that, when a future set of lawmakers want to do tax reform, they view this as a nonstarter,” said one senior financial industry executive, according to the article.

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