The Internal Revenue Service contends that the Tribune Co. owes $915 million for transactions connected with its purchase of the Times Mirror Co. in 2000.
The business deals involved Times Mirror's divestiture of two publishing units in 1998. When the Tribune Co. acquired Times Mirror and its flagship newspaper, the Los Angeles Times, it also inherited its tax problems.
According to the Los Angeles Times, the trial between the IRS and the Tribune Co. began Monday in U.S. Tax Court in Los Angeles, with the IRS alleging that the divestiture deals were essentially sales while Times Mirror argued that the company had no tax liability.
The two publishing units, Matthew Bender & Co. and Mosby Inc., were acquired by the Reed Elsevier Group and Harcourt General, respectively. Times Mirror reported gains of nearly $1.4 billion, but the company's attorneys said there was no tax liability because the units had been “disposed of” in separate tax-free reorganizations.
The IRS said the transactions should be taxed as sales, which means the Tribute would have to pay $600 million in back taxes and $315 million in interest. The IRS would not comment on this specific case, but the agency issued a legal opinion in 2001 challenging Times Mirror's deal and saying it would not accept sales structured similarly in the future.
Hatef Behnia, a tax attorney who reviewed the deal for Times Mirror, testified that accounting firm PricewaterhouseCoopers come up with the structure of the deal, which was presented to Times Mirror by investment bank Goldman, Sachs & Co.
Asked by an IRS lawyer whether he received any pressure from Times Mirror to provide a favorable opinion, Behnia said, "No, sir, I did not."
Andrew M. Short, a tax partner at the law firm Paul, Hastings, Janofsky & Walker in New York, told the Los Angeles Times that Times Mirror received shares in two corporations created specially for the situation, rather than receiving cash for its assets. The company claims those shares were not subject to taxes. Those corporations set up separate limited liability corporations whose main assets—cash from the divestiture of Bender and Mosby—were controlled by Times Mirror.
Short said the arrangements were "very cleverly constructed," complying precisely with the letter of the tax law.
Prudential Equity Group analyst Steven Barlow told the newspaper Monday that an unfavorable ruling for Tribune is "a big risk out there that shareholders should be aware of."