Tribune's Newsday Sell-off to Grab Tax Breaks

According to tax regulations, determination of the extent to which a partner has an obligation to make a payment (to any person) is based on those ubiquitous "facts and circumstances." For this purpose, and this seems to be key to the technique's efficacy, the regulations provide that all contractual obligations are taken into account, including contractual obligations outside of the partnership agreement such as, among other things, guarantees.

Thus, it appears that Tribune's guarantee of the partnership's recourse debt will enable Tribune to conclude that its allocable share of that debt is at least equal to the amount of money that will be conveyed to it by the joint venture. Accordingly, the formation of the joint venture will not constitute a disguised sale.

Presumably, the "sale" (of Newsday) will occur when the joint venture pays off the loan incurred to fund the distribution to Tribune. So long as that event is delayed to a point in time after the expiration of the 10-year recognition period, the gain derived from such sale should not be subjected to the ravages of the built-in gains tax.

Anti-Abuse Regulations
There may be one complication with the deal from a tax perspective, however — the so-called "anti-abuse" regulations. Reg. Section 1.701-2(b) states that if a partnership is formed in connection with a transaction, which principal purpose is to reduce substantially the present value of the partners' aggregate tax liability, "in a manner that is inconsistent with the intent of Subchapter K," the tax commissioner can recast the transaction for federal income tax purposes as appropriate to achieve tax results that are consistent with such intent.

The Internal Revenue Service — in LTR 200513022, November 15, 2004 — concluded that these anti-abuse rules properly applied to a leveraged partnership transaction engaged in by a taxpayer who sought to defer the gain realized on the conveyance of a building. It is unclear, of course, whether the IRS will attempt to advance this line of reasoning in the Tribune case. And it is, in our judgment, even more problematic that such an attempt would be successful.

Therefore, if all goes according to plan, Tribune will have "monetized" Tribune without incurring a tax liability, and will have done so at a seemingly modest, tax efficient cost. That cost: the incurrence by Tribune of a guarantee of the liability incurred by the joint venture to fund the distribution to Tribune. It seems highly unlikely that Tribune's creditors would seek to prevent the company from incurring this secondary liability.

Contributor Robert Willens, founder and principal of Robert Willens LLC, writes a weekly tax column for CFO.com.

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