Tax Ruling May Cost Tribune $1 Billion

The media giant inherited the dispute, which involved the 1998 sale of two publishing units, when it acquired Times Mirror Co. in 2000.
Stephen TaubSeptember 28, 2005

Tribune Co. announced that it could be on the hook for nearly $1 billion in back taxes after the United States Tax Court disallowed the 1998 tax-free reorganization of legal publisher Matthew Bender.

The media giant — which publishes the Los Angeles Times, the Chicago Tribune, and nine other daily newspapers, operates 26 television stations, and owns the Chicago Cubs — will appeal the tax court’s ruling.

Tribune inherited the tax dispute when it acquired Times Mirror Co., Matthew Bender’s former corporate parent, in 2000. Times Mirror had sold Matthew Bender and a stake in another legal publisher to Europe’s Reed Elsevier Group for $1.6 billion and health publications group Mosby Inc. to Harcourt General Inc. for $415 million, reported the Times.

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Times Mirror reported gains of nearly $1.4 billion on the transactions but asserted that because the units had been disposed of in separate tax-free reorganizations, it had no tax liability, according to the newspaper. The IRS disagreed, claiming that the deals were sales and should have been taxed in that manner.

According to the Times account of the IRS ruling, Judge Mary Ann Cohen ruled that “Times Mirror intended a sale, assured that it would receive the proceeds of sale for use in its strategic plans, used the proceeds of sale in its strategic plans without limitation attributable to any continuing rights of Reed, and represented to shareholders and to the [Securities and Exchange Commission] that it had full rights to the proceeds of sale,” the judge reportedly wrote. “None of these actions were inconsistent with the contractual terms.”

Tribune stated that the exact amount of the tax deficiency has yet to be determined, but is estimated to total about $1 billion for the Matthew Bender and Mosby transactions. Previously, according to the Times. the company disclosed that it could be liable for $600 million in taxes and $368 million in interest. Deductions reduce the net cash outlay to roughly $850 million, the company reportedly stated on Tuesday.

Despite its appeal, Tribune also stated that it intends to pay the tax promptly through the issuance of commercial paper. The company’s current reserves connected to the litigation total about $250 million.

Tribune added that it anticipates that about $500 million will be added to goodwill on its balance sheet and that about $125 million (after taxes) will be charged to the income statement in the third quarter.