(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)
By Jeffrey Goldfarb
NEW YORK, June 18 (Reuters Breakingviews) - Tribune's tax hell perpetuates a vicious circle. The U.S. media giant may wind up owing tax collectors over $500 million for a couple of deals executed under former owner and real estate mogul Sam Zell. It's a reminder of how the complex tax code creates perverse incentives that can boomerang.
Recent scrutiny has made clear that everyone from Apple (AAPL.O) to Citigroup (C.N) exploits the dense internal revenue guidebook to maximize profit. The iPhone maker was made an example of by a powerful Senate investigative subcommittee last month. The U.S. mega-bank is sitting on $55 billion of credits and deductions thanks to whopping losses accumulated during the financial crisis. Lawmakers criticize the loopholes used by private equity firms like Blackstone (BX.N). Meanwhile, General Electric (GE.N) and Starbucks (SBUX.O) have been targeted by the media for tax avoidance.
The Tribune case makes clear the damage can extend from public image to the balance sheet. Zell's overleveraged $13 billion 2007 buyout would eventually send Tribune into bankruptcy, but first the company offloaded New York newspaper Newsday. Only instead of calling it a sale that would be accompanied by a tax bill, Tribune argued the deal, which generated over $600 million of cash for Tribune, was a "partnership" – 97 percent owned by Cablevision. According to Tribune documents released on Monday, the IRS instead has belatedly proposed a $190 million assessment and $55 million of penalties and interest.
A similarly clever arrangement structured by Tribune for its 2009 sale of the Chicago Cubs baseball team has not passed muster with U.S. tax authorities either. That could cost another $225 million before interest and penalties. Tribune, which only emerged from bankruptcy protection on the last day of last year, holds no tax reserves for either transaction.
The tactics attempted by Zell – who also happens to relish his abilities in this area, according to Fortune – are easy to scorn, but America's overly long and complex tax code clearly fosters the quest for ways around it. Many companies probably have a responsibility to shareholders to do so. Even Procter & Gamble (PG.N), which garners admiration for being boring, succumbed to the siren call of tax avoidance in what turned out to be a doomed initial effort to sell Pringles. Until a clearer, simpler tax line is drawn, companies are bound to keep seeking and stepping over it.
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- The Tribune Co said in financial disclosures on June 17 that the Internal Revenue Service (IRS) had proposed a $190 million tax assessment and $55 million of penalties and interest related to the 2008 sale of Newsday and that the agency may seek an additional $225 million and unspecified penalties and interest for the 2009 sale of the Chicago Cubs.
- Both deals were structured by Tribune's previous owner Sam Zell. Tribune exited bankruptcy proceedings last year. The possible IRS consequences were first reported by Fortune magazine, which credited tax expert Robert Willens.
- Tribune financial documents: link.reuters.com/zuc98t
- Fortune article: link.reuters.com/fyc98t
- Reuters: INSIGHT-Why Citi wants to rack up U.S. taxes [ID:nL2N0EO1XW]
Global solution [ID:nL3N0E21JI]
- For previous columns by the author, Reuters customers can click on [GOLDFARB/]
(Editing by Antony Currie and Martin Langfield)
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