Tribune Is Found Liable for Taxes

A U.S. Tax Court judge dealt a potential $1-billion blow to Tribune Co. on Tuesday, ruling that the Chicago-based media company was liable for back taxes on two deals it inherited from its 2000 purchase of Times Mirror Co.

The 135-page opinion did not make a finding as to how much Tribune, which publishes the Los Angeles Times, owes in taxes. The company has said previously that it could be liable for $600 million in state and federal income taxes, plus $368 million in interest.

Tribune said late Tuesday that it would appeal the ruling but would immediately pay the taxes from the proceeds of a debt offering.

“We are disappointed by the court’s ruling,” said Crane Kenney, Tribune’s general counsel. “We look forward to our appeal in the 7th Circuit,” a process that could take up to 18 months.

As of late July, Tribune had set aside $253 million to cover a potential judgment. In its most recent earnings report, Tribune had $125.4 million in cash. Last month, it sold $780 million in notes, saying proceeds would be used to repay debt and for “general corporate purposes.” Tribune said late Tuesday that after deductions for state taxes and interest, the net cash outlay would total about $850 million.

Officials at the Internal Revenue Service declined to comment on the ruling Tuesday evening.

One tax expert said the ruling indicated that Times Mirror had been too aggressive in structuring the deal.

“The message the court sent was, ‘You can be a bull or a bear but you can’t be a pig,’ ” said Carol Perrin, head of the tax practice in law firm Greenberg Traurig’s Los Angeles office.

The dispute stems from the unusually complex arrangements surrounding Times Mirror’s divestiture of two publishing units in 1998.

The Los Angeles-based company 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.

Times Mirror reported gains of nearly $1.4 billion on the transactions. Company attorneys told the IRS that Times Mirror had no tax liability because the units had been “disposed” of in separate tax-free reorganizations.

The IRS contended that the deals essentially were sales and should have been taxed that way. It issued a legal opinion in 2001 challenging the transactions and saying it would not accept sales structured in such a way in the future.

In her opinion Tuesday, Judge Mary Ann Cohen said the reorganizations were in fact taxable sales.

“The evidence compels the conclusion 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 wrote. “None of these actions were inconsistent with the contractual terms.”

Times Mirror had argued that the transactions were not sales because it did not receive cash directly for the two publishing units. Instead, Times Mirror received shares in two specially created corporations.

Those corporations set up separate limited liability corporations whose main assets -- the cash realized from the divestiture of Bender and Mosby -- were controlled by Times Mirror.

Attorneys for Tribune and the IRS argued over the suitability of the accounting maneuver in U.S. Tax Court in Los Angeles in December.

During that trial, former Times Mirror Chairman and Chief Executive Mark H. Willes and former Chief Financial Officer Thomas Unterman said the two deals were not constructed to dodge taxes.

The ruling was announced after the markets closed. Tribune shares rose 3 cents to $35.75 in the regular session.

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Times staff writer Kathy M. Kristof contributed to this report.