IRS Ruling on Pacific Telesis Is Challenged : Court to Decide Status of Stocks Distributed

The U.S. Tax Court has been asked to decide if 3 million AT&T; stockholders owe the government tens of millions of dollars as a consequence of the Bell System breakup.

American Telephone & Telegraph said Tuesday that it is paying the law firm of Davis, Polk & Wardwell to represent a shareholder in the case filed Monday.

The test case challenges the Internal Revenue Service ruling that a portion of the stocks distributed in the divestiture constituted a dividend of 39 cents a share.

Shareholders on Dec. 30, 1983, received one share of stock in each of seven new regional holding companies.

The IRS ruled that a portion of the stock in one of those companies, Pacific Telesis Group, was in fact a dividend.

AT&T; disagreed but could not challenge the ruling on its own because its own tax liability was not affected by the decision.

Washington AT&T; publicist Edith Herman said the company felt an obligation to its shareholders to get a ruling on the conflicting interpretations of the tax liability in the case.

Morgan Guaranty Trust agreed to cooperate in the test case.

At 39 cents for each of 966 million shares, the total dividend, if it was such, would come to $370 million.

The IRS invoked a section of the tax code that deals with the length of time that AT&T; held portions of Pacific Telephone & Telegraph stock that it purchased from minority shareholders in May, 1982, in a taxable transaction.

AT&T;, in its announcement, said the parties had agreed not to appeal the Tax Court’s ruling. The company said it would not support or encourage any other litigation in the matter.

The case was filed under new Tax Court procedures designed to expedite major cases.