AT&T; Holders Win Decision in Tax Court

More than 2.1 million shareholders of American Telephone & Telegraph are not liable for federal income taxes on stock distributed as a part of the breakup of AT&T;, the U.S. Tax Court ruled Friday.

The long-awaited decision, which overruled the Internal Revenue Service, means that the IRS will have to refund taxes to the stockholders. The IRS and the stockholders had agreed in advance to abide by the Tax Court decision.

“We are looking at the situation now but have not yet decided how to proceed with the refunds,” IRS spokesman Larry Batdorf said.

The case affected an estimated $370 million worth of dividends that were distributed as a result of the court-ordered breakup of AT&T.; The suit against the IRS was filed by the Edna Louise Dunn Trust, which was billed by the IRS for a $29.64 tax deficiency for 1984, and by Morgan Guaranty Trust of New York.

The trust owned 400 shares of AT&T; common stock. As a result of the 1984 breakup, the trust received 40 shares of stock in each of AT&T;’s seven regional holding companies.

Singled Out Telesis

Before the breakup took effect, the IRS had ruled that no gain or loss would be recognized on the transfer of stock in 22 Bell operating companies to the holding companies. The IRS also agreed that there would be no taxable income from the stock in six of the seven regional companies. But the agency held that 39 cents of each share in the seventh, Pacific Telesis Group, was a taxable dividend.

The IRS viewed distribution of the Pacific Telesis stock differently because of the relatively brief time that AT&T; had owned a portion of Pacific Telephone & Telegraph. Assets of Pacific Telephone were transferred to Pacific Telesis as part of the breakup.

Tax Court Senior Judge Theodore Tannenwald held that no part of the Pacific Telesis stock distributed to AT&T; shareholders amounted to “other property,” which the law affecting business divestitures subjects to tax.