IRS OKs Tax-Free Liberty Spinoff

The Internal Revenue Service approved AT&T; Corp.’s proposed spinoff of Liberty Media Corp., the subsidiary controlled by cable maverick John Malone, as a tax-free transaction for shareholders.

The ruling clears the way for Liberty to become an independent company, free of a corporate parent that has restricted its movements and at times caused regulatory conflicts.

AT&T; acquired the company in 1999 as part of its purchase of Tele-Communications Inc., the huge cable operator controlled by Malone.

Because AT&T; acquired Liberty less than two years ago, the IRS could have imposed taxes of more than $2 billion on the spinoff, which is part of AT&T;’s plan to chop itself into smaller companies.

But because the breakup marks a sharp reversal in AT&T;’s strategy to become a one-stop shop for communications, the company convinced the IRS that it could not have foreseen the need for a Liberty spinoff.

AT&T; said it expects to separate from Liberty by midsummer, after which Malone will step down from the board. Malone’s relationship with AT&T; management has at times been rocky. The telecommunications giant then plans to split itself into three units--long-distance telephone, cable television and wireless telecommunications groups.

Liberty holds a 20% interest in News Corp. that is nonvoting because federal rules prevent cross-ownership of cable systems and television stations in the same market. AT&T; is the nation’s largest cable operator, and News Corp. is one of the biggest TV station owners.

Liberty also has stakes in AOL Time Warner, Starz Encore Group, QVC and Discovery Channel.

Liberty and its assets are wholly owned by AT&T;, but its financial performance is represented separately by a special tracking stock that was issued to AT&T; shareholders after the TCI deal.

In a spinoff, those tracking shares would be converted to common shares.

AT&T; also announced an agreement Wednesday with the Communications Workers of America for the union to withdraw a lawsuit aimed at impeding the company’s planned breakup.

On the New York Stock Exchange, shares of New York-based AT&T; closed off 1 cent at $21.71, and tracking shares of AT&T; Wireless Group, based in Redmond, Wash., fell 10 cents to close at $19.22.