Tribune nearing IRS settlement

Tribune Co., corporate parent of the Los Angeles Times, said Friday that it had reached a tentative settlement of a long-standing dispute with the Internal Revenue Service under which the company will get back about $350 million in federal and state taxes and interest that it paid out after an adverse U.S. Tax Court decision in 2005.

The unexpected cash would give Tribune a welcome bit of breathing room as it prepares to go private in an extremely debt-heavy, two-stage buyout led by Chicago financier Sam Zell.

“This is a positive for Tribune at a time when there haven’t been a lot of positive developments,” said Mike Simonton, analyst for debt-rating firm Fitch Inc. He said the windfall was “not material enough” to change Fitch’s “junk” rating on Tribune bonds, which stands at “single-B-plus,” or four notches below investment grade.

Since the buyout was announced April 2, Chicago-based Tribune has reported a continuing erosion of advertising revenue and cash flow from its newspapers and broadcast properties. The poor performance made it tougher to secure initial financing for the deal and forced it to accept higher interest rates and more onerous terms than expected.

Tribune said two weeks ago that it had obtained $8 billion in financing for the first stage of the deal, which included a tender offer for 126 million shares -- about 53% of the shares outstanding -- at $34 a share, for a total of $4.3 billion. The company intends to borrow an additional $4 billion this year to buy back the remaining shares.

William C. Pate, managing director of Zell’s Equity Group Investors, said of the proposed settlement: “It’s nice, but I wouldn’t want to overstate what this does for the deal or the business. It doesn’t really change our plans in any way.”

Pate said the terms of the financing required that any such unexpected cash be used to pay down the loans.

The agreement, which must be formally approved by the IRS, came as the two sides prepared for oral arguments Tuesday in the 7th Circuit U.S. Court of Appeals in Chicago on Tribune’s appeal of the 2005 decision. The court postponed the arguments for 90 days to give the government time to review the proposal.

The dispute stemmed from two 1998 deals in which Times Mirror Co., The Times’ former parent company, sold its Matthew Bender publishing unit and a stake in another legal publisher to Reed Elsevier Group for $1.6 billion and its Mosby Inc. health publishing group to Harcourt General Inc. for $415 million.

Although Times Mirror reported gains of nearly $1.4 billion on the transactions, it told the IRS that it owed no taxes because the divestitures had been via tax-free “reorganizations.”

The IRS challenged the transactions in 2001, contending that the complex structures surrounding the deals were created simply to disguise what were garden-variety sales. The agency demanded $600 million in back taxes and $315 million in interest.

Tribune, which inherited the dispute when it acquired Times Mirror in 2000, took the matter to U.S. Tax Court in Los Angeles. In September 2005, the court sided with the IRS. By that time the liability had reached just over $1 billion in federal and state taxes and interest. Tribune paid and later filed its appeal.

If Times Mirror had structured the 1998 deals as ordinary sales, its tax liability on the $1.4-billion gains would have been more than $500 million, according to a person familiar with the situation.

thomas.mulligan@latimes.com