Tribune Co. loses major tax ruling, will appeal

Media giant to pay $1 billion to IRS


Tribune Co. expressed cautious optimism yesterday that it would succeed in overturning a tax ruling costing the company $1 billion, even as its stock price fell to its lowest level in nearly four years.

Still, executives pledged to immediately pay the back taxes and interest to the Internal Revenue Service stemming from two transactions carried out by the former Times Mirror Co., before its takeover by Tribune in 2000.

As the stock slid by more than 4 percent yesterday to its lowest level since November 2001, Tribune said the payment won't require the sale of assets because $250 million had been set aside and additional money was raised last month through bond financing.

The company also anticipates deductions for state taxes and interest to cut the total cost to about $850 million.

But the company said it would scale back its stock repurchase plan a day after a U.S. Tax Court judge ruled against it in a $1 billion dispute.

Donald C. Grenesko, the Tribune's chief financial officer, said the payment of the back taxes would push Tribune's debt from below $2 billion to $2.9 billion. He said the company's overall debt level was "comfortable."

News of the adverse tax ruling, which came Tuesday night, rattled some investors and credit-rating agencies.

Tribune stock fell $1.53 to close at $34.22. The stock is down 19 percent in 2005.

Some Wall Street analysts expressed frustration that the tax case hadn't been settled long ago. And Standard & Poor's said it would review Tribune's creditworthiness with an eye toward lowering the current ratings.

Crane H. Kenney, the Tribune's top lawyer, told analysts in a telephone conference call that the company has "strong grounds for appeal." He estimated it would take up to 18 months for the 7th U.S. Circuit Court of Appeals in Illinois to issue a ruling.

"This is a process that has been followed by a number of other taxpayers with the tax court, and many of them have had success recently in overturning these opinions," Kenney said.

The case involves Times Mirror's decision in 1998 to divest itself of two subsidiaries - Matthew Bender legal textbooks and Mosby medical textbooks.

Both transactions were structured so that the proceeds didn't go directly to Times Mirror but to separate entities that it controlled. The price tag for Matthew Bender was about $1.38 billion, while Mosby went for $415 million.

At the time, Times Mirror officials described the deals as "reorganizations," rather than sales, which would have been subject to tax. The IRS disagreed, issuing an adverse opinion in 2001 and pursuing the case in federal tax court in California, where Times Mirror was headquartered.

Tribune Chief Executive Officer Dennis J. FitzSimons said the company was aware of the tax issues five years ago when it paid $8 billion for Times Mirror, which included Newsday, The Los Angeles Times and The Sun. In addition to its flagship Chicago Tribune and several other daily newspapers, Tribune owns 26 television stations and the Chicago Cubs.

FitzSimons also said there were no immediate plans to sue Times Mirror's financial advisers over the deals. The advisers, Goldman Sachs and PricewaterhouseCoopers, declined to comment.

The case is the latest tax controversy linked to Times Mirror. Earlier transactions such as the 1995 sale of a cable television unit and stock in Netscape Communications Corp. also raised questions with federal regulators and others.

In a memo to employees, FitzSimons said "while we had hoped for success in tax court, we have always realized that our best opportunity for winning this case would be on appeal." An IRS spokeswoman in New York City declined to comment.

While the $1 billion tax payment is nearly double Tribune's 2004 profit, some analysts said the company remains financially strong due in part to little debt.

James C. Goss, who covers media for Barrington Research Associates Inc. of Chicago, said, "I don't think they have their back to the wall. ... This will not force them to make some decision that they really don't want to make because there's no other way out."

As for Tribune's stock repurchase plan. Grenesko said the company had bought back $365 million in shares as part of its $500 million repurchase plan for the year. "But," he said, "we expect to scale back in that number in the fourth quarter."

Asked about 2006, FitzSimons said, "It's too early for us to make any judgment as to what we're going to do with share repurchases for next year," adding that the company should have enough financial flexibility to do what's necessary.

FitzSimons did dismiss the idea of selling assets, including its stake in the cable Food Channel, saying that, even with the potential tax hit, that the company is not "under pressure to do anything now."

"The issue there has always been tax efficiency, and at this point we would not make any short-term decision," FitzSimons said.

"We'll continue to make decisions that we feel are in the best interest long-term for our shareholders," he said.

James T. Madore writes for Newsday, and Phil Rosenthal writes for the Chicago Tribune.

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