More on Proposed Cash-Rich Split-Off of Atlanta Braves

Interesting article in the Weekend Wall Street Journal:  Tax Advantage Is Driving Deal To Buy Braves; Swapping Slice of Liberty Stake For Time Warner Team Creates Favorable Accounting Scenario, by Jesse Drucker & Matthew Karnitsching:

Liberty Media Corp. may be on the verge of buying the Atlanta Braves baseball team -- but it's not because Liberty Chairman John Malone loves baseball. It's because he loves not paying taxes.

As reported by The Wall Street Journal in March, Liberty is in talks to buy the Braves from Time Warner Inc., in exchange for about 63% of Liberty's 4% stake in Time Warner (see article). In addition to the ball club, valued at about $460 million, Time Warner would transfer about $1.38 billion in cash to Liberty. The deal is in the final stages of negotiation, and could be announced in the next few weeks, according to people familiar with the situation.

How can this happen? The deal is being structured as a "cash-rich split-off," a relatively new type of transaction that allows corporate shareowners in other companies to avoid taxes on cash deals.

Thanks to an obscure provision in the new tax law signed May 17 by President Bush, there could be a lot more such deals to come -- potentially helping companies avoid paying billions of dollars in taxes. The new law contains a provision, lobbied on by Time Warner and others, that essentially codifies the controversial structure, and is likely to make such deals more common, particularly over the next 12 months, according to corporate-tax attorneys. Both companies confirmed they are in discussions.

"Of all the different techniques we've had through the years for corporate-tax management, this is probably as good as I've seen," said Robert Willens, a corporate-tax accounting expert at Lehman Brothers Holdings Inc. "When else can you sell a highly appreciated asset for cash and never pay tax? What more could you want from a technique? It's not like you're deferring the tax on the cash; you're permanently avoiding it. It's fantastic."

The irony is, the new law is a result of efforts to restrict such deals. Last year, the White House and the Congressional Joint Committee on Taxation sought to crack down on these types of transactions by restricting the cash portion to just under 50% of the value of the deal. At the time, the Joint Committee even acknowledged that its proposal "could be criticized as not going far enough" and raised the possibility of restricting the cash portion to just 20% of the deal.

For prior TaxProf Blog coverage of the deal, see here.