Tax Court Recharacterizes Matthew Bender Reorganization as Taxable Sale to Reed Elsevier

The Tax Court held yesterday, in Tribune Co. v. Commissioner, 125 T.C. No. 8 (9/27/05), that the divestiture of the Matthew Bender Publishing Co., and its 50% interest in Shepard's-McGraw Hill, was not a tax-free reorganization and instead was a taxable sale to Reed Elsevier for $1.375 billion:

The evidence compels the conclusion that Times Mirror intended a sale, assured that it would receive the proceeds of sale for use in its strategic plans, used the proceeds of sale in its strategic plans without limitation attributable to any continuing rights of Reed, and represented to shareholders and to the [SEC] that it had full rights to the proceeds of sale.

The L.A. Times quotes a tax expert:  "You can be a bull or a bear but you can't be a pig."  Tribune Co. (which acquired Times Mirror in 2000, inheriting the pre-existing tax dispute) announced plans to appeal the decision to the 7th Circuit.  If affirmed, the judgment could cost Tribune Co. $1 billion in taxes and interest.  For other press coverage, see:

• ABC News
• Business Week
• CNN
• MSN
• Newsday
• Reuters
• Wall Street Journal

(Thanks to Ellen Aprill (Loyola-L.A.) for the tip.)

Update:  Joe Kristan has more here:

While I haven't had time to analyze the transaction, which apparently was structured by Price Waterhouse, the Tax Court ruled that the deal failed to qualify as a Sec. 368(a)(1)(E) reverse subsidiary merger. By failing to achieve tax-free reorganization status, the transaction ends up being a taxable stock sale similar to the pending Maytag deal.