Times Mirror - a reflection of the past.

• Author: White, Kelly

In Tribune Co., 125 TC No. 8 (2005) (Times Mirror), the Tax Court held that a corporate reorganization was not tax flee under Sec. 368(a)(1)(A) and (B) and (a)(2)(E). Rather, the transaction was characterized as a sale for Federal tax purposes. While the decision led to a great deal of discussion and analysis within corporate tax circles, the court's holding is in fact nothing more than the continuous application of the economic-substance, business-purpose and sham-transaction doctrines to corporate reorganizations.

Times Mirror Decision

At a time of major changes in the legal publishing industry, Times Mirror Co., Inc., decided to divest itself of Matthew Bender & Co., Inc., a legal publisher, to restructure its business to focus on newspaper publishing. The transaction at issue in Times Minor was the disposition of Matthew Bender by its parent, Times Mirror, to Reed Elsevier, also a legal publishing company. The transaction was structured as a "corporate joint venture" as follows:

1. Creation of a special purpose corporation (MB Parent) owned partly by Times Mirror and partly by Reed;

2. Stock ownership by MB Parent of stock in an acquisition subsidiary that would eventually merge with Matthew Bender;

3. Ownership by MB Parent of a single-member limited liability company (SMLLC);

4. Control by Times Mirror Of the SMLLC;

5. Control by Reed of Matthew Bender; and

6. A merger of Matthew Bender into the acquisition subsidiary.

In holding that the transaction was not a tax-flee reorganization, the court determined that the economic substance of Times Mirror's management of the SMLLC's assets represented boot; thus, Times Mirror did not receive stock of the requisite 80% value, as required by Sec. 368(a)(2)(E). Similarly, the existence of boot meant that the restructuring could not qualify as a reorganization under Sec. 368(a)(1)(B). In determining that control over the SMLLC represented boot, the Tax Court needed to look no further than Times Mirror's legal and tax advisers, as well as the company's own internal communications, which clearly established the significant value placed on controlling the SMLLC.

While the Tax Court held that it did not need to apply the business-purpose, economic-substance or sham-transaction doctrine to determine whether the reorganization failed to qualify under Sec. 368, the final four pages of the opinion (perhaps contemplating the expected appeal) address how each applies. In citing the fact that the economics of...