title: “Don T Try This At Home” ShowToc: true date: “2023-01-18” author: “John Spurgeon”
We last saw the Chandlers’ fancy stepping two years ago, when the family managed to increase its dividend income while other holders’ income was slashed. Times Mirror had cut its dividend after selling its cable-TV systems to Cox Communications in a tax-free, $2.3 billion deal. Regular stockholders got Cox shares that paid no dividend. The Chandlers got Times Mirror preferred shares paying a fat 8 percent.
This time around, the Chandlers aren’t trashing the other shareholders. This two-part deal, completed Aug. 8, helps the non-Chandler holders–though, in my humble opinion, far less than it helps the Chandlers, who cut their stake in the company to 34 percent from 39 percent without paying a single penny of income tax. Other holders benefit because the deals will increase Times Mirror’s per-share profits, presumably making the stock sell at a higher price than it otherwise would.
To keep this simple, we’ll gloss over one of the deals, in which Times Mirror gave the Chandlers a big slug of stock in return for a family company whose major asset was a big slug of stock. It saves the Chandlers a few million in corporate taxes and gives them a slightly higher income, but it’s small beer compared with the big deal (chart).
This is a classic. Even though the company and the family each put $475 million of assets into a partnership, they don’t split the proceeds equally. It’s not clear if the IRS will challenge this little jewel, but let’s assume for now that it goes through. ““We’re well within the comfort zone,’’ insists Thomas Unterman, Times Mirror’s chief financial officer.
And what a zone it is. The partnership, TMCT (for Times Mirror Chandler Trusts), uses something called ““disproportionate allocation’’ to share income and profits. Think of it as dancers who end up wearing each other’s clothes. The Chandlers will get 80 percent of the income from the $475 million of cash and real estate that Times Mirror put into TMCT, Times Mirror gets 80 percent of the income from the $475 million of Times Mirror stock the family put in. Don’t ask how they can get away with this. We’re talking the tax code, not logic.
If you read the fine print and do the math, you see that the Chandlers give up $16.6 million of Times Mirror dividend income and get about $24 million of lease and interest income. As a bonus, they can shelter some of their income with the depreciation on TMCT’s properties.
Hello? The Chandlers have effectively swapped 80 percent of the stock they contributed–$380 million worth–for $380 million of cash and real estate without actually making the swap. A swap would have produced a $75 million federal capital-gains tax bill plus state and local taxes, leaving the Chandlers with less than $300 million to reinvest. The virtual swap means the Chandlers have all $380 million at work.
To be fair, you should know that I worked for Times Mirror’s now defunct New York Newsday before joining NEWSWEEK in 1995, and that I’ve criticized the way the Chandlers seem to get treated better than other Times Mirror holders. The family declined to comment. Times Mirror chairman Mark Willes insists that this is a good deal for the company, not only for the Chandlers, and that company managers conceived these deals and sold them to the Chandlers, rather than the other way around. I have no reason to doubt him.
Regardless, this tale proves, yet again, that if you have enough lawyers and money, you can usually find a loophole to waltz through. Score this a big win for the Chandlers, a small win for non-Chandler Times Mirror holders. And a big loss for the taxpaying public. That’s a point you just can’t dance around.
Watch Times Mirror’s Chandler family dance around the tax laws by making a nonsale sale of some of their stock.
l Institution: Times Mirror and Chandler Trusts set up a new partnership, TMCT, that’s owned jointly by company and family.
Contribution: Times Mirror puts in $249 million in cash and $226 million in real estate, which it leases back. Chandlers put in $475 million in Times Mirror stock.
Distribution: The key step. Chandlers get 80% of income from cash and real estate; company gets 80% from stock. Chandler income rises; company retires shares.
Substitution: In effect, Chandlers have swapped $380 million in stock for $380 million in real estate and cash. An actual swap would trigger $75 million in tax.
NUMBERS HAVE BEEN ROUNDED. SOURCE: TIMES MIRROR SEC FILINGS
