Developments in the Tribune Media Appeal
Last Spring, we let you know about the appeal to the Seventh Circuit (No. 23-115) of the Tribune Media decision, TC Memo 2021-122 (Oct. 26, 2021), by both the taxpayer and the IRS. The case involves the IRS challenge to the Chicago Tribune’s use of the debt-financed distribution exception to the disguised sale rules (Reg. §1.707-5(b)(1)) in the Tribune’s 2009 “sale” of the Chicago Cubs to the Ricketts family. The Cubs were valued at approximately $735 million (net of debt), and the transaction involved the transfer of the Cubs by the Tribune to a partnership between the Tribune and the Ricketts family from which the Tribune received a debt-financed distribution from the proceeds of (1) a senior loan to the partnership by a third-party unrelated lender of approximately $425 million and (2) a subordinated loan of $250 million from an affiliate of the Ricketts family (with both debts guaranteed by the Tribune), leaving the Tribune with approximately a 5% residual ownership interest. The Tax Court held that the senior loan was “valid” (i.e., the proceeds were non-taxable to the Tribune) and recharacterized the subordinated loan as equity (i.e., making the proceeds taxable to the Tribune). Neither party was happy with the decision.
Earlier this week, the IRS filed its reply brief in the appeal. The 73-page brief makes for interesting reading, as it sets forth the IRS’s view of the “atomic bomb” rule for allocating “purported” recourse debt under Reg. §1.752-2(a) and how this rule integrates with the then anti-abuse rule contained in Reg. §1.752-2(j). While these regulations have been “tightened” by the October 2019 revised §752 regulations, the concept of a debt-financed distribution remains in Reg. §1.707-5(b)(1). Consequently, for those of you involved in these types of transactions, monitoring developments is advisable.