… unless you’re Sam Zell.
Most of you have heard by now how our hometown paper, the Los Angeles Times has been sold by the Chicago Tribune to Sam Zell — in fact, all Tribune properties have been sold. You may be thinking to yourself… boy, those Chandlers (former owners of the Times) knew how to avoid taxes, but the Tribune as a whole is probably a good upstanding corporate citizen, and under Zell ownership, will be paying its fair share of taxes.
Think again, oh naive readers.
After the transaction completes, do you know how much tax Sam Zell will pay on Tribune and its income? A big fat Zero. Goose Egg. No taxes.
How, you may ask, is Zell doing this? Both LA Biz Observed and the Washington Post are describing the scheme. Zell is using a provision that was stuck into a minimum-wage-increase bill in 1996 at the behest of the owner of a small Minnesota company who wanted to sell a stake to his workers via an employee stock-ownership plan. The company couldn’t do the ESOP because it was an S corporation (usually small businesses that have income taxed directly to its shareholders) rather than a C corporation (generally large ones). The provision permitted S corporations to do ESOPs.
So what is Zell doing? The $34-a-share, $8.2 billion buyout of Tribune is being run through an ESOP, using borrowed money, for a total transaction cost of $13B. Zell is lending the post-buyout company — which will be an S corporation — $225 million. He’ll pay it an additional $90 million for a warrant that gives him the right to buy 40% of it for prices ranging from $500 million to $600 million. The post-buyout Tribune (call it S-Tribune) will be an S corp, with its only shareholder the employee stock ownership plan, which — like all ESOPs and other employee-benefit plans — is tax-exempt. Had it been a C-Tribune, the post buyout taxes would have had $527 million in pretax profit and a $167 million tax bill, according to a recent filing. Taxes for S-Tribune: $0.
As for Zell himself? Zell and Tribune’s management avoid taxes on their pieces of S-Tribune by having “phantom stock,” not real stock. These are warrants giving the rights to buy the stock, but not actual ownership, and thus no tax liabilitity.
I find this really problematic, for the government will still need the money to finance its activities. So where will it go to get it? You guessed it.
I think we should call this to the attention of our congress-critters, and see if something can be done about it.
