L.A. Times caught in tax liability

Los Angeles times building, WikimediaJune 25, 2013 

By Wayne Lusvardi

File this under Hoist With Your Own Petard.

As I wrote last month, the Los Angeles Times mistakenly said Michael Dell used a tax dodge to avoid $1.1 million in property taxes on his purchase of the Miramar Hotel in Santa Monica. It was blamed on a loophole in Proposition 13, the 1978 tax-limitation measure.

Now it turns out the IRS ruled the Tribune Company, which owns the Times, owes $190 million in unpaid taxes for a similar tax dodge from when it sold the Long Island Newsday newspaper to Cablevision in 2008. The IRS tacked on a 20 percent penalty for “negligence or disregard of rules or regulations.” The Newsday deal was also very similar to the 2005 purchase of the LA Times.

Worse, today the Chicago Tribune, the Tribune Company’s flagship newspaper, reported that the total owed by the company to the IRS could be as much as $500 million.

And all this comes just months after the company emerged from a long bankruptcy ordeal.

Newsday deal was not tax exempt

The Tribune Company contended its 2008 sale of Newsday was not a sale at all because the Tribune as seller and Cablevision as buyer formed a partnership.  The Tribune contributed Newsday to the partnership and Cablevision contributed an I.O.U. based on borrowed money from a bank due in 10 years.  The Tribune asserted there was no tax due until the loan was repaid in 2018.

The Tribune had only one shareholder in the partnership with Cablevision, an employee stock ownership plan, called ESOP.  In essence, the Tribune’s employees assumed ownership of Newsday and folded it into a partnership with Cablevision.

According to the New York Times, tax analyst Robert Willens said, “It would have been probably the greatest tax avoidance structure ever devised, had they earned income.” Newsday did not earn any net income and thus the whole arrangement was ruled to be a tax dodge.

LA Times purchase of 2005 also likely not tax exempt

Billionaire Sam Zell bought the Tribune newspaper and broadcast chain in 2007 for $8 billion.  When Zell bought the Tribune, the ownership of the LA Times changed from a “C” Corporation to a Subchapter “S” Employee Stock Ownership Plan.

A “C” corporation is a conventional ownership and tax structure for corporations.  An “S” corporation pays no income taxes, but its stock shareholders do pay taxes on profits even though they may not have been paid dividends. “S Corps” is the preferred structure for small businesses with less than 100 stock shareholders.  The LA Times is not a small business and alone has a 500-person editorial/newsroom staff.

Glass houses 

The Times’ series of articles was about how Dell and his wife avoided $1.1 million in property taxes on their $200 million purchase of a majority share of the Miramar Hotel business in 2005.  The Times has made the Miramar Hotel into a symbol of how “Big Business” exploits loopholes in Prop. 13 to escape property taxes.

But as I wrote earlier, Michael Dell and his wife probably paid much higher taxes on their 2005 purchase of the Miramar Hotel operating company than buying the hotel real estate.  That is because California real estate taxes are 1 percent of the assessed value of a property.  Conversely, corporate taxes on the same sum to buy a hotel business in 2005 would have been assessed at a rate of 8.84 percent.

The backdrop to the Times series is the threatened elimination of Prop. 13 for commercial properties.  State Senate President Pro Tem Darrell Steinberg, D-Sacramento, next year is going to bring up eliminating the Prop. 13 protections for commercial properties.

The Times’ editorial stance long has been that taxes should be raised, including by modifying Prop. 13. Now, the Times is getting its wish by having to pay a lot more taxes itself through the Tribune Company.

To coin a phrase, those who live in glass houses shouldn’t throw stone newspapers.

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