Penalties associated with sale of Newsday, Cubs could cost Tribune Media

CHICAGO – The sale of Newsday and the Cubs under Sam Zell may be coming back to haunt Tribune Media.

Tribune Media in the second quarter took a $193 million tax charge connected to Zell’s 2008 sale of Newsday, the company said Tuesday.

The $650 million deal to sell the New York newspaper to Cablevision was structured as a leveraged partnership rather than an outright sale as a way to avoid capital gains taxes. The Internal Revenue Service challenged that strategy, as well as the 2009 sale of the Cubs, and Tribune Media could be on the hook for more than $500 million in assessments, penalties and interest on the two transactions.

Chicago-based Tribune Media said it expects to settle with the IRS on the Newsday transaction in the second half of 2016.

“We believe the reserve will be sufficient to cover all net payments resulting from a potential resolution,” Tribune Media CEO Peter Liguori said during an earnings call Tuesday morning. “Given the strong liquidity of our balance sheet, these actions will have no impact on our ongoing business.”

Tribune Media ended the second quarter with about $367 million in cash and $3.5 billion in debt.

The $845 million sale of the Cubs to the Ricketts family also was structured as a leveraged partnership, but Tribune Media plans to challenge the IRS in tax court over any potential liabilities, the company said Tuesday.

The tax strategy used in both deals relied on a decision Zell made to take Tribune Media, then known as Tribune Co., private in 2007 as an S-Corp ESOP, a Subchapter S corporation owned by an employee stock ownership plan. Because an ESOP is a retirement vehicle, the structure eliminates corporate income tax, according to tax experts.

The IRS didn’t buy the arrangement and notified the company of tax deficiencies in both transactions. In 2013, Tribune disclosed it could owe an additional $273 million on the Newsday sale, and $225 million on the Cubs sale.

Tribune Media said none of the tax liability will fall on Tronc, formerly Tribune Publishing, the company that was formed when it spun off its newspaper properties.

The Newsday tax charge led to a second quarter loss of $161.6 million, or $1.76 per share. Tribune Media lost $3.3 million, or 4 cents per share, during the same quarter last year.

On an adjusted basis, Tribune Media had a net income of 42 cents a share, slightly above consensus estimates. Revenue for the quarter was up 5 percent to $526.1 million, driven by an increase in political advertising at its 42 television stations.

Tribune Media saw “substantial progress” in monetizing its $1 billion real estate portfolio during the quarter, Liguori said. The company said that the Times Mirror Square building and Olympic printing plant in Los Angeles are under contract with nonrefundable deposits, and are expected to close in the third quarter. Tribune Media has sold six smaller properties for about $90 million this year.

Los Angeles-based developer CIM Group is the front-runner to buy Tribune Tower in Chicago, offering between $240 million and $260 million for the Michigan Avenue landmark, according to sources familiar with discussions. CIM is partnered with Chicago developer Golub & Co. on the Tribune Tower bid, sources said.

Tribune Media spun off its publishing division – including the Chicago Tribune, Los Angeles Times and other daily newspapers – in August 2014, retaining the broadcasting business and real estate portfolio.