United States

Tribune settles disguised sale fight as forthcoming regulations loom


In a recent public filing with the Securities and Exchange Commission, Tribune Media Company disclosed that it settled a long running dispute with the IRS over a leveraged partnership transaction it entered into in connection with a sale of its Newsday business unit. Tribune will pay significant additional taxes as a result of the settlement, although less than the IRS had originally proposed by a substantial amount.

Leveraged partnership transactions

A leveraged partnership is a common tax-planning tool used by taxpayers who would like to monetize assets in a sale-like transaction, while deferring taxable gain on the transaction. In a typical leveraged partnership transaction, a would-be seller contributes assets to a partnership, while a would-be buyer contributes other property, such as cash or a note. The partnership then borrows (from a third party) against its own assets, and distributes the proceeds to the would-be seller. Without the intervening borrowing, this would likely be characterized as a disguised sale of the property between the two parties. The addition of the borrowing, however, qualifies the transaction for the ‘debt-financed distribution’ exception to the disguised sale rules, to the extent that the liability would be allocable to the would-be seller.

In the Tribune transaction, the borrowing against the partnership’s assets was guaranteed by subsidiaries of the would-be buyer, who were in turn indemnified by Tribune to the extent they had to pay on their guarantees. Tribune argued that this indemnification meant that the third-party debt should be allocated to it, as it would bear the ultimate liability for the note if the partnership defaulted and the buyer’s subsidiaries were required to pay on their guarantees. The IRS, however, argued due to the way in which it was structured, the indemnity was largely a non-economic sham and should be disregarded.

Forthcoming regulations

Although the IRS’s analysis that led to this settlement was relatively targeted towards the specific leveraged partnership used by Tribune, there is another specter looming over potential would-be sellers that are considering using this planning tool. In 2014, the IRS proposed regulations that, among other items, would affect the method in which liabilities are allocated for all partnership purposes, with knock-on effects for the debt-financed distribution exception from disguised sale treatment. These regulations are now expected to be finalized very soon, perhaps in the next couple of days. Sellers who are currently in the process of forming a leveraged partnership arrangement might be urged to complete their transactions very quickly, lest the finalized regulations make them impossible.


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