Tribune, IRS Spar Over Loper Bright in Anti-Abuse Case

In a dispute between the IRS and a media company over the tax consequences of a disguised sale of a professional baseball team, the parties disagree over the impact of a recent Supreme Court decision on Treasury’s partnership anti-abuse rule.

Attorneys representing Tribune Media Company and the Justice Department exchanged a back-and-forth in letters sent to the Seventh Circuit this month that address the outcome of Loper Bright, in which the Supreme Court overturned the 40-year-old Chevron doctrine and held that courts are not bound by a government agency’s interpretation of the law.

The aspect of the case, Tribune Media Co. v. Commissioner, where Loper Bright comes into play is the validity of Reg § 1.701-2, which establishes a general anti-abuse rule under Subchapter K. On July 3, Joel Williamson of Mayer Brown LLP and counsel for Tribune, wrote to the Seventh Circuit that the “general anti-abuse rule is an extraordinarily broad assertion of agency authority; the agency even contends that it can invalidate a transaction that follows ‘the literal words’ of a statute that Congress enacted.”

The Supreme Court’s Loper Bright decision “confirms that this Court should scrutinize that assertion of authority carefully to ensure that the agency stayed within permissible statutory bounds,” Williamson’s letter concluded.

In a response letter July 10, government attorney Norah Bringer said the partnership anti-abuse rule is “rooted in well-established caselaw combating tax abuse” and “supported by a long and unbroken history of judicial doctrines and congressional enactments empowering the IRS to combat the kind of chicanery attempted here.”

At issue in the case is Tribune’s 2009 disguised sale of Major League Baseball franchise the Chicago Cubs to the Ricketts family through a leveraged partnership. Tribune, a Chicago newspaper publisher, first bought the Cubs and its stadium, Wrigley Field in 1981. As part of the disguised sale, Tribune formed Chicago Baseball Holdings LLC (CBH) with the Ricketts. Tribune contributed the team and related assets, and the family contributed cash, which was then distributed to Tribune.

The IRS audited Tribune’s 2009 Form 1120S, U.S. Income Tax Return for an S Corporation, and assessed an increased tax liability of nearly $181,662,000 attributable to Code Sec. 1374 built-in gains. Citing the Code Sec. 701 anti-abuse rules and the substance-over-form doctrine, the IRS took the position that the disguised sale was taxable and Tribune’s guarantees were not valid.

The Tax Court determined in October 2021 (TC Memo 2021-122) that the third-party senior debt part of the transaction qualified for the debt-financed distribution exception and therefore was nontaxable under Code Sec. 707(a)(2)(B). But it agreed with the IRS on the subordinated loan aspect. In total, $425 million of the $714 million distribution was deemed nontaxable. The IRS appealed to the Seventh Circuit.

As the Tax Court concluded in its partial ruling, the “advance characterized as sub debt was equity for tax purposes, and the portion of the distribution attributable to the sub debt cannot offset Tribune’s recognized gains from the disguised sale. The senior debt guaranty was bona fide, and the portion of the distribution attributable to the senior debt guaranty is a nontaxable debt-financed distribution.”

For more on the Tax Court’s decision and the case’s background, see Tribune Media: A Split Decision for the Chicago Cubs’ Leveraged Partnership Transaction.