Tribune Co. is facing an Internal Revenue Service audit over a transaction key to deal led by real estate mogul Sam Zell that took the company private and saddled it with $8 billion in new debt.
Meanwhile, a bankruptcy judge on Tuesday allowed Tribune to pay more than $13 million in bonuses to almost 700 employees.
The IRS audit could create a hefty bill for the media company. As much as $1.8 billion could be at stake, the amount that Tribune wrote off in net deferred income tax liabilities after Mr. Zells takeover was completed in December 2007.
Under scrutiny is a $250-million purchase of Tribune shares in April 2007 by the companys newly minted employee stock ownership plan. The ESOP was the first step in Mr. Zells privatization of the company. The IRS disclosed the audit in a motion filed Friday in Tribunes Chapter 11 bankruptcy proceedings.
IRS investigators are attempting to determine if the transaction was for the benefit of employees, according to a declaration filed by a Waukesha, Wis.-based agent in charge of the probe. If the IRS determines that the transaction wasnt prudent, Tribune could be subject to an excise tax and corporate income tax for 2008, the declaration said.
The IRS asked the Bankruptcy Court judge to grant a six-month extension to a June 12 deadline for filing claims because its investigation has been hampered by debtors delays in providing accurate information to the auditors.
A Tribune spokesman said the company would respond to the allegations within the normal framework of the Chapter 11 process, but that it has provided complete, timely and accurate financial information at all times.
Word of the IRS audit comes a month after the company disclosed that the Department of Labor was investigating the ESOP, a probe Tribune called routine. Former Los Angeles Times employees are also suing Mr. Zell and board members over the ESOP.
Tuesdays ruling on bonus payments came after Tribunes chief financial officer testified that the bonuses are needed to motivate key managers in a challenging economic climate.
The judge was also to hear arguments on Tribunes request to make $2.6 million in severance payments to 68 employees, all but two let go before the company filed for bankruptcy protection.
Tribune, which owns the Los Angeles Times, Chicago Tribune, the Baltimore Sun, the Hartford Courant and other dailies, as well as 23 TV stations, sought bankruptcy protection last December because of dwindling advertising revenues and $13 billion in debt. (The Associated Press contributed to this report.)
Ann Saphir is a reporter at Crain's Chicago Business, a sister publication of Pensions & Investments