Robert Willens (Managing Director, Lehman Brothers, New York) has published Does the Tribune Decision Endanger Cash-Rich Split-Offs?,109 Tax Notes 547 (Oct. 24, 2005), also available on the Tax Analysts web site as Doc 2005-21152, 2005 TNT 205-48. Here is the opening:

Tribune Corp., the successor to Times Mirror Corp. (TMC), recently suffered a crushing defeat in the Tax Court [blogged here], and as a result a $552 million deficiency came home to roost. The transaction was a business combination that was structured carefully to constitute a reorganization.

TMC transferred the stock of its subsidiary, Matthew Bender, to a new company (MB Parent), created by both TMC and Reed Elsevier, in exchange for MB Parent’s common stock; that stock possessed 20% of the voting power of all MB Parent’s outstanding stock. The balance of the voting rights resided in the preferred stock, issued to Reed Elsevier. In addition to its stock in Matthew Bender, MB Parent possessed $1.375 billion (derived from Reed Elsevier), and that cash was conveyed as part of the plan by MB Parent to a single- member LLC of which TMC was appointed the sole manager.

The Tax Court, deciding the case on narrow technical grounds, held that the acquisition (by MB Parent of Matthew Bender from TMC), which was structured as a reverse triangular merger, did not qualify as a reorganization under § 368(a)(1)(A) by reason of § 368(a)(2)(E), and, therefore, the disposition by TMC of the Matthew Bender stock was taxable. The transaction did not qualify as a reorganization because the "control for voting stock" requirement of § 368(a)(2)(E) was not met. That requirement provides that the former shareholders of the acquired corporation must, "in the transaction," exchange for voting stock of the controlling corporation an amount of stock in the acquired corporation that constitutes control (within the meaning of § 368(c)) of the acquired corporation. See Treas. reg. § 1.368-2(j)(3)(i).