Tribune Bankruptcy May Trigger Tax Complications

Of the many issues that surfaced after Tribune Co. filed for Chapter 11 protection yesterday, tax consequences were among the least discussed. But tax effects may be extremely cumbersome to deal with as the company works its way through bankruptcy, especially if Tribune loses its tax status as a so-called S corporation, says a new client advisory from Robert Willens LLC.

An S corporation — named so because it is subject to the tax code's subchapter S provision — meets the Internal Revenue definition of a small business, has fewer than 100 shareholders, and is structured as a corporation but taxed like a partnership. As a result, income and the attendant taxes pass through the corporation directly to the shareholders, who pay taxes on the profits. So, with the exception of "built-in gains," an S corporation is not subject to tax on its income.

Currently, all of Tribune's outstanding stock is owned by an Employee Stock Ownership Plan (ESOP), established when owner Sam Zell orchestrated the LBO. However, the number of shareholders may grow precipitously if the company is forced through a bankruptcy restructuring to pay-off its creditors in stock. That's a problem, notes tax expert Willens in his company's advisory. [Click for MORE]

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