Tribune Company v. Commissioner of Internal Revenue

In 1998, Times Mirror (“Times”) divested Matthew Bender & Co. (“Bender”) in a transaction that the parties sought to qualify as a tax-free reorganization. Times sold stock in Bender in exchange for stock in the company (MB Parent, a subsidiary of Reed Elsevier) that acquired Bender.

Dr. Shapiro was asked to testify regarding the value of the MB Parent common stock. He opined that the value of the MB Parent common stock was subject to a significant discount for lack of control, and ranged from $0 to $337 million. In its decision, the United States Tax Court favorably cited Dr. Shapiro’s testimony, and agreed that the value of MB Parent stock was negligible due to the lack of control discount to which it was subject.

The Court explained that:

Respondent presented three experts who had separately valued the management authority and the MB Parent common stock. Alan C. Shapiro (Shapiro) provided an opinion of the fair market value of the common stock immediately after the merger. Like Bradley, Shapiro began with a determination of net asset value. Shapiro, however, reviewed all of the contractual arrangements and corporate governing documents and concluded that the MB Parent common stock should be discounted substantially for lack of control over the assets. Using various assumptions, such as the net value of MB Parent’s assets after liabilities and the scope of fiduciary responsibilities by the manager, Shapiro concluded that the fair market value of the MB Parent common stock ranged from a negative number, through worthless, to a maximum of $337 million. (pp. 122-123)

The parties agreed that the value of the MB Parent common stock must have had a value of $1.1 billion (80 percent of the total consideration paid by Reed) for the transaction to qualify as a tax-free reorganization, and the court did not need to determine the actual value of the stock, just whether it was worth more or less than $1.1 billion. The court concluded that “the common stock of MB Parent, objectively, had a value less than $1.1 billion and less than 80 percent of the $1.375 billion paid by Reed.” (p. 125). In drawing this conclusion, the court emphasized the lack of control described by Dr. Shapiro, stating.

Because the MB Parent common stock lacked control over any assets, its value was negligible in comparison to the $1.1 billion value that would be required to qualify the Bender transaction as a tax-free reorganization under section 368(a)(1)(A) and (a)(2)(E).
(p. 133)

The full text of the Tax Court’s decision can be found here.