The New York Times editorial page is unsparing when it comes to flogging tax-dodging corporations. Corporate tax avoidance, it intoned in a typical piece last April, is "both a straightforward fiscal problem" and "a broader threat to our civic culture." Indeed.
Last week, the New York Times Co. didn't exactly practice what the New York Times editorial page preaches. The Times Co.'s $410 million cash purchase of Primedia's About.com subsidiary, announced on Thursday, is set up to maximize tax benefits. For those of you who adore complicated details, the Times Co. is using the portion of Section 338 of the tax code that lets the buyer of the stock of a second company's subsidiary act as if it had bought the subsidiary's assets. It can then put a value on the assets for tax purposes and take depreciation deductions on some or all of them.
This has become conventional tax-avoidance strategy -- but it's giggle-making, considering the newspaper's editorial stance about corporate taxes.
The Times Co.'s response? "The editorial policy of the paper is not dictated by the business side and business-side policy is not dictated by the editorial side," says spokesman Catherine Mathis.
Disclosure alert: The Washington Post Co., my employer, may be using the same tax strategy with its recent purchase of Slate from Microsoft Corp. Even if the Post Co. is playing this game with Slate -- I don't know, because there are no documents on file and Post Co. officials won't comment -- we're talking pennies. The Times Co.'s first two years of tax savings appear to exceed the Post Co.'s total cost for Slate. Dow Jones says it's not using this tax strategy for its purchase of Marketwatch, because it bought an entire company, not a subsidiary.
Lehman Brothers tax expert Robert Willens, who is not involved in the deal, puts the Times Co.'s savings at around $160 million over 15 years. "It's a perfect deal," he says. "They get to deduct most of the purchase price for tax purposes but don't have to deduct it from their reported profits."
The sale will produce a fat gain (for tax purposes) of about $400 million for Primedia, even though it paid $790 million of stock for About.com in 2001. The reason Primedia books a gain even though it's selling About.com for less than it paid is too complicated to go into here. But Primedia won't be sending a check to the IRS anytime soon because it's run up about $1.8 billion of tax losses over the years and can use them to shelter its gain on this transaction.
In other words, we're looking at a typical piece of corporate tax gamesmanship. The Times Co. wins by getting tax breaks that effectively reduce the cost of its purchase; Primedia wins by getting an unexpectedly high price.
The losers? You've got it: the taxpayers of the United States.
Sloan is Newsweek's Wall Street editor. His e-mail address is email@example.com.