Could Book Income AMT Impact Potential Liberty Media 'Spin-Off'? Liberty May Not Be in Scope

By Stuart E. Leblang, Michael J. Kliegman and Amy S. Elliott

Since enactment of the Inflation Reduction Act, ¹ tax advisers have focused on the suspected unintended consequences of the 15-percent alternative minimum tax (AMT) on companies’ book income.  One such area of collateral damage involves an otherwise tax-free split-off, i.e. a transaction where Parent distributes the stock of its Spinco subsidiary in a qualifying tax-free Internal Revenue Code Section 355 transaction not as a pro rata share dividend (with Spinco stock distributed to all Parent shareholders in proportion to their ownership) but rather as a non pro rata share distribution in exchange for Parent stock (Parent redeems or buys back its stock with Spinco stock from only some of the Parent shareholders).  As we discussed in our September 14 report, ² the reason a split-off presents a corporate AMT problem is that, unlike with a pro rata spin-off, financial accounting rules treat the exchange in a way that can give rise to financial statement gain based on the fair value of the Spinco stock relative to its book basis. ³ 

Most tax-free divestitures under Section 355 are pro rata spin-offs, but companies do like to have the option to do a non pro rata split-off instead, for example, where there has been a prior IPO of less than 20 percent of the Spinco and the tax-free distribution of the remaining 80-plus percent is effected via a Dutch auction exchange offer. ⁴ While efforts are underway to seek either legislative relief via a technical corrections bill or clarification from Treasury that split-offs and other generally tax-free corporate transactions will not give rise to taxable income as a result of the 15-percent AMT calculation, companies planning a tax-free Section 355 transaction during the next year or so are likely to avoid this problem and stick with the pro rata spin.^[5]

We have written a fair bit^[6]about issues affecting ongoing expectations for a tax-free separation of one or more of the businesses held by Liberty Media Corporation (Liberty Media) ⁷ We and others have casually used the term “spin-off” in referring to any potential tax-free distribution of stock of a Liberty subsidiary conducting one of the three principal businesses—SiriusXM, Formula One and the Atlanta Braves—but in fact, any tax-free distribution undertaken by Liberty Media could not be a spin-off, but would have to be a non pro rata split-off of such subsidiary primarily to holders of the corresponding Liberty Media tracking stock. ⁸ 

But while a non pro rata exchange involving one of Liberty Media’s tracking stocks would potentially raise the threat of a corporate AMT problem, a threshold question that we did not address in our initial write-up is whether Liberty Media is an Applicable Corporation within scope of the new tax.  In general, a calendar-year Applicable Corporation potentially subject to the new tax in 2023 must have average annual Adjusted Financial Statement Income (AFSI) in excess of $1 billion over the three-year period from 2020 through 2022.

It is extremely difficult to determine with certainty solely from publicly available financials whether a complex group of companies such as Liberty Media meets the scope threshold because, in part, AFSI is determined by taking into account numerous adjustments (including aggregation of income from related entities plus certain adjustments for depreciation, controlled foreign corporations, disregarded entities, and federal income taxes).

Although Liberty Media’s reported annual average operating income for 2019 through 2021 is well in excess of the $1 billion threshold, ⁹ once interest expense is factored in (ignoring other items that may or may not be taken into account in determining AFSI), Liberty Media’s net income appears to fall below the threshold.  Considering the complexities of making the AFSI determination and in view of Liberty Media's public financial information, we think it makes sense to not assume that the corporate book income AMT would be applicable to the company, including to any potential split-off transaction that it may enter into during the next year.

Note that Liberty Media’s Senior Vice President of Tax Tim Lenneman wrote a letter to Treasury and the Internal Revenue Service dated September 29, 2022 requesting guidance on a separate tax provision in the Inflation Reduction Act—the 1 percent stock buyback excise tax.  Among other comments, Lenneman wrote that he does not believe the excise tax should apply to tax-free split-off transactions.  Lenneman did not mention the corporate AMT in his letter.  One might infer that that means Liberty Media has run the numbers and has gotten comfortable that the company’s income falls below the threshold.

^{[1] P.L. 117-169; for the enrolled bill, see https://www.congress.gov/117/bills/hr5376/BILLS-117hr5376enr.pdf; note that while the bill is commonly cited as the Inflation Reduction Act of 2022, its name is technically “An Act To provide for reconciliation pursuant to title II of S. Con. Res. 14” (modified S.A. 5194 to the bill H.R. 5376).}

^{[2] “Surprising Impacts of Inflation Reduction Act’s Stock Buyback Excise Tax and Corporate Book Minimum Tax (Including Overblown Concerns About Berkshire” (Sept. 14, 2022).}

^{[3] ASC 845-10-30-12 as compared to the treatment of a spin-off at ASC 845-10-30-10.}

^{[4] An example of this IPO/split-off sequence was Danaher Corporation’s December 2019 transaction with respect to its subsidiary Envista Holdings Corporation (for more, see https://investors.danaher.com/download/Form+8937+-+Envista.pdf).}

^{[5] See, e.g., Laura Davison, “Corporate Dealmakers Hit by 15% US Tax Threatening Piece of M&A World,” Bloomberg, Sept. 12, 2022 (https://www.bloomberg.com/news/articles/2022-09-12/m-a-world-roiled-by-us-15-corporate-tax-threatening-split-offs).}

^{[6] Most recent reports are “Tax Considerations of Berkshire Hathaway’s Exchange of SiriusXM Stock for Liberty SiriusXM Tracking Stock” (November 10, 2021) and “Will Atlanta Braves Be Sold Before Team Changes Its Name?” (August 9, 2021).}

^{[7] Liberty Media’s shares are divided among three tracking stocks—Liberty SiriusXM (including NASDAQ: LSXMA), Liberty Braves (including NASDAQ: BATRA) and Liberty Formula One (including NASDAQ: FWONA)—each corresponding to the principal underlying holdings associated with the stock (although attributed to the Formula One tracking stock is Liberty Media’s approximate 31 percent interest in Live Nation Entertainment, Inc. (NYSE: LYV)).}

^{[8] There are several examples of prior tax-free split-offs to holders of tracking stock, going back to General Motors Corporation’s 1996 distribution of Electronic Data Systems Holding Corporation to holders of its Class E stock; more recently and directly relevant, Liberty Interactive Corporation’s 2016 split-off of Liberty Expedia Holdings, Inc. (https://www.businesswire.com/news/home/20161104006112/en/Liberty-Interactive-Corp.-and-Liberty-Expedia-Holdings-Inc.-Announce-Completion-of-Split-Off).}

^{[9] According to Liberty Media’s Form 10-K filed Feb. 25, 2022, annual operating income for 2019 through 2021 averaged $1.208 billion (in 2021, $1.977 billion; in 2020, $177 million; in 2019, $1.47 billion). But once interest expense is factored in, the average goes down to about $564 million.}