WASHINGTON-AirTouch Communications Inc.’s planned $5 billion purchase of U S West Inc.’s wireless properties is threatened by a proposal backed by Congress and the Clinton administration to close a loophole allowing tax-free stock sales of corporate subsidiaries.
Legislation introduced a little more than a week ago in the House by Ways and Means Committee Chairman Bill Archer (R-Texas) and in the Senate by Finance Committee Chairman William Roth (R-Del.) and Sen. Daniel Patrick Moynihan (D-N.Y.), ranking minority member on Finance, would make the new law-if enacted-retroactive to April 16.
That could complicate or even kill not only the AirTouch-U S West deal, which was announced April 17 and supersedes a 1994 agreement to combine each company’s cellular and personal communications services operations, but could throw a wrench in a slew of other tax-free deals in the works.
“If it were proposed as written today it would affect the transaction,” said Amy Damianakes, a spokeswoman for AirTouch.
As such, AirTouch and U S West are pinning their hopes on a paper trail going back months, which includes a December ruling request to the Internal Revenue Service, that they hope will show that the deal has been in progress for some time.
“We hope it will fit into the definition of transition when all is said and done,” said Steve Lang, a spokesman for U S West.
The legislation has limited exceptions that address deals that were in the pipeline but not consummated by April 16.
The bill’s authors are seeking additional input from the industry, which Hill staffers say has been plentiful so far. No dates have been set for hearings on the legislation.
Critics charge so-called Morris Trust transactions, those like the one contemplated by AirTouch and U S West involving the distribution of stock of a subsidiary by a parent company on a tax-free basis, represent “corporate welfare.”
“The misuse of this provision in the tax code to avoid payment of taxes should be terminated,” said Archer. “In order to protect taxpayers, I’m taking this action to close this loophole, effective immediately.”
Some in Congress have applied the same label to digital TV channel allocations and the Overseas Private Investment Corp., a government funded entity that sells political risk insurance to wireless companies and others seeking business ventures in Russia and in other developing economies.
Congress and the White House are looking for revenue to temper politically sensitive entitlement spending reforms as part of strained negotiations to a strike a balanced budget agreement. Budgeteers are hopeful of saving $350 billion during the next five years by closing the Morris Trust Fund loophole.
President Clinton’s fiscal 1998 budget proposal projects eliminating the loophole will save $311 billion.
But even if a budget agreement is reached soon, it will be limited to a non-binding resolution that outlines broad spending and savings parameters. The actual writing of the legislation will not be finished until July or August in massive budget reconciliation legislation. In the interim, companies like AirTouch, U S West and others ensnared in the tax reform will have ample time to bring their concerns to lawmakers.
There also is speculation that such firms may simply restructure their deals, but not necessarily in ways that enable the federal government to recoup the taxes it anticipates.
