Liberty Media Corp. recently announced that its board of directors has authorized management to pursue a “split-off” of the Atlanta Braves, which it owns, and its associated real estate development project, something investors have been anticipating for a while. Atlanta Braves Holdings Inc. will hold Braves Holding LLC, the owner and operator of the MLB’s Atlanta Braves. That will be the “active business” that Atlanta Braves Holdings, Inc. will rely on to satisfy Internal. Revenue Code Section 355’s active business requirement.
Attention must be paid to the active trade or business requirement in the case of a split-off or spin-off. Unless a trade or business has been actively conducted by the distributing or controlled corporation for at least five years, or has been acquired within the past five years in a wholly tax-free transaction (from a seller who had itself conducted the business for at least five years), the trade or business can’t be relied on for the satisfaction of the active business requirement.
A split-off also gives rise to a financial accounting gain measured by the excess of the fair-market value of the stock surrendered by the shareholders in the transaction over the book value of the stock delivered by the distributing corporation in the transaction. There had been concern that this accounting gain would give rise to an equivalent amount of adjusted financial statement income and, in turn, render Liberty Media vulnerable to the minimum tax. Excluding these gains from adjusted financial statement income ensures that split-offs, if the exacting requirements of Section 355 are met, will remain tax-free, even in the era of the book minimum tax.
Liberty Media’s split-off of the Braves is conditioned on securing an IRS ruling and opinion of counsel attesting to its tax-free status. The IRS ordinarily doesn’t issue rulings on matters involving tracking stock, but in this case, it likely will have to determine whether the existing tracking stock to be redeemed as what it purports to be—a class of Liberty Media common stock. If that is determined, the agency can rule on the status of the transaction—particularly its compliance with the active business requirement.
Following the split-off, Liberty Media plans a recapitalization by creating a new tracking stock group, the “Liberty Live Group,” by reclassifying all of Liberty Media’s remaining common stock, including SiriusXM and Formula One tracking stocks. The Liberty Live group wouldn’t have an active business within it. The split-off isn’t conditioned on the recapitalization, although, for obvious reasons, the recapitalization won’t occur unless the split-off does.
The biggest hurdle in the separation is for Liberty Media to ensure that the active business requirement can be met. By waiting until at least Jan. 16, 2023, at which point the Formula One stock will have sufficiently “aged,” the company has absolute certainty regarding the active business character of the split-off. The other necessary requirements for a separation to be tax-free all seem to be in place, assuming the tracking stock is nothing more than a class of the stock of the issuing corporation. The IRS ruling and opinion of counsel is expected to be forthcoming, and the split-off should easily attain tax-free designation. The recapitalization will certainly be a tax-free transaction.
In substance, all Liberty Media is doing is paying a stock dividend of new Liberty Live tracking stock to the holders of its existing tracking stock. Stock dividends—at least those that are not “disproportionate” within the meaning of Section 305(b)—are excluded from the gross income of the recipient.
Liberty Media’s spin-off of the Atlanta Braves shows tax practitioners should heed to what is seemingly the simplest of the Section 355 requirements—the active business requirement. Reliance on a recently acquired business to meet that requirement might be misplaced.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Robert Willens is president of the tax and consulting firm Robert Willens LLC in New York and an adjunct professor of finance at Columbia University Graduate School of Business.
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