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AT&T has received a “favorable” IRS ruling on the planned tax-free mega-merger of its entertainment unit WarnerMedia with Discovery Inc., the telecom giant disclosed in a regulatory filing Wednesday.
The companies unveiled the big combination in May, saying it would use a rare multistep structure known as a Reverse Morris Trust, which is designed to ensure deals are tax-free. In the transaction, AT&T will separate WarnerMedia, via one of two ways (a decision on which will be reached at a later stage), into the so-called SpinCo, followed by the merger with Discovery.
In a Reverse Morris Trust deal, to ensure that it is tax-free, the shareholders of the divesting company — in this case AT&T — need to retain a majority stake in the merged firm to prove to the IRS that there technically was no sale with capital gains that could be taxed. In this specific case, AT&T stockholders will receive shares representing 71 percent of the new company, with Discovery shareholders owning the other 29 percent, even though Discovery CEO David Zaslav and CFO Gunnar Wiedenfels will run the merged entity. The telecom giant also gets to name seven members of the merged firm’s board, compared with Discovery’s six.
“The transactions are expected to be tax-free to stockholders of the company for U.S. federal income tax purposes, except to the extent that cash is paid to stockholders of the company in lieu of fractional shares,” AT&T summarized in a filing with the Securities and Exchange Commission on Wednesday.
More important, it added: “As contemplated by the merger agreement, AT&T submitted to the Internal Revenue Service a request for a private letter ruling from the IRS. On December 28, 2021, the company received a favorable private letter ruling from the IRS regarding the qualification of the contribution of the WarnerMedia business to SpinCo pursuant to the separation, the distribution and certain related transactions for their intended tax treatments.”
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