Take him out to the tax game

NEW YORK (Fortune) -- The Chicago Cubs may not make it to the World Series this season, yet may still end up as players in a classic event: the World Series of tax dodging. That's because I think the team owner, Sam Zell's Tribune Co., is trying to unload the Cubs in a way likely to draw heat from tax authorities.

Here's the deal: Zell, who proudly talks about having played tax-avoidance games throughout his 40 years of buying and selling, bought control of Tribune, the big media company, using a clever scheme to shelter Tribune's profits from income tax. No one outside the worlds of media and tax gaming seemed to pay much attention, although House Ways and Means Committee chairman Charles Rangel has introduced legislation to close the loophole Zell used.

But swapping the iconic Cubbies for perhaps $800 million and saying there's no tax due? That's something the world may actually pay attention to - and that may give Rangel's proposal some legs.

Normally I wouldn't discuss a deal that hadn't even been announced yet. But this is different, because logic suggests Zell will try a tax-avoidance structure like the one he's using with Newsday, a New York paper that's a former employer of mine.

Zell wants to get around a problem created by the structure of the Trib acquisition, in which Tribune converted to an S corporation from a C corporation. Firms making that switch owe corporate gains taxes if within ten years of the change they sell assets - like Newsday - in which they have "built-in gains."

Hence the following game involving Newsday, which I'm simplifying so that you don't fall asleep on me. Tribune put Newsday into a partnership to which Cablevision Systems contributed $650 million of promissory notes. The partnership borrowed money secured by the notes and paid $630 million of the proceeds to Tribune. Tribune ended up with all that cash and a 2.8571% sliver of Newsday. Cablevision ended up with 97.1429% of Newsday and operating control.

Tribune claims the money is a nontaxable distribution from a leveraged partnership - "leveraged" means using borrowed money - rather than proceeds from a sale. Well, excuse me, but if it walks like a duck...

A leading tax authority, Robert Willens of Robert Willens LLC, found the Newsday transaction so gamy that he's told clients he expects the IRS to go after it. "The IRS has many weapons under the anti-abuse rules with which to attack this transaction, and I fully expect it to be challenged," Willens told me.

Zell's people wouldn't let me talk to him and declined to discuss the Cubs deal. Instead, they gave me a statement saying that the Newsday deal "meets the letter and the spirit of the tax law."

With luck, the IRS will challenge that assertion (and similar games Tribune might play with the Cubs, Wrigley Field, and its 31% of the Food Network), because Zell is trying to dodge so much in taxes - call it $200 million just on Newsday - in such a public way.

I've had this dance before with Zell, one of the business world's true characters. He even included me in a marvelous artwork, by John Rush, he commissioned to celebrate a 1992 tax-avoiding asset sale that I'd written about. Zell zapped me by placing me in the lowest circle of Hell, misspelling my name to bust my chops, and describing me thusly: "He wrote on a slate with a poisonous pen/Muckraking drivel which was boring and flat/How Newsday could print it was beyond our ken."

What's not so funny, though, is what Zell is doing to Tribune, where he's gutting newsgathering functions in an attempt to stay afloat. He's also telling employees they are clueless. He forgets to mention his own cluelessness in overpaying and overborrowing to buy newspapers in a hideous market.

Even though I'm rooting for Zell to lose his tax game, I'm rooting for Tribune to recover and for the Cubs to win their first Series title in 100 years. Unless, that is, they end up playing the Yankees. In that case, Cubs fans - even those in my extended family - are on their own. Kinda like those of us who actually pay taxes.