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IRS says Viv U owes it $2.7 bil in taxes

Seagram's DuPont deal questioned

NEW YORK — As if Vivendi Universal didn’t have enough on its hands, the Internal Revenue Service is still trying to hit the Gallic conglom up for some $2.7 billion in taxes including interest on DuPont shares it inherited from Seagram.

On the eve of its board meeting in Paris to decide the future of its entertainment assets, Viv U disclosed Monday that the IRS is challenging the tax treatment of Seagram’s redemption of shares in the chemical company DuPont in April 1995.

Meanwhile, John Malone’s Liberty Media Corp. announced Monday that it was pulling out of the bidding for the Viv U entertainment assets. Execs said analysis of the assets indicated there were not enough synergies with other Liberty businesses to justify the expected asking price. Liberty remains a major stockholder in Vivendi Universal.

The IRS is seeking $1.5 billion in tax plus interest (which amounts to another $1.2 billion accrued since 1995). Viv U said Monday that it will contest the IRS claim in U.S. Tax Court.

This hefty liability, which Viv U carries on its books, dates back to Seagram’s 1995 purchase of MCA-Universal from Matsushita. Seagram had sold a large chunk of its 24% stake in chemical giant DuPont to help finance the deal and exploited a tax loophole to defer capital gains tax on the shares at the time. Vivendi inherited the shares when it purchased Seagram along with the Universal assets in 2000. But as long as the liability remains on Viv U’s balance sheet, investors have not been able to factor in the value of Vivendi’s remaining 16.4 million DuPont shares, which are worth around $650 million.

Fighting claim

The IRS has been contesting the tax treatment since 1998, and Viv U had been fighting the claim actively over the past year.

“Vivendi Universal continues to believe that the tax treatment is fully compliant with U.S. tax laws in force at the time,” Viv U said in a statement. “While the outcome of any controversy cannot be predicted with complete certainty, Vivendi Universal believes that this dispute with the IRS will be resolved so as not to have a material adverse effect on its financial statements as a whole.”

Most analysts did not seem overly concerned with the IRS’ latest threat in an ongoing dispute, which they are confident Viv U can defer and fight in the courts for many more years before it creates a major financial problem.

Other headaches

Still, it’s just another tax headache to add to the list of complex legal footnotes to Vivendi Universal Entertainment’s impending sale. Company is still in dispute with Barry Diller’s InterActiveCorp over some $630 million Diller claims his company is owed for taxes incurred on dividends it received from its VUE preferred stock. InterActive sued for its claim, which Viv denies it is obliged to pay, citing three separate legal opinions. The case is still winding its way through legal proceedings, though InterActive has not recently pursued the matter further.

Viv U could also be obligated to pay up to $600 million to Seagram to cover the Bronfman family’s own capital gain depending on how much of VUE they ultimately sell.