Rupert Murdoch’s tax bill could top $4 billion in Fox deal

In the battle between Disney and Comcast for the Twenty-First Century Fox assets, one silent partner could play a key role: the IRS.

According to tax experts and people familiar with the Murdoch family trusts, the Murdoch family could end up owing more than $4 billion in taxes if the Fox assets are sold in an all-cash deal to Comcast or another buyer.

That could be the largest check ever written to the IRS, tax experts say. And it could create conflicting interests between the Murdoch family and Fox’s broader shareholder base. If Twenty-First Century Fox does an all-stock deal with Disney, the deal would be tax-free — which makes it more attractive to the Murdochs but less appealing to the broader shareholders, who wouldn’t have a penalty in a cash deal.

Fox shareholder and activist investor Chris Hohn warned in a letter that “the personal tax position of the Murdoch family must be an irrelevant consideration for the board, in order for the board to comply with their fiduciary duties.”

Patriarch Rupert Murdoch and the board have said repeatedly that they will act “in the interests of all shareholders.” The company declined comment on the Murdoch Family Trusts or its tax strategies, since they are separate entities.

No one knows exactly how much the Murdochs would owe since their trusts and personal financials are not disclosed. But tax experts say they see no conventional tax strategy for Murdoch to avoid a 10-figure tax bill if the deal is done with cash.

“Unfortunately for Murdoch, there is no easy way around that tax bill if it includes cash,” said Robert Willens of Robert Willens LLC, a leading tax adviser to the wealthy. “A $4 billion check … I can’t think of anyone who’s ever had to write a check like that.”

Of course, every tax situation is different. And the Murdochs could find loopholes that get around some aspects of the taxes. But based on current tax law, tax experts say if a cash deal is approved, the Murdochs might have to hand over more than a third of the proceeds to the government.

Based on some basic assumptions, here is how the taxes might work for the Murdochs.

If Comcast buys the Fox assets for $65 billion in cash, Murdoch’s 17 percent share of the company would translate into a cash windfall of about $11 billion. That amount is subject to a capital gains tax.

The basis for most of those shares is probably low or next to nothing, since Murdoch built the company. Murdoch has gifted some shares to his children and their trusts over the years, and those shares would have a higher cost basis. But the vast majority of the shares are still controlled by Rupert Murdoch, with a low or next-to-zero cost basis, or purchase price.

If the entire amount were subject to a federal capital gains tax of 23.8 percent, he would owe $2.6 billion.

But Murdoch and several members of his family live in New York City. New York state and New York City assess capital gains at the same rate as ordinary income. So on top of the $2.6 billion, he and his family would owe an additional 12.7 percent — or about $1.4 billion. (Which by the way, he won’t be able to deduct from his federal taxes starting this year because of the new tax law.)

So the federal, state and city taxes for Murdoch would total around $4 billion on a $65 billion cash deal.

There’s more. If the deal is done with cash, tax law would require Murdoch (and other shareholders) to pay a tax on the spinoff company that would be created to hold the remaining assets of 21st Century Fox. That company, being called “New Fox” would include Fox News and Fox Broadcasting. The Murdochs would be required to pay a dividend tax on the value of that spinoff if the deal is done in cash.

Assuming the spinoff is valued at about $10 billion, the Murdochs would have to pay the federal dividend tax rate of 23.8 percent as well as state and city income tax. So their total tax bill on the spinoff could be an additional $3 billion.

That means the Murdochs’ total tax bill of an all-cash deal as it’s proposed could be $7 billion.

If Fox decides to sell to Disney (or any other company) in an all-stock deal, neither the capital gain nor the divided tax would apply, experts said. So the Murdoch family wouldn’t owe additional taxes.

“There is a reason Murdoch structured the deal the way they did with Disney,” Willens said.

But in a quirk of deal law and tax rules, the dividend would also apply to the Disney deal if Disney decided to add cash to the terms. Typically, a deal is only tax-free if it is done entirely with stock. Even a small cash sweetener would trigger the dividend tax.

So if Disney decided to increase its deal with cash, the Murdochs (and the other shareholders) would have to pay the dividend tax.

There are other reasons Murdoch may prefer Disney stock over cash — especially if he thinks Disney stock will rise significantly over time and that Disney will be the best steward of the assets.

But a $4 billion to $7 billion payment to the IRS is hard to ignore — even for a man as rich as Rupert Murdoch.

Disclosure: Comcast is the parent company of NBCUniversal and CNBC.

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