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Liberty Media Corporation Announces Agreement With IRS

Stocks in this article: LMCA LMCB

Liberty Media Corporation (“Liberty Media”) (Nasdaq: LMCA, LMCB) announced that its former parent, Liberty Interactive Corporation (“Liberty Interactive”), and Liberty Media reached an agreement with the IRS on December 16, 2011 (the “Agreement”) to settle each of the disputed tax positions taken by the Liberty Interactive affiliated group in 2010 for U.S. federal income tax purposes. As a result of the Agreement, Liberty Media will make a payment of approximately $136 million for federal income taxes. With the execution of the Agreement, Liberty Media and Liberty Interactive have resolved all outstanding disputed tax positions with the IRS through 2010.

For financial statement purposes, the Agreement will result in a decrease to Liberty Media’s short term deferred federal income tax liability of $700 million (related to the recognition of deferred derivative gains) and a decrease to Liberty Media’s long term deferred federal income tax asset of $460 million (related to the use of capital losses). Liberty Media expects to record a current federal income tax expense of approximately $136 million and a deferred federal income tax benefit of approximately $240 million during the fourth quarter of 2011.

In connection with the Agreement, Liberty Media intends to settle all outstanding share borrowing arrangements by releasing the pledged shares to the counterparty. Pursuant to the Agreement, such settlement will not result in the recognition by Liberty Media of any further taxable gain or loss.

A summarized pro forma balance sheet and statement of operations are provided below for the period ended September 30, 2011, which reflect the tax settlement and the pending settlement of all outstanding share borrowing arrangements which are expected to be completed by December 31, 2011.

About Liberty Media Corporation

Liberty Media (Nasdaq: LMCA, LMCB) owns interests in a broad range of media, communications and entertainment businesses, including its subsidiaries Atlanta National League Baseball Club, Inc. and TruePosition, Inc., its interests in Starz, LLC, SiriusXM, Live Nation Entertainment and Barnes & Noble, and minority equity investments in Time Warner Inc. and Viacom.

                                     

Liberty Media Corporation

Condensed Pro Forma Consolidated Balance Sheet Information (A)

September 30, 2011

(unaudited)

 
         

Consolidated

Liberty

Media as

Reported

     

Impact to

deferred

taxes (B)

     

Cash

payment

(C)

     

Impact to AFS

securities and

share borrows

(D)

     

Financial

reporting

reclassification

     

Consolidated

Liberty Media

as Adjusted

ASSETS
Current assets:
Cash $ 1,937 (136 ) $ 1,801
Other current assets   1,830                                           1,830  
Total current assets 3,767 - (136 ) - 3,631
 
Investments in AFS securities and others 2,782 (1,076 ) 1,706
Investments in equity method affiliates 507 507
Property and equipment, net 219 219
Intangible assets not subject to amortization 475 475
Deferred tax asset 238 (460 ) 222 -
Other assets, at cost, net of amortization 927 927
                                         
Total assets $ 8,915         (460 )       (136 )       (1,076 )       222       $ 7,465  
 
LIABILITIES AND EQUITY
Current liabilities:
Derivative Instrument Obligation $ 1,085 (1,076 ) $ 9
Current portion of debt 754 754
Current deferred income tax liability 742 (700 ) 42
Other Current Liabilities   431                                           431  
Total current liabilities 3,012 (700 ) - (1,076 ) 1,236
 
Long-term debt 37 37
Deferred income tax liabilities - 222 222
Other liabilities   788                                           788  
Total liabilities 3,837 (700 ) - (1,076 ) 222 2,283
 
Combined equity 5,084 240 (136 ) - 5,188
Noncontrolling interests in equity of subsidiaries (6 ) (6 )
                                         
Total liabilities and equity $ 8,915         (460 )       (136 )       (1,076 )       222       $ 7,465  
 
Notes to Condensed Pro Forma Consolidated Balance Sheet Information:
A) The above balance sheet information illustrates the impact on Liberty Media's consolidated unaudited balance sheet as if the Agreement had been reached and as if the share borrowing arrangements had been unwound as of September 30, 2011. In connection with the Agreement, Liberty Media intends to settle all outstanding share borrowing arrangements prior to December 31, 2011. This is included for illustrative purposes only and only includes federal tax impacts.
B) As a result of the Agreement, Liberty Media's short term deferred federal income tax liability will decrease $700 million related to the recognition of deferred derivative gains and Liberty Media's long-term deferred federal income tax asset will decrease $460 million due to the use of capital losses. This will result in the recognition of a deferred federal income tax benefit of approximately $240 million during the fourth quarter of 2011.
C) Represents the cash payment to the IRS in the amount of $136 million. Does not include additional payments related to interest and state income tax liabilities arising from the Agreement. This will result in Liberty Media recording a current federal income tax expense of approximately $136 million during the fourth quarter of 2011.
D) Represents the impact of settling all outstanding share borrowing arrangements by releasing the underlying securities to the counterparty, which is expected to occur prior to December 31, 2011. Represents the fair value of the share borrowing arrangements and underlying securities as of September 30, 2011. The delivery of the underlying shares and the unwind of the share borrowing arrangement will not result in any income statement impact as both the underlying shares and the share borrow liability are recorded at fair value on Liberty Media's balance sheet.
 
 
                             

Liberty Media Corporation

Condensed Pro Forma Consolidated Statement of Operations (A)

Nine months ended September 30, 2011

(unaudited)

 
       

Consolidated

Liberty Media as

Reported

     

Impact to

deferred

taxes (B)

     

Cash

payment (C)

     

Impact to AFS

securities and share

borrows (D)

     

Consolidated

Liberty Media as

Adjusted

REVENUE:
Communication and programming services $ 2,051 $ 2,051
 
OPERATING COSTS AND EXPENSES:
Operating 1,048 1,048
Selling, general and administrative, including stock based compensation 290 290
Legal settlement (7 ) (7 )
Depreciation and amortization   56                                   56  
  1,387         -       -         -         1,387  
Operating income 664 - - - 664
 
OTHER INCOME (EXPENSE):
Interest expense (13 ) (13 )
Share of earnings of affiliates net 3 3
Realized and unrealized gains (losses) on financial instruments, net (81 ) (81 )
Other, net   60                                   60  
  (31 )       -       -         -         (31 )
Earnings from continuing operations before income taxes 633 - - - 633
Income tax benefit (expense)   (256 )       240       (136 )                 (152 )
Net earnings 377 240 (136 ) - 481
Less net earnings attributable to the noncontrolling interests   (1 )                                 (1 )
Net earnings attributable to Liberty Media Corporation shareholders $ 378         240       (136 )       -       $ 482  
 
Notes to Condensed Pro Forma Consolidated Statement of Operations:
A) The above income statement information illustrates the impact on Liberty Media's consolidated unaudited balance sheet as if the Agreement had been reached and as if the share borrowing arrangements had been unwound as of September 30, 2011. In connection with the Agreement, Liberty Media intends to settle all outstanding share borrowing arrangements prior to December 31, 2011. This is included for illustrative purposes only and only includes federal tax impacts.
B) As a result of the Agreement, Liberty Media's short term deferred federal income tax liability will decrease $700 million related to the recognition of deferred derivative gains and Liberty Media's long-term deferred federal income tax asset will decrease $460 million due to the use of capital losses. This will result in the recognition of a deferred federal income tax benefit of approximately $240 million during the fourth quarter of 2011.
C) As a result of the anticipated $136 million payment to the IRS, Liberty Media will record a current federal income tax expense of approximately $136 million during the fourth quarter of 2011.
D) Represents the impact of settling all outstanding share borrowing arrangements by releasing the underlying securities to the counterparty, which is expected to occur prior to December 31, 2011. The delivery of the underlying shares and the unwind of the share borrowing arrangement will not result in any income statement impact as both the underlying shares and the share borrow liability are recorded at fair value.




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