Liberty Media Makes Bet Corporate Tax Rate Will Decline

Greg Maffei, the chief executive officer of Liberty Media Corp., reaped about $245 million in option profits ahead of time under a company plan that anticipates Congress will lower corporate tax rates next year.

Liberty Media and Liberty Interactive Corp., both of which are based in Englewood, Colorado, moved up the date that Maffei and other employees were allowed to cash in options on millions of shares, according to filings yesterday and Dec. 6 with the U.S. Securities and Exchange Commission. Maffei and the others used the resulting profits to buy restricted shares from the companies.

Both companies said they undertook the transactions earlier in the week “based on the belief that the corporate tax rate will decrease in 2013 and beyond,” thereby reducing the value of related deductions. Republican Mitt Romney championed lower corporate taxes in his losing campaign for the presidency, and President Barack Obama and Congress may not lower corporate taxes as they wrangle over ways to cut the budget deficit.

Liberty Media “must possess a clearer crystal ball than anyone else has in Washington because it’s very up in the air,” said Dean Zerbe, a former senior tax counsel for the Senate Finance Committee who is now national managing director of Alliantgroup, a Houston-based tax-services firm for businesses. “There is not as much zeal as you would have seen if Romney had gotten in.”

Compensation Expense

Liberty Interactive, whose assets were formerly owned by Liberty Media, carried out the same transactions with executives who hold options on its Class A shares and those of yet another affiliate, Liberty Ventures, according to a separate filing. Maffei is the CEO of both Liberty Media, the owner of the cable network Starz LLC, and Liberty Interactive, which participates in the video and online-commerce industries, though the two companies are now separate.

U.S. companies get to treat employee profits from stock options as compensation expense that can be deducted from income, resulting in lower corporate tax bills. Liberty Media and Liberty Interactive will benefit from the stock transactions by receiving the compensation deduction at a potentially higher corporate tax rate than in the future, the companies said in their filings.

“Liberty Media and Liberty Interactive have effected transactions with respect to outstanding employee stock options in a manner that is consistent with the company’s historical goal of minimizing the company’s taxable income,” the companies said in an e-mailed statement. Whit Clay, a spokesman, declined to comment beyond the statement.

Starz Spinoff

As a result of the option exercises, Liberty Media expects to record deductions for compensation expense totaling $358 million this year, producing an estimated cash tax benefit of $129 million, according to its filing. Liberty Interactive expects to record deductions for compensation expenses totaling $242 million, generating benefits of about $85 million, the company reported in a separate filing.

Many of Liberty Media’s employees will work for Starz after the parent company spins off its other assets, a move that is scheduled to take place by year-end, according to yesterday’s filing. Starz will have “limited amounts of taxable income” to use the stock-option deductions, so having employees exercise the securities ensures that Liberty Media can take advantage of the benefits.

President Obama is negotiating with Congressional Republicans to avert the so-called fiscal cliff, a series of tax increases and spending cuts set to take effect in January. Obama has pushed to raise the personal income tax rate for top earners to 39.6 percent from the current 35 percent.

‘Good Bet’

When executives exercise options to purchase shares below their current market price, the resulting paper profits are taxed as ordinary income, even if the person holds onto the shares and doesn’t realize any gains. As a result, Maffei would benefit from the early exercise of options should Congress agree to raise the rate on top earners or reduce the deductions they can take on charitable gifts or interest payments on home mortgages, said Alan Johnson, the head of Johnson Associates Inc., a New York-based compensation consulting firm.

“I would think this is being done to benefit the executives,” Johnson said in a telephone interview. “While it’s not clear that the corporate rate will go down, it’s a good bet that high-end individual rates will go up.”

Maffei earned paper profits of $340.4 million by exercising options on 10.3 million Liberty Interactive shares, 515,681 Liberty Ventures shares, and 2.78 million Liberty Media shares, according to SEC filings. About $245.2 million of these gains came from options that had yet to reach the date on which they originally could be exercised.

Liberty Media and Liberty Interactive accelerated the vesting dates on the options, allowing Maffei and the others to take the gains before year-end. The executives used the profits to buy restricted shares from the companies at current market prices, and also received additional options, according to the filings.

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