The IRS allowed T-Mobile and Sprint to maximize a massive tax benefit in the wake of their planned merger—following T-Mobile’s call for the agency to do so—as the deal has stalled in court.
The agency earlier this month proposed exempting deals from previously issued proposed rules if they have been announced publicly or in Securities and Exchange Commission filings. Those September proposed rules would have limited how much of Sprint’s $21 billion in losses T-Mobile could use after the merger to shrink its taxes.
The reversal followed a November letter from T-Mobile requesting that its merger with Sprint and other publicly announced transactions be subject to the old, more favorable rules. A T-Mobile spokesperson said the company believed it fit the exemption, but declined to comment further.
“It’s striking that T-Mobile seems to have gotten exactly what it wanted,” said Duke University School of Law professor Lawrence Zelenak.
In a November research note, Andrew Silverman, a Bloomberg Intelligence tax policy analyst, wrote that the September proposed rules could have reduced the portion of Sprint’s losses the combined company could use in the future to 43% from 85%. T-Mobile’s success in dodging those rules could raise the amount of post-merger profits the company could shield from tax each year to more than $900 million from $458 million, Silverman wrote.
“I think the IRS didn’t want to be the agency to make this deal fall through,” he said.
Sprint declined to comment. The IRS didn’t respond to a request for comment.
T-Mobile’s acquisition of Sprint is set to trigger an annual cap on the combined company’s use of those losses, equal to a small percentage of Sprint’s market value right before the deal.
Losses generated prior to Sprint’s 2018 tax year will expire in up to 20 years, so a low cap could prevent the combined company from taking advantage of the losses in full.
In the first five years after an acquisition, companies can raise the cap using so-called unrealized built-in gains, the difference between the market value of a target company’s assets and the value of the company’s investment in them at the time of the sale.
The September proposal would eliminate a method of calculating built-in gains used to maximize the amount of losses companies can use after a merger.
Under the Jan. 10 proposal, deals entered into under a binding contract; ordered by a court, such as in a bankruptcy case; or announced publicly or in an SEC filing would be off the hook.
T-Mobile and Sprint jointly announced their merger in April 2018. Since then, the transaction has earned the blessing of the Federal Communications Commission and the Justice Department, but faces a pending lawsuit from 13 states and the District of Columbia seeking to kill the deal. Post-trial arguments in New York v. Deutsche Telekom AG are set for Jan. 15.
“They’re well within the transition rule,” said New York-based tax consultant Robert Willens. Referring to the IRS’s list of ways deals can be exempted, he added, “any one of those will do.”