Vivendi Agrees To Pay $686 Million In Tax To Settle With IRS

by Leroy Baker, Tax-News.com, New York

02 June 2006

Vivendi, the French media giant and owner of the world's largest record label, announced on Wednesday that it has reached an agreement with the US Internal Revenue Service (IRS), bringing to a close their dispute concerning the amount of tax due on the redemption of DuPont shares in April 1995.

The IRS, which contested the tax treatment applied at the time, initially demanded payment of $1.5 billion in tax from Vivendi, plus interest accumulated since 1995, after challenging the way it reported a share sale by Seagram, a Canadian media-to-drinks group the firm acquired in 2000.

In 1995, DuPont redeemed 156 million shares from Seagram for a total sum of $8.8 billion, which was treated as a taxable dividend, and 80% of the amount was reported as an income tax deduction, leaving tax to be paid on the remaining 20%.

The agreement reached with the IRS provides for Vivendi to pay a total of $686 million (including tax of $284 million and interest of $402 million) in full settlement of the dispute.

As a result of this settlement, Vivendi will be able to eliminate a $1.85 billion deferred tax liability previously established in connection with this matter, which was recorded on the Group's balance sheet as of December 31, 2005.

In addition, under the terms of the agreement with the IRS, the 16.4 million DuPont shares still held by Vivendi may be sold freely, subject to regular capital gains tax provisions.

According to the company, if these shares were sold at a share price of $42.15 (closing price on May 30, 2006), the pre-tax proceeds of the sale would amount to $700 million and all capital gains on the sale would be fully covered by the deductible portion of the settlement payment and Vivendi's US tax loss would carry forwards.

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