The Strange Tax Treatment of Liberty Broadband’s GCI Spin-Off Prior to the Planned Charter Merger

By Stuart E. Leblang, Micheal J. Kliegman and Amy S. Elliott

On November 12, 2024, Liberty Broadband Corporation (NASDAQ: LBRDA, LBRDK, LBRDP) (Liberty Broadband) entered into an agreement to be acquired by Charter Communications, Inc. (NASDAQ: CHTR) (Charter) by way of a merger of a Charter subsidiary with and into Liberty Broadband, with Liberty Broadband surviving.¹ The sole consideration to Liberty Broadband shareholders in the tax-free merger is Charter stock. However, the terms of the deal also call for Liberty Broadband to spin off its wholly owned subsidiary, GCI, LLC (GCI), Alaska’s largest communications company and Liberty Broadband’s sole asset other than its minority interest in Charter. The spin-off will be taxable both to Liberty Broadband² and its shareholders. The central focus is whether the distribution is a dividend or stock sale for tax purposes. For U.S. investors, this will affect how they report the GCI receipt on their tax returns, while for offshore investors, it will determine whether there is U.S. withholding tax in connection with the distribution.

Legal documents and the joint proxy statement provide that although the GCI stock will be distributed by Liberty Broadband prior to the merger and the GCI stock will not be part of the merger consideration, the companies are treating the GCI stock as nonqualifying consideration (boot) being distributed to shareholders as part of the plan of reorganization.3 As such, for any shareholder receiving both Charter stock and GCI stock, the shareholder will recognize taxable gain equal to the lesser of the value of the GCI stock and the overall gain realized with respect to its Liberty Broadband stock, i.e., excess of value of GCI stock and of Charter stock in the merger over the shareholder’s basis in its Liberty Broadband shares.⁴ 
This gain is taxed as capital gain unless receipt of the boot “has the effect of the distribution of a dividend,” in which case the gain is taxed as a dividend to the extent of the earnings and profits (E&P) of the corporation.⁵  

The determination of whether the boot distribution should be treated as a dividend is made by using the rules under Section 302 of the Internal Revenue Code for determining whether a stock redemption is taxed as a sale or as a dividend. The shareholder is viewed as if it received solely qualifying stock consideration of the acquiror and then had stock in the acquiror redeemed equal to the value of the boot.⁶ The safe harbor test under Section 302(b)(2) looks to see that the post-redemption percentage of the outstanding stock held by the shareholder is less than 80 percent of the pre-redemption percentage. Assuming the GCI stock is less than 20 percent of the total consideration to be received by Liberty Broadband shareholders, then a shareholder would presumably not satisfy this test, unless it makes use of the Zenz doctrine to look to the percentage of stock held after the redemption and sales of stock pursuant to a stock sale plan adopted prior to receipt of the GCI stock.⁷ 

In applying this test, all Charter stock that the shareholder already owned or purchases (or may be acquired pursuant to options) must be taken into account, including any such stock owned by attribution from certain related parties.

Assuming the safe harbor test is not met, Section 302(b)(1) provides for a facts-and-circumstances test focused on whether it can be said that the redemption brings about a “meaningful reduction” in the shareholder’s ownership in the corporation.⁸ The IRS’s long-standing position is that a “small shareholder” in a public company with no influence over the company will be viewed as having a meaningful reduction no matter how small the reduction is.⁹ This is likely to be available for most Liberty Broadband shareholders.

The companies state that the IRS might not agree with the “boot” characterization and instead might view the GCI distribution as a stand-alone dividend distribution, taxable as a dividend to the extent of Liberty Broadband’s E&P and thereafter as a tax-free return of basis with any remaining value taxed as capital gain.

But things became more interesting. On June 20, Liberty Broadband announced ¹⁰ that the record date for receipt of GCI stock was June 30, with an expected distribution date of July 14. It is unclear when the Charter-Liberty Broadband merger will close. The official planned closing date is June 30, 2027. ¹¹ However, in connection with Charter’s recent agreement to acquire Cox Communications, Charter and Liberty Broadband intend to arrange to close their transaction contemporaneously with the Cox transaction, presumably well before 2027. ¹² The significant time gap between the GCI distribution and closing of the merger highlights the fact that there are three different categories of Liberty Broadband investors from the standpoint of their tax-treatment in connection with the GCI distribution.

An investor may acquire its Liberty Broadband shares prior to the GCI distribution record date and continue to hold them through the merger. Another investor may acquire Liberty Broadband shares after the record date for the GCI distribution and hold the shares at the time of the merger. And a third investor may hold Liberty Broadband shares, participate in the distribution of GCI shares, but dispose of its Liberty Broadband shares at some point prior to the Charter merger. The proxy statement tax disclosure indicates how each of these may be treated for tax purposes.

A shareholder that receives only Charter stock in the merger and does not participate in the distribution—meaning it did not hold Liberty Broadband shares on the GCI distribution record date—simply recognizes no gain or loss on the exchange of Liberty Broadband stock for Charter stock (ignoring cash in lieu of fractional shares).¹³ As discussed above, a shareholder that receives Charter stock in the merger and participates in the GCI distribution recognizes taxable gain equal to the lesser of gain realized and the value of the GCI stock. The proxy disclosure states that “such gain recognized by a U.S. holder will generally be capital gain if it results in a reduction in such U.S. holder’s percentage ownership in Charter relative to what such holder’s percentage ownership would have been if the U.S. holder had received solely Charter Class A common stock rather than a combination of Charter Class A common stock and stock of GCI spinco.”¹⁴ 

Most problematic is the shareholder that participates in the GCI distribution but disposes of its Liberty Broadband stock before the Charter merger closes. As such, receipt of the GCI stock is not taxed under the “boot” rules of Section 356 but is viewed as an independent taxable distribution. The Form S-1 for GCI Liberty, Inc. (spinco) provides more detail than the merger proxy about how the distribution to this group is to be treated for tax purposes. ¹⁵

Noting that the stand-alone GCI distribution could be treated as either an ordinary dividend distribution or as a distribution in redemption of stock, Liberty Broadband intends to take the position that the GCI distribution to investors not participating in the Charter merger will be a redemption distribution. ¹⁶ The tax disclosure goes on to state that in testing this deemed redemption, a sale of the Liberty Broadband stock would enable the shareholder to treat the redemption as a complete termination of interest in the corporation under Section 302(b)(3). Presumably this would be by reference to the Zenz doctrine, under which the post-redemption percentage owned takes into account stock sold pursuant to a prearranged plan.¹⁷ 

The disclosure states that the tax characterization of the GCI distribution in each of these circumstances will be the same for non-U.S. investors as for U.S. investors, noting that dividend treatment would generally give rise to U.S. withholding tax at a 30 percent rate subject to reduction under an applicable tax treaty. Capital gain treatment would not give rise to withholding tax. In this regard, we are impressed by the lengths to which the company seems to have gone to ensure that, at least as far as it is concerned, capital gain will be the appropriate treatment in all scenarios.

For U.S. investors, the ultimate decision as to how to report the GCI distribution for tax purposes rests with the investor (and its accountants). For offshore investors, the essential party will be the prime brokers who bear the responsibility for any withholding taxes, and it will be interesting to see what sorts of certifications they may seek from investors. If Liberty Broadband were not taking the position that recipients of a stand-alone GCI distribution (i.e., not participating in the Charter merger) are subject to the redemption rules, then it would be very difficult for the withholding agents to avoid withholding on the basis that the distribution is part of the plan of reorganization. Indeed, with the likelihood that the merger will close in a subsequent tax year, they might be compelled to withhold, since there could be no guarantee that any investor would retain its stock through the merger.

^{[1] Press Release, Liberty Broadband, Charter to Acquire Liberty Broadband Corporation (Nov. 13, 2024) (https://www.libertybroadband.com/news/detail/321/charter-to-acquire-liberty-broadband-corporation).}

^{[2] Note that the parties entered into a tax receivables agreement providing that, if tax owed by Liberty Broadband (but borne by Charter upon completion of the merger) as a result of the GCI spin exceeds $420 million, then GCI spinco must pay the combined entity “the value of the portion of tax benefits realized by GCI Liberty as a result of the step-up in tax basis obtained from the spin-off corresponding to such excess amount” (https://d1io3yog0oux5.cloudfront.net/_004fdb4ee06afabba5aa87c3fee3afef/libertybroadband/db/856/8007/pdf/2025+GCI+Liberty+Investor+Conference+Call_Addendum_vPost.pdf).}

^{[3] Joint Charter Liberty Broadband Proxy Statement/Prospectus dated Jan. 22, 2025 (https://www.sec.gov/Archives/edgar/data/1091667/000114036125001605/ny20038391x12_424b3.htm).}

^{[4] IRC §356(a)(1).}

^{[5] IRC §356(a)(2). The law is unclear as to whose E&P we look to as between the target and the acquiror. Here, we may assume there is an adequate pool of E&P in either case to take that question off the table.}

^{[6] See Commissioner v. Clark, 489 U.S. 726 (1989).}

^{[7] See Zenz v. Quinlivan, 213 F.2d 914 (6thCir. 1954). Assuming the shareholder has a plan to sell all of its Charter stock, then the deemed redemption could qualify as a complete termination of interest under IRC §302(b)(3).} 

^{[8] See United States v. Davis, 397 U.S. 301 (1970).}

^{[9] See Rev. Rul. 76-385.}

^{[10] Press Release, Liberty Broadband, Liberty Broadband Corporation Announces Record Date and Distribution Date for Spin-Off of GCI Liberty, Inc. (June 20, 2025) (https://www.libertybroadband.com/news/detail/334/liberty-broadband-corporation-announces-record-date-and).}

^{[11] Supra, Note 2 (page 19).}

^{[12] Press Release, Liberty Broadband, Liberty Broadband Provides Update Regarding Pending Acquisition by Charter (May 16, 2025) (https://www.libertybroadband.com/investors/news-events/press-releases/detail/331/liberty-broadband-provides-update-regarding-pending).}

^{[13] IRC §354(a)(1).}

^{[14] Supra, Note 2.}

^{[15] GCI Liberty, Inc., Amendment No. 2 to Form S-1 Registration Statement, filed May 28, 2025 (see discussion starting on page 62) (https://www.sec.gov/Archives/edgar/data/2057463/000110465925029933/tm2510075-1_s1.htm).}

^{[16] This is despite the fact that the legal form for the distribution seems to be a dividend, with no indication that there is a reduction in the number of shares a shareholder will hold following the distribution.}

^{[17] Zenz v. Quinlivan (supra, Note 6).}