This is a day the Tribune Company hoped would never come—or one of them at least. Call it the revenge of Times Mirror's former bosses. When the Chicago-based Tribune swooped in to buy Times Mirror and the L.A. Times out from under unsuspecting executives in 2000, it also acquired a potential tax liability dating from an earlier, too-clever TM scheme to dodge the IRS. Well, on Tuesday the U.S. Tax Court sided with the IRS. After interest, Tribune owes—are you sitting down?—a cool billion. Not ephemeral paper assets, but actual money. Tribune will appeal but has decided to go ahead and pay the tax bite to avoid building up more penalties. Do companies like Tribune keep that kind of free cash around? No. A missive to employees from CEO Dennis J. FitzSimons tonight says the company had banked away only about $250 million to cover the massive expense.

As many of you are aware, Tribune Company has been involved for several years in a tax dispute with the Internal Revenue Service. We inherited the dispute when we acquired The Times Mirror Company in 2000. The issue revolves around tax treatment of the 1998 reorganization of Matthew Bender, a former subsidiary of Times Mirror.

Today, the U.S. Tax Court ruled in favor of the IRS in this important case. In effect, the court said that Times Mirror's reorganization of Matthew Bender was, in substance, a sale, and therefore taxable.

Our attorneys aggressively defended the tax structure in Tax Court but to no avail. We will immediately appeal the ruling to the Seventh Circuit Court of Appeals. While we had hoped for success in Tax Court, we have always realized that our best opportunity for winning this case would be on appeal. The appeals process is lengthy and it is likely to be 15 to 18 months before an opinion is rendered.

Tribune's tax liability in this matter is approximately $1 billion. Over time, deductions for state taxes and interest will reduce our cash outlay to approximately $850 million, and about $250 million was previously allocated to a reserve fund tied to this case. The company will pay the tax promptly to stop further IRS interest from accruing.

This afternoon's ruling was disappointing, but our legal team will continue to fight hard for a successful final outcome.

The painful part, of course, is that Tribune could have settled for far less, but chose to fight and go for the win. They might still prevail on appeal—or they might not. No good analysis up yet, but here's the Tribune press release on Yahoo. Tribune's other big gamble, that the U.S. will change the law and let them keep both the Times and KTLA rather than force a sale, still lies a couple of years ahead. More ouch: Times Mirror CFO Thomas Unterman got a $1 million bonus for devising the tax scheme, and a whole bunch more millions for brokering the company's sale to Tribune on behalf of the Chandler family.