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WHITE PLAINS-While the company says it will continue to defend its position in the case, Starwood Hotels & Resorts Inc. has agreed to make a $360-million cash payment to the Internal Revenue Service. The payment is in connection with an ongoing tax liability dispute centered around its $1.2-billion sale of Yellow Pages publisher ITT World Directories in 1998.

Starwood’s board of directors approved the cash payment to the IRS so that it could eliminate any further interest accrual associated with the case. Alisa Rosenberg, vice president of investor relations for Starwood, explains that Starwood contends that its sale of ITT was a tax-deferred transaction. The IRS views the matter differently and, according to a recent SEC filing by Starwood, the IRS estimates Starwood has a tax liability of $499 million in connection with the sale, plus accrued interest dating back to the transaction which closed more than seven years ago.

Rosenberg says that Starwood decided to make the payment as a result of a recent US Tax Court decision against the Tribune Co. in September that disallowed the 1998 tax free reorganization of Matthew Bender, a former subsidiary of the Times Mirror Co., which Tribune acquired in 2000. She says that case is similar to its tax case with the IRS. Last month, Tribune announced it would appeal the ruling, but said its tax deficiency in the Matthew Bender transaction and another similar deal completed by Times Mirror the same year could be in the $1-billion range.

Starwood’s Rosenberg says that the IRS has put its case against Starwood on hold while the Tribune case was being decided. Since Tribune has decided to appeal the court decision, which could take more than 12 months or more before it is resolved, Starwood decided to make the payment to the IRS to eliminate further interest accrual. Rosenberg says Starwood believes that Tribune has a good case and will prevail on the issues, as will Starwood. “We will continue to vigorously defend our position with the IRS,” she says.

Starwood officials say that the company had previously reserved a substantial amount of the potential liability in connection with the ITT sale, but is expected to record a charge of $40 million in the third quarter of 2005 for interest charges that would be owed to the IRS if the US Tax Court rules in favor of the IRS.

Unrelated to the tax issue, the company’s board of directors approved an increase in its share repurchase program from $1 billion to $1.3 billion. The board also decided to repatriate approximately $550 million from its Italian subsidiary (CIGA) to be used for its domestic reinvestment plan. The company says that the tax on the repatriation to be approximately $50 million, which will be reflected in its third quarter 2005 filings.

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