Vector Group, which owns cigarette maker Liggett Group, on Monday said it recently reached a settlement with the Internal Revenue Service that calls for it to pay about US$ 42 million related to a gain stemming from a deal with Philip Morris.

In a 1998 and 1999 deal with Philip Morris, Liggett contributed three brands to Trademarks, a limited liability company. In 1999, Vector recognised a pretax gain of US$ 294.1 million and established a deferred tax liability of US$ 103.1 million related to the gain.
As part of the deal, Philip Morris, a unit of Altria Group, has the option to buy the remaining interest in Trademarks for a 90-day period beginning in December 2008. Also, Vector has the option to require Philip Morris to buy the remaining interest for a 90-day period commencing in March 2010.
Vector has expected that, if either of those options are exercised, it would have to pay tax in the amount of the deferred tax liability, offset by the benefit of any net operating losses available to it at that time.
Under a 20 July settlement with the IRS, Vector must recognise US$ 87 million of its gain on the deal as income for tax purposes in 1999 and the balance of the remaining gain, or US$ 192 million, must be recognised as income in 2008 or 2009 once the options are exercised.
Vector said it expects to pay about US$ 42 million, including interest, with respect to the gain recognised in 1999. Due to the IRS settlement, it will reduce the excess portion of a previously established reserve in its consolidated financial statements for income taxes payable during the third quarter of 2006. The company estimated that the amount of the reduction would be about US$ 11.5 million. (pi)