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Thursday, September 17, 2009

Tax Breaks Fuel Sale of Chicago Cubs for $845m

Cubs Yahoo Sports, Buying Cubs Could be a Steal for Ricketts, by Josh Peter:

A businessman has agreed to pay $845 million for the Chicago Cubs ... The Cubs pocket more than $2 million for each of their 81 regular-season home games, based on financial information Yahoo! Sports obtained from three people familiar with the pending deal between Chicago businessman Tom Ricketts and the Tribune Co., current owner of the team. ...

And game-day profits are only one reason Ricketts is prepared to pay more than anyone has for an American sports franchise and nearly double what anyone has paid for a baseball team ... Tax breaks will enable both Ricketts and Tribune to save hundreds of millions of dollars. ...

Tax Benefits Estimate: $100 million.

...  [T]he federal government allows sports franchises to be depreciated, which in turn creates an annual deduction and shelters income from taxes. This will come in handy for Ricketts. In 2008, the Cubs made about $45 million in profits, according to sources familiar with the deal. That $45 million is subject to a 35% tax, meaning the government ought to get almost $16 million. But an owner enjoying the special depreciation pays nothing in taxes.

The easiest way to calculate the value is to project depreciation of the asset over 15 years and do some quick math. Divide the $845 million purchase price by 15. That’s $56 million that can be deducted against team income and personal income each year for the next 15 years. The $56 million exceeds the Cubs’ yearly profit, sheltering it all from taxes. The owner must pay capital gain taxes if he sells the team at a profit. But until then, he keeps it all to do with as he pleases.

The maximum tax savings would be $19.7 million a year. Assuming Ricketts can earn an average of 7% yearly interest, his annual return from the accrued tax deduction over the next 15 years could reach $105 million. ...

A group of investors led by businessman Marc Utay reportedly offered more than $845 million. But Ricketts guaranteed more cash up front and allowed Tribune to keep 5 percent of the team, which gives the company a shrewd tax break. Sources said that by accepting the lower purchase price in exchange for retaining a portion of team ownership, Tribune will save about $400 million in capital gains taxes.

This also delays Ricketts’ ability to depreciate part of his $845 million purchase. Which makes perfect sense, said Tom Brennan, a tax law expert who teaches at Northwestern University. “Saving capital gains tax dollars today generally is more valuable than having higher depreciation deductions tomorrow,” he said.

(Hat Tip: Mike McIntyre.)

http://taxprof.typepad.com/taxprof_blog/2009/09/tax-breaks-.html

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Comments

Okay how does the Tribune save $400M in taxes by keeping 5% ownership????

Posted by: Clinton | Sep 17, 2009 10:55:13 AM

I second Clinton, how does a 5% rollover save $400m capital gain tax on an $856m sale?

I think the buyer gets an even better deal than illustrated in the article because soem of the cost is allocated to player contracts, which I believe have a less than 15 year amortization.

They should hire Steve Bartman.

Posted by: guy in the veal calf office | Sep 17, 2009 5:50:27 PM

Player contracts have a useful life of fewer than 15 years, simply because they will expire before 15 years have passed. And, in the pre-section 197 days, team buyers would allocate the lion's share of the purchase price to player contracts, for that very reason. In those days, however, the amount paid for the league franchise couldn't be amortized at all, because league franchises never expire. Section 197 changed the old way of doing things, because 197(d)(1)(F) allows team buyers to amortize the amount allocated to league franchises (even though they don't expire). On the other hand, 197(d)(1)(C)(i) -- while continuing to allow the amortization of player contracts -- treats player contracts the same as other intangibles, and therefore requires them to be amortized over 15 years, even though player contracts expire sooner than that. In short, section 197 gave team buyers something valuable, and took away something that was valuable. On balance, I think team buyers got a lot more than they lost.

Posted by: Lon Sobel | Sep 17, 2009 10:40:40 PM

I think it's just a typo. $40 million corresponds roughly to 5% of the $800+ million in capital gains that would be produced according to the article.

It looks to me like the tax lawyers are earning their fees in this deal.

Posted by: hah | Sep 18, 2009 12:59:20 PM