Tax Breaks Fuel Sale of Chicago Cubs for $845m

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.)