Two major sports franchises might soon be on the auction block following Microsoft Corp. co-founder Paul Allen’s death last week. But a recent Internal Revenue Service rule could cut the teams’ sales prices.
Allen died with no heirs and a $26 billion estate, including the National Football League’s Seattle Seahawks and the National Basketball Association’s Portland Trail Blazers. The teams together are worth more than $3 billion, according to the Bloomberg Billionaires Index. In addition to factors such as TV ratings and scarcity of teams for sale, their prices could have been enhanced by President Donald Trump’s 2017 tax law, which seemed to hand sports franchise owners a tax break.
Instead, the IRS said in August that team owners would be barred from the write-off -- one of the biggest benefits in the law -- that allows owners of pass-through entities such as partnerships and limited liability companies to deduct as much as 20 percent of their taxable income.
In its proposed regulations implementing the law, the agency said sports owners are considered service professionals just like lawyers and doctors, for whom the break fully phases out at $207,500 for single filers and $415,000 for married couples filing jointly. The IRS is expected to issue final regulations, which generally reflect its proposed rules, by the end of the year.
Arthur Hazlitt, a tax partner at O’Melveny & Myers LLP in New York who provided the tax structure and planning advice for hedge fund manager David Tepper’s acquisition of the Carolina Panthers, estimates the IRS rules could spur potential bidders to offer at least tens of millions of dollars less.
“It is clear that these are relatively sophisticated buyers and that tax planning does weigh heavily,” Hazlitt said. “These people don’t pick a number out of thin air” on what to bid, he said.
Hazlitt added that a billionaire’s vanity can be a more powerful force in deciding whether he or she makes a run at a team -- but the actual number offered generally takes after-tax profits into consideration.
Still, many potential buyers of Allen’s teams could structure their purchase in such a way that there are other tax perks -- like the depreciation of a stadium that comes with a team -- that override the loss of the pass-through break, Robert Willens, an independent tax expert, said in an email.
Allen’s estate hasn’t said what it intends to do with the teams. Bankers and lawyers who specialize in sports have said they expect the franchises to be sold with the proceeds going to his philanthropic endeavors. A representative for Vulcan Inc., which oversees Allen’s investments, including his stakes in the teams, didn’t respond to a request for comment.
Current franchise owners have appealed to the IRS to change the regulations before they’re finalized.
Sports skills
The owners might have a good argument to make, according to Laura Howell-Smith, managing director at Deloitte Tax LLP. The regulations seemed to narrowly define performance in the field of athletics to services by people who actually participate in an athletic event, she said. For example, it appears Congress was trying to prevent, say, a baseball player from forming a pass-through corporation that merely sold his own services, Howell-Smith said.
Team owners don’t necessarily have sports skills themselves and aren’t performing services in the field of athletics, she said. Franchises also make money not just from ticket sales but from selling TV rights, merchandise, concessions and myriad other business lines, according to Howell-Smith.
Ultimately, owners fighting to get the break are in the bizarre position of essentially arguing that sports make up a relatively small part of how a sports franchise makes money.
Major League Baseball Commissioner Rob Manfred this month wrote a letter to the IRS saying that the activities of baseball players “make up a de minimis amount of the total activities of all employees of a professional sports franchise.”
Minor league
At a recent American Bar Association panel with Treasury officials in Atlanta, one member of the audience went even further, arguing that minor league baseball fans don’t go to games to watch baseball.
“It’s really just the place you go to drink beer and have fun,” the attendee said. “You’re not paying your ticket to watch them play.”
Audrey Ellis, the Treasury official on the panel, seemed dubious.
“I would be hard pressed to say that’s not the field of athletics,” she said.
