Everyone knows Uncle Sam is spending money faster than he takes it in. Just how fast? As of March 1, according to CNBC, we’re adding a trillion dollars to the national debt every 100 days. Naturally, that eye-popping number has the IRS scrambling for every nickel they can find. So they’ve launched all sorts of campaigns to squeeze more money out of particularly promising prospects. Some are dreadfully technical and dull, like the “FIRPTA reporting for NRAs” campaign. (For the record, that involves withholding a 15% tax on gains when non-resident aliens sell U.S. real estate.) Others target a small number of high-dollar opportunities, like the “expatriation of individuals” campaign chasing after taxpayers who renounce their U.S. citizenship, or the “business aircraft campaign” that targets personal use of corporate jets.
But some of those campaigns target higher-profile taxpayers. The independent newsroom ProPublica has just released a story highlighting a new “Sports Industry Losses” campaign, “designed to identify partnerships within the sports Industry that report significant tax losses and determine if the income and deductions driving the losses are reported in compliance with the applicable sections of the Internal Revenue Code.”
Pro sports teams are some of the most valuable businesses in America, jewels in capitalism’s crown. Forbes magazine reports the Dallas Cowboys are worth $9 billion. Even the least valuable NFL franchise, the Cincinnati Bengals, is worth $3.5 billion. Basketball and baseball franchises sport similarly glittering numbers, with the New York Yankees hitting $7.1 billion and the Golden State Warriors reaching $7 billion.
Where’s the tax issue? It turns out that many owners are using noncash amortization and depreciation deductions to offset cash income and cut their tax bill, in some cases, to zero. (As former Cleveland Indians and Chicago White Sox owner Bill Veeck once said, “Look, we play the Star Spangled Banner before every game. You want us to pay income taxes too?”)
Let’s look at the Los Angeles Clippers to see how it works. Steve Ballmer, the former Microsoft CEO, bought the team for $2 billion in 2014. (They’re worth $4.65 billion today.) But he didn’t just buy “the team.” He bought a collection of assets that includes player contracts and TV deals that he can write off over 15 years. Separating out those assets lets him deduct players like his own crown jewels, Kawhi Leonard and Paul George, twice—once against his operating income, and a second time against his purchase price.
From 2014-2018, Ballmer deducted over $700 million in operating losses for a business that generates over $400 million in revenue per year. Ballmer himself paid a lower tax rate than his star players and even many of the concession workers selling hot dogs and beer in the stands.
Critics of the current rules argue that writing off some assets, like broadcast rights, is abusive. Why? Because the value of the asset never really goes down. This is especially true for the NFL, which dominates TV ratings and distributes revenue equally among the 32 teams.
There’s one downside of the current rules, however. Writing off assets when you buy them means paying more tax down the road when you sell them. But sports franchise owners can afford the best tax planners in the business to manage those obligations when they sell. And if franchise owners die without selling their team, the “stepped-up basis” rules eliminate any such taxes for their lucky heirs.
There’s no reason to assume the IRS is looking for illegal behavior. Rather, as is so often the case, the real scandal is what’s legal. But who can blame team owners for taking every advantage in the code? You should do the same—so call us for a three-pointer against the IRS!