In Episode 20 of How Tax Works, Matt Foreman discusses the pros and cons of buying a professional sports team from a tax perspective. Listen for a discussion of depreciation, amortization, and business expenses galore.

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How Tax Works, hosted by FRB Partner Matthew E. Foreman, Esq., LL.M., delves into the intricacies of taxation, breaking down complex concepts for a clearer understanding of how tax laws impact your financial decisions. Through this, listeners are treated to a comprehensive breakdown of entity structures, from the robust shield of C corporations to the flexibility of partnerships and LLCs. Foreman navigates through the maze of tax considerations, shedding light on entity-level taxation, shareholder responsibilities, and nuanced tax strategies. Foreman shares valuable insights and practical advice, emphasizing the need for informed decision-making and consultation with tax professionals. From qualified small business stock to state and local tax considerations, no stone is left unturned in this illuminating exploration of tax law and entity selection.

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Transcript:

**This transcript has been prepared automatically by AI and may contain inaccuracies**

Matthew Foreman [00:00:00]:
Welcome to the 20th episode of How Tax Works. I’m Matt Foreman. In this episode, I’m going to talk about why you should buy a professional sports team. But I’m going to do it by talking about tax, which is how everything should be viewed through a lens of tax, because that’s all that matters. How Tax Works is meant for informational and entertainment purposes only. This may be attorney advertising and it is not legal advice. So don’t just go by a professional sports team.

Matthew Foreman [00:00:33]:
Maybe a good decision, maybe a terrible one. Don’t do it because you listen to this podcast. Please hire your own attorney. How Tax Works is intended to help listeners navigate the intricacies and complexities of tax law, regulations, case law, and guidance to demystify how taxes shape the financial and business choices that we all make before we get started. Administrative New episodes every two weeks. The next episode is going to talk about why foreign persons should not use LLCs. Please do not and don’t have investors in your LLC who are foreign either. Unhelpful.

Matthew Foreman [00:01:04]:
If you have any questions, comments or constructive criticism, you can send me an email, which you can find at your favorite search engine. All right, this one, you know, the last couple I’ve had some pretty detailed notes. I’ve been knocking through it. This one probably has about a hundred words on it. Total, Total. Okay, my notes. So it is a little bit more, I’m going to say loose is, is the word they would use in, in radio or tv, less scripted. And what I’m going to be talking about is, you know, why you should own a professional sports team, particularly the top level ones.

Matthew Foreman [00:01:36]:
Minor leagues and lower leagues are a little different. Anyone who’s ever seen the movie Slap Shot, extremely vulgar. Actually it’s probably rated R. I don’t know. It’s out there, man, but it’s really good. But it’s, it’s about a minor league hockey team as Paul Newman in its pretty really good movie. But anyway, not what I’m talking about. I’m talking about professional top team sports team.

Matthew Foreman [00:01:55]:
So in the context of this, I’m going to sort of use the Washington Commanders because I think pretty sure they were the last professional sports team to be sold. There are some others that it sounds like they might get sold for a variety of reasons. Some ones that the fans of a team want to be sold perhaps for the same reasons, perhaps for different ones. But you know, I’m going to talk about it and use as a context because it’s pretty easy for me to, you know, talk about One, and it’s recent. So, so it’s, it’s sort of top of my mind. First and foremost, if you own a professional sports team, we should hang out. And the reason for that is because you own a professional sports team and you probably can do some really fun stuff because they’re really expensive, all right? And if you have that kind of money and, or you can get the debt to buy them, you know, with limited partners, like, we could have a lot of fun. So for non tax reasons, we should hang out.

Matthew Foreman [00:02:45]:
But let’s, let’s talk about the Washington Commanders, right? They were sold for something like $6 billion, which I’m going to use as an example because it’s fairly round and it works well into my numbers. All right? This is not to pick on them. I mean, hey, they had a great year. I think there are 28 franchises that would trade with them any time for what they had this year. A lot of fan bases, a lot of optimism for, for good reasons. So the first thing is, and this is important to know, top two professional sports teams are profitable. They make phenomenal amounts of money. There’s a huge amount of cash.

Matthew Foreman [00:03:17]:
The notion that they may not be profitable or it’s hard to turn a profit, belies one incredible fact that the Washington Commanders, just the team that’s been not very good for 20, 30 years now, just sold for $6 billion. There’s an article in the Athletic that the prior owner put up a price that you didn’t think anyone would actually pay and they paid it. And I appreciate that there’s a level of vanity and look at what I can do by buying a professional sports team. But at the same time, if you’re just hemorrhaging cash, you probably don’t want to do that. That’s not a great investment and it would be for lower. And as a result, the sheer value of these sports teams suggests that they are extremely cash flow positive and profitable from an income perspective. Maybe, maybe not income perspective, but definitely cash flow positive. Right? So let’s talk about why, right? You got media contracts, people are paying to attend games, they’re buying jerseys, you know, sponsorship, partnership, stuff like that.

Matthew Foreman [00:04:17]:
That’s bringing in cash. But that’s not that interesting from a tax perspective. It really isn’t. I’m sorry to say. That’s just the revenue. I think most tax professionals will agree with me that expenses are the more complex and nuanced thing. And if you listen to, you know, if you listen to this podcast, 20th episode, I think you’ll Notice that I’m talking about expenses. A lot.

Matthew Foreman [00:04:40]:
When can you take deductions? When can you take losses? When is this? When is this right? Timing and the first thing I always point out, you know, PP&E, plant, property and equipment, right. Is three, five, seven year, maybe bonus, you know, stadium, the stadium itself or the arena is 39 and a half, which is pretty long. But, you know, $1 billion, 39 half years, 50 million a year, sloppy math. That’s a lot of deductions. That’s going to offset a lot of income. So that’s pretty big. One question that, you know, I suspect I’m not the only person who’s pondered this, but I suspect for my listeners, none of you have ever pondered this before. But what is the useful life of a seat at a stadium or an arena? Now, they’re bolted in, they’re connected.

Matthew Foreman [00:05:25]:
So I suspect they’re going to get 39 and a half. But maybe, you know, how long do they actually last right, in an arena? You know, I live in New York, Madison Square Garden, probably use about 300 days a year, give or take, maybe more, maybe a little less. You know, 10 years for a seat, something like that might be the right useful life. Maybe it’s, you know, seven or five, depending on how they do it. Maybe it’s 39 and a half for the whole thing. I don’t know. I’ve never worked on something like that. I’ve never really thought about it.

Matthew Foreman [00:05:53]:
And I can tell you that objectively I did not research this question because I didn’t want to go down a rabbit hole. I already do way too many rabbit holes. So you have the seats, you have the concessions, you have all that stuff. When he gets to write it off, right, he’s deducted over time. Over time. But the biggest deduction that you get when you own a professional sports team, especially top tier one, is not going to be the actual value of tangible property. It is going to be the amortization of goodwill and going concern over 15 years. And let’s make an assumption that the Washington commanders were worth $3 million at Goodwill and going concern.

Matthew Foreman [00:06:32]:
I suspect that number’s higher. Four and a half, maybe five, maybe five and a half. I don’t know. It sounds like they’re looking for a new stadium, so maybe it’s not worth as much as I think. But let’s just lazily say it’s worth $3 million. Right? $3 million. Excuse me, $3 billion. Very different number over 15 years.

Matthew Foreman [00:06:52]:
Okay, right. $3 billion divided by 15. Right. Is a gigantic, gigantic number. $200 million per year, if I have that right. Okay. That’s how much you’re amortizing every year. You are never going to use those losses, okay? You’re just never going to use them.

Matthew Foreman [00:07:15]:
Maybe you will, Right. But there’s limitations on them. And if you listen to this podcast, I’ve kind of gone through two of them, but there’s basically four. Right. There is your basis, okay, in the actual property. And the buyer probably has $6 billion. Let’s assume they bought it with a partnership. Right.

Matthew Foreman [00:07:32]:
So they get that basis under section 752, which I’m not going to go into in detail, but just assume that they have full basis in all. In all the assets. So that one’s done. The amount at risk.465. Well, a lot of it’s real estate, goodwill. Maybe you can, maybe you can’t, but you know, it’s going to sit there unused anyway until you have income from it. So you’re just not going to pay taxes on this business until you sell. Right.

Matthew Foreman [00:07:55]:
There’s the active trader business. Right. 469, the passive activity loss rules. I should say they may do it, but most owners, I bet you most owners are active in their business. And, and I say that for an extremely specific reason, which I’ll kind of talk about in a bit. And the final limitation is 461L, which is a limitation on losses from other businesses. Can’t really move them across. Yeah, Maybe, you know, could do it, but I, I suspect for a lot of them, you know, once you get past the real estate, you’re not getting past 465.

Matthew Foreman [00:08:27]:
And for a lot of them, look, if you’re pulling out cash, pulling out cash, right. Offset by losses. And if you’re not pulling out cash, you’re not really putting in cash. And you own a professional sports team. Right? So there’s, there’s some benefits to that. There’s some other stuff you can do. You’re going to every game. That’s something an owner should do.

Matthew Foreman [00:08:46]:
They should watch their business, they should pay attention to it. They should go to meetings. You’re going to the owners meetings, which in the summer are in northern places and in the winter they’re in the south. Right. They’re going to fun places to go to. You’re networking, you’re meeting people. You’re getting business deals, tangibles. Right.

Matthew Foreman [00:09:02]:
Free flights. You want to travel with the team. Travel with the team. That’s probably an ordinary, necessary business. Someone who Owns a business may need to go with the business, you know, to observe it, to watch the employees, to see how they are. I joke that this is the ultimate marketing expense, right? Anything you’re doing right, you want to do it, you want to have it. There’s a case called Cohan, which I have mentioned on this before, particularly during my. The episode on 162.

Matthew Foreman [00:09:31]:
George M. Cohan was a Broadway producer. He wrote plays, he wrote songs. He acted earlier in his career. And what he. What he did was he used to throw parties and deduct them as a marketing expense, right? Giving tickets. Say you have someone who is. You’re considering getting a little bit of partner in the business, or, you know, that person says, you know, come to the game or you’re gonna have the meet a baseball player.

Matthew Foreman [00:09:58]:
There’s a lot of marketing expenses and that you can do by throwing parties, by bringing people to games, which may or may not be the rules kind of change on that. And I think that’s something that’s really, really, really, really, really important, right? The other thing that a lot of people do is they compensate themselves and their families with salaries, right? Guaranteed payments, or if you’re an S corp, you’re going to make reasonable compensation, et cetera, and they do it. And if you look at every single professional sports team except for the packers, who kind of have a weird ownership, there are family members involved. You know, some of it is, look, if you’re the head of a company and you can hire whoever you want, there is a scene in an episode of a show. It stars Billy Bob Thornton. I forget the other guy. You can. You can tell me.

Matthew Foreman [00:10:43]:
And they had Jerry Jones came in, and if you watch the scene, man, I’m not convinced he was acting. I think that was real. I think that’s really how he felt. And he talked about how he decided when he went into business that he was. This is what Jerry Jones was saying. He said it much better than I was. He wanted to work with his family and his kids and how he talked about it. And I recommend watching the clip.

Matthew Foreman [00:11:05]:
It’s. It’s on YouTube. And I recommend watching the clip because you can see he. I really think it’s. I think. I don’t think it was acting. I think that they wanted someone to give that someone happy to know Jerry. And he talked about himself, you know, And a lot of owners, for whatever reason, right? Good, bad, indifferent, will hire their family members for positions, right? Which is something a lot of owners do, pay them a salary for their work and that’s it.

Matthew Foreman [00:11:32]:
So you have salaries for your family, you know, you have the ability to go to games and you’re doing it. But let’s, you know, think about some numbers, right. If you look at teams, you know, that are public, such as the Atlanta Braves, or teams that are engaged in litigation, such as the Tampa Bay Rays, I believe, but discussed that on this podcast before. I’m not going to go into detail again. What you learn is that a lot of these companies are either, you know, profitable from a tax perspective, right? In the financial statements. Braves are public company if tracking stock. So you don’t have to get all of, I think it’s Liberty Media Group’s stock and just invest in the Braves. There’s a significant profit, especially if the team’s good, right? The Los Angeles dodgers salaries for 20, 25.

Matthew Foreman [00:12:18]:
I haven’t totally done it, but I think it’s $1,000,000,000 they keep. They seem to be finding someone every week. It’s kind of, kind of bananas and some sour grapes from me. But. So there clearly has to be significant revenue going to them. So they’re taking deductions, right. You know, look like the normal business stuff, right? There’s computers, there’s desk chairs, things like that. But there’s a gigantic expensive stadium that they build and they upkeep every year.

Matthew Foreman [00:12:42]:
You’re going to recapitalize it. You know, things like that. You’re going to replace a wall, you’re going to paint it, maybe it’s deducted. You’re going to put in some new chairs. Are they depreciated, is their bonus? Things like that. But really, when you buy it, right, you have 15 years of goodwill going concern and you have the stadium over 39 and 1/2 years, right? So $1 billion stadium, 50 million a year, $3 billion of goodwill going concern. So 200 million. So you’re at $250 million of deductions a year even if you can’t offset your businesses more than the, you know, it used to be 250, 250,000 to 500.

Matthew Foreman [00:13:17]:
There’s inflation, I think it’s 313 and 626. Now it might be 20, 24 numbers, I’m not sure. Off the cuff, a little bit of a looser episode. Not as much detail down for me. But you know, that’s the idea. You’re really, you know, it’s just going to sit there and wait and you’re never going to pay taxes on it. Then what happens right. 20 years, you get bored.

Matthew Foreman [00:13:37]:
It seems like a lot of these teams are getting sold when, you know, owners get older or someone dies, there’s estate tax, there’s a fight over it. You know, the Padres, I don’t want to bring up, you know, sore things, but the Padres are. Appears to be a fight brewing over the team. Don’t know how that’s going to go. You know, not great, you know, for the fans. Fights tend not to be great for ownership of businesses and definitely not things like sports teams that are kind of different, you know, how they operate. So I think, you know, they get sold, you know, and that’s a lot of times what happens. They get sold for significant amounts, everyone walks away.

Matthew Foreman [00:14:10]:
And you then use all your suspended losses, whatever. However they’re suspended. Why ever they’re suspended doesn’t really matter. They get used. And that’s really important. One comment I always make is, you know, you don’t want to accelerate your losses. A lot of times you actually want them to be suspended under 465 or 469 because. And people are like, well, why? What’s the difference? And there used to not be a difference, but, you know, NOLs, you can only use 80%.

Matthew Foreman [00:14:36]:
Offset 80% of your income with NOLs, so you don’t want to lose them. And you also, with suspended losses, you know, 465, 469, you could just use them 100% immediately available. So it’s important to really get that right. You know, it used to not matter as much whether they were NOLs or suspended. Now it really matters. You know, will it matter again? Will that change? I don’t know. You know, anyone who says they can predict the future in this regard is lying or delusional, whatever you want it to be. So I think it’s really important to think about, you know, what is the cash flow on it, Right? So I know, you know, my whole premise of this episode is a little bit of a joke, and I appreciate that.

Matthew Foreman [00:15:14]:
Right? Yeah. You should buy a professional sports team for the tax benefits. Kind of silly, but the truth is they work, right? If you own a professional sports team, you know, a football team, whatever, you can go to the super bowl, you can go to all of your team’s games. There’s 17 games in 18 weeks. And you can do that and call it a business expense because that’s ordinary, necessary, right? People say, look like, how ordinary necessary can it be? And the answer is, well, a lot of owners go to a lot of games. You’ll See them, you know, you see tendency to more at home than on the road, I suspect because they don’t want anyone to actually know where the visiting owner sits. You know, they tend to be less popular home team owner maybe, maybe not. But they’re at a lot of games, they’re traveling to things, they’re doing things, stuff like that.

Matthew Foreman [00:15:59]:
And so I think it’s really important to think to yourself, you know, what do you want to do should you buy something like that? And this is a commonality. Look, I know I’m doing this as an absurd example, but I think it’s really, really important to note that this is the same basic concept as buying any business, right? Okay, not a sports team, but if you buy a business for $50 million, 15 year amortization, 1 million per year, that’s going to offset your income. That’s it. You know, if you’re running the business, you’re not going to get, you know, it’s going to go into NOLs or if the business is sufficiently profitable, it’s going to offset it. But that’s something you get right. You know, people always say I’d buy a business but it’s so expensive and this and that. And look, it is right, you’re going to take out debt or you have to pay for it somehow, but you get deductions to offset the income because you’re getting a step up in basis from buying it if structured properly. I should note that a lot of these are.

Matthew Foreman [00:16:54]:
The premise of this is predicated on the notion that you’re buying the assets, not the stock of the business or the team. If you’re buying the stock, you probably shouldn’t, you know, we should really talk about that. Whether it makes sense to gross up the owner or whatever. I think it’s necessary to think that through and whether you should do it. Just the benefits of depreciation can be significant. They’re not as big as people think. You know, I’ve run the numbers, time value of money, et cetera, et cetera. So if you can lower the purchase price, maybe that’s worth it.

Matthew Foreman [00:17:24]:
You know, I suspect the owners of the Washington Commanders would rather have paid $3 billion than 6 and just not taken the depreciation amortization. But you know, this, this is what it’s going to be. You know, this was the price, this is what he wanted post tax and that’s it. Intentionally not saying names, obviously. And I think that that’s really important. I think it’s really important to think about, you know, when you’re buying a business, right. Again, goofy that I did. This is a sports thing, but that’s the idea, right? You buy it, you get to step up and plant property, equipment.

Matthew Foreman [00:17:56]:
You get to step up in real estate, you get to step up in goodwill going concern. There’s a covenant not to compete. You know, I suspect most people who sell a baseball team won’t then buy another baseball team. They sold it. Also, I suspect that most people who did it, you know, let’s, let’s say, you know, team A gets sold, they kind of can’t just go by another team. It’s not like the teams directly compete. I could see it being more of an issue if there are two leagues in a similar area, you know, maybe a Bundesliga team. Serie A.

Matthew Foreman [00:18:25]:
Serie A, right. You know, that, that may be different. That may be a different thing to think about, but that’s the idea. Those are all things you can depreciate or amortize over a number of years to recover your cost basis, your expenses. Expenses. Rather than waiting until you sell it. If you buy the stock, you’re waiting until you sell it. Suboptimal.

Matthew Foreman [00:18:42]:
So that’s, that’s this episode, you know, I kind of just me, you know, chatting along, discussing the useful life of a stadium seat. And there’s a level of absurdity to it, but also like it works in other contexts and I think that’s important. So that was the 20th episode of how Tax Works. I, I hope you learned something. I hope you enjoyed it. I’ll be back in two weeks with the, the 21st episode and I’m going to talk about why foreign persons should not use LLCs, they shouldn’t buy them, shouldn’t set up as them, they shouldn’t invest in them, etc. Etc. I do see it.

Matthew Foreman [00:19:14]:
I don’t want to say fairly often, but I run into it and sometimes it works out okay. Most of the time it doesn’t. And people are just like, well, why didn’t my advisors say it? The answer is it depends. You know, the U.S. tax system, it has some real differences than the rest of the world and it can create problems. All right, I hope you enjoyed it. Thank you so much. Now for the best music of all time.