ATL Article on Tax Structuring on Sale of MLB Team (2/8/24)

I picked this up today involving the type of planning that may keep well-paid tax controversy specialists busy in the future. Steven Chung, The Upcoming Baltimore Orioles Sale Is Structured To Avoid Capital Gains Taxes (Above the Law 2/7/24), here. The sale is described:

But it is not a straightforward sale. Rubenstein and his group will initially purchase 40% of the team. The remaining 60% will be sold, reportedly for tax reasons, after 94-year-old Angelos passes away. Angelos purchased the team in 1993 for $173 million. If the sale were to take place now, Angelos would face an estimated $250 million capital gains tax on the approximately $1.5 billion profit. But by waiting until after his passing, the basis step-up rule would increase his cost basis to current market value instead of his original purchase price. If the team is sold immediately thereafter, there will be little to no capital gains tax on the sale.

Rubenstein and his group [the buyers] would also enjoy some tax benefits as the new owners. According to Forbes, if the buyers are able to structure this as an asset sale, they will be able to take advantage of any losses incurred to offset other income. However, investors who do not materially participate in the team management can only use their losses to offset passive income such as real estate rental income.

 What is not clear is who will control the Orioles after Rubenstein’s initial 40% purchase. On one hand, the Angelos family could still control the team through its majority ownership. On the other hand, the Angelos family could allow Rubenstein to control the team after the initial purchase. If this happens, the IRS may try to reclassify the transaction as if 100% of the team was sold while Peter Angelos was still alive and thus trigger the capital gains tax. The IRS could argue that this two-step transaction was purely tax motivated, specifically to avoid the capital gains tax.

 The article goes on to discuss the tax issues familiar to and loved by all tax controversy afficionados-- “substance over form,” “codified economic substance doctrine,” and “step transaction doctrine.”  And the article notes:

Even if the sale avoids capital gains tax, Peter Angelos’s estate will be subject to federal estate taxes which is as high as 40% at the top bracket. Also, Maryland also has its own estate tax.

So, the IRS will certainly share in the success of this venture, with the only issue being how large its overall share will be.

Of course, a lot of this genre of planning—both good and bad—invokes Frank Lyon Co. v. United States, 435 U.S. 561 (1978), one of the worst Supreme Court tax opinions (on my list of many worst Supreme Court opinions (such as Gitlitz)). Confession, about 8 years after Frank Lyon, I was consulted to assist in a similar transaction. I recommended that the parties clone the Frank Lyon document set and implementation and do not stray too far from that deal; I even recommended tongue in cheek that, if possible, they change the name of the bank involved to Worthen Bank (the Frank Lyon bank). After Frank Lyon, many lawyers and tax shelter promoters read Frank Lyon a lot more expansively than I did and many, imagining themselves within the spirit of Frank Lyon, went well over the line.

As a side note on worst Supreme Court tax opinions, I sometimes told my students (also somewhat, but not much, tongue in cheek) that tax cases are too important for the Supreme Court to handle. See Some Justices' Aversions to Tax Cases (Federal Tax Procedure Blog 8/4/23; 9/6/23), here.