Chicago Cubs, Team’s Former Owner Lose Tax Dispute With IRS

The holding company for the Chicago Cubs and the Tribune Media Co.—which held an ownership stake in the team until 2019—failed to convince the U.S. Tax Court to strike down millions in IRS penalties on procedural grounds.

The case involves the transaction that created the holding company, Chicago Baseball Holdings LLC., which the IRS determined to be a disguised sale.

The agency determined that the Tribune had a resulting deficiency of nearly $182 million on its 2009 tax returns and imposed a misstatement penalty of nearly $72.7 million. The holding company also was hit with a 40% penalty under tax code Section 6662(h) of the U.S. Tax Code.

The central question addressed in the court’s Jan. 6 ruling is whether the IRS complied with a requirement under tax code Section 6751(b)(1)to obtain an immediate supervisor’s approval for the initial determination of a penalty.

The court, in an opinion authored by Judge Ronald L. Buch, held that the IRS complied with the approval requirement when it imposed the 40% penalty. However, Buch said there weren’t enough facts on the record to determine whether that was true for 20% penalties imposed in the alternative for other reasons, including negligence and substantial understatement of income tax.

Chicago Baseball Holdings and the Tribune unsuccessfully argued that 2016 notices of proposed adjustment, which did propose penalties, triggered the requirement for supervisor approval.

But Buch determined that later communications—a notice of deficiency sent to the Tribune and a notice of final partnership administrative adjustment to Chicago Baseball Holdings—were actually the first written communication that the agency had made a penalty determination. Buch said the earlier notice didn’t qualify as a formal determination.

“Although the statute looks for approval of the “initial determination,” Tribune and CBH look for approval of the “first propos[al]”, Buch said. “This approach ignores the sense of formality implied by Congress’ use of the word “determination” and would render the examination of penalty issues unworkable.”

“Clearly “determination” is not a synonym for a mere suggestion, proposal, or initial informal mention of the possibility of the assertion of a penalty,” Buch said.

An attorney for the petitioners declined to comment. The IRS didn’t immediately respond to a request for comment.

The case is Tribune Media Co. v. Comm’r, T.C., No. 20940-16, 1/6/20.