Sports Team Owners Can Still Win on Taxes Despite IRS Scrutiny

The Internal Revenue Code can provide massive tax benefits to acquirers of sports franchises, as the full purchase price can typically be expensed over time. This can allow for the reporting of significant tax losses.

A 2021 exposé in ProPublica highlighting the tax losses reported by wealthy owners in the sports industry hasn’t stopped such deals from happening. At the end of March, MLB owners approved the acquisition of the Baltimore Orioles by a consortium led by Carlyle Group Inc.’s David Rubinstein.

The deal valued the franchise at $1.725 billion, representing a 10-fold increase in value from the last acquisition of the team in 1993. This occurred on the heels of a majority stake in the Dallas Mavericks being sold in a deal valued at $3.5 billion, another massive increase from the $285 million it took to acquire the franchise in 2000.

In light of the skyrocketing value of sports franchises, the ability of investors in such franchises to reap the benefits of significant tax losses, and the infusion of enforcement funding to the IRS from the Inflation Reduction Act, the IRS announced a campaign this year targeting sports industry losses.

The IRS aims to identify partnerships in the industry that report significant tax losses and determine whether the income and deductions causing the losses are reported in accordance with the IRC, potentially putting acquirers under more scrutiny. But acquirers can still consider several potential deductions that fall within the guidelines.

As with the acquisition of any business, new owners of a sports franchise can depreciate the value of the tangible assets acquired, including stadiums, arenas, team facilities, equipment, and vehicles. They may also be able to accelerate the depreciation by claiming bonus depreciation to the extent possible. For 2024, owners of sports franchises can deduct up to 60% of the value of qualifying assets as bonus depreciation.

Additionally, the interest expenses associated with debt financing for the acquisition of a sports franchise can be deducted. However, the interest deducted by any individual partner may be limited by the tax code’s business interest deduction limit provision.

Depreciation and interest deduction expenses could generate a loss; however, the most significant tax losses are likely to be triggered based on the amortization of intangible assets. Up until the enactment of the American Jobs Creation Act of 2004, most of the purchase price used to acquire the intangible assets of a sports franchise couldn’t be written off, especially if such assets had an indeterminable life. The law change allowed intangible assets acquired to be written off through amortization over 15 years.

Player contracts and contract rights can be a significant part of the amortizable intangibles. The amount that can be written off for player contracts is simply the value of the contract. This allows the franchise to deduct both the salaries paid as operating expenses as well as the amortization.

Contract rights are the amount of the purchase price of a player’s contract based on the difference between the anticipated revenue generated by the player and the cost of the contract. Let’s say a player has a $30 million contract for three years but is expected to generate $50 million in revenue over the same timeframe. A group purchasing the contract as part of an acquisition may pay $8 million above the value of the contract based on the future expected revenue.

Franchise rights and TV rights will make up most of the remaining purchase price. They can be quite valuable due to the monopoly most sports franchises have in their local areas. For example, it is believed that the broadcast deal the Texas Rangers had with their local regional sports network generated an average of $111 million in revenue per year.

Goodwill, or the difference between the purchase price and the underlying fair market value of the assets and liabilities, can also generate significant deductions, especially with the sizable increases in the value of sports franchises.

Partnerships and their partners in the sports industry should be prepared for increased scrutiny by the IRS. Partners should be proactive in properly documenting the purchase price, including appraisals, and retaining documents and records. That way, they can justify any losses reported and show that deductions are being properly taken under IRC requirements.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Clay Hodges is director at Moss Adams and specializes in tax controversy and strategic planning, representing taxpayers under audit at the federal and state levels.

Daniel Quintana is a tax associate at Moss Adams within the firm’s national tax practice.

Write for Us: Author Guidelines