Two major sports franchises might soon be on the auction block following Microsoft Corp. co-founder Paul Allen’s death last week. But a recent Internal Revenue Service rule could cut the teams’ sales prices.
Allen died with no heirs and a $26 billion dollar estate including the National Football League’s Seattle Seahawks and the National Basketball Association’s Portland Trail Blazers. The teams together are worth more than $3 billion, according to the Bloomberg Billionaires Index. In addition to factors such as TV ratings and scarcity of teams for sale, their prices could have been enhanced by President Donald Trump’s 2017 tax law, which seemed to hand sports franchise owners a tax break.
Instead, the IRS said in August that team owners would be barred from the write off -- one of the biggest benefits in the law -- that allows owners of pass-through entities such as partnerships and limited liability companies to deduct as much as 20 percent of their taxable income.
In its proposed regulations implementing the law, the agency said sports owners are considered service professionals just like lawyers and doctors, for whom the break fully phases out at $207,500 for single filers and $415,000 for married couples filing jointly. The IRS is expected to issue final regulations, which generally reflect its proposed rules, by the end of the year.
Arthur Hazlitt, a tax partner at O’Melveny & Myers LLP in New York who provided the tax structure and planning advice for hedge fund manager David Tepper’s acquisition of the Carolina Panthers, estimates the IRS rules could spur potential bidders to offer at least tens of millions of dollars less.
“It is clear that these are relatively sophisticated buyers and that tax planning does weigh heavily,” Hazlitt said. “These people don’t pick a number out of thin air” on what to bid, he said.
Hazlitt added that a billionaire’s vanity can be a more powerful force in deciding whether he or she makes a run at a team -- but the actual number offered generally takes after-tax profits into consideration.
Still, many potential buyers of Allen’s teams could structure their purchase in such a way so there are other tax perks -- like the depreciation of a stadium that comes with a team -- that override the loss of the pass-through break, Robert Willens, an independent tax expert, said in an email.
Allen’s estate hasn’t said what it intends to do with the teams. Bankers and lawyers who specialize in sports have said they expect the franchises to be sold with the proceeds going to his philanthropic endeavors. A representative for Vulcan Inc., which oversees Allen’s investments, including his stakes in the teams, didn’t respond to a request for comment.
Current franchise owners have appealed to the IRS to change the regulations before they’re finalized.