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Financial ReportingI don’t want to oversell the importance of this update, so I’ll say up front that this is merely a small update to the large financial piece I wrote last month on the state of economic Chicago Cubs affairs.

As you may recall, or may go back and see, a portion of that article discussed the leveraged partnership between the Tribune Company and the Ricketts Family (the partnership that indirectly limits the Cubs’ financial might, and that lasts until at least 2019), and the tax implications of that transaction. In short, a leveraged partnership can allow for the transfer of substantial assets without immediately triggering a taxable sale. In long, the IRS can investigate these kinds of transactions to determine whether they truly involve a partnership, or whether they are merely designed to disguise a sale. A pertinent section from the financial piece:

Even when ostensibly following the letter of the law, a leveraged partnership can come under IRS scrutiny if it looks too much like a sale. And that’s exactly what happened last year with a Tribune Company transaction involving the formation of a leveraged partnership very similar to the Chicago Cubs transaction: the “sale” of Newsday to Cablevision, regarding which the IRS has already concluded there was a sale that should have resulted in the Tribune Company paying tax on gains back in 2008.

The IRS is also auditing the Tribune Company’s taxes for 2009, the year in which the Chicago Cubs’ “sale” took place, and that transaction is also being scrutinized. Presumably, the IRS will seek to treat the “sale” of the Chicago Cubs as a sale (no quotation marks) for tax purposes, as it did with Newsday, and the Tribune Company may wind up with a heavy tax bill when all is said and done.

Here’s where I’d love to say that, if the Tribune Company is forced to recognize the Chicago Cubs transaction as a sale and pay taxes accordingly – whether by edict or by negotiated settlement agreement – the constrictive partnership structure goes away, and the Ricketts Family is free to do as it pleases with the Cubs, including obliterating the team’s debt. Unfortunately, I can’t say that, because I’m simply not so sure that’s how things would proceed, given the complexities of the partnership and the debt. That said: it’s worth keeping tabs on the IRS investigation. If and when it finally comes to a resolution, some of these issues will likely be re-examined.

Against that backdrop, here’s the small update.

The Tribune Company recently released its consolidated financial statements for 2013, and, therein, the company disclosed that it expects the IRS to release its audit report related to the Chicago Cubs transaction in 2015. At that time, it is possible that the “sale” will be designated a sale, and the Tribune Company will owe a significant tax bill.

It remains unclear, however, how such a decision would impact the current partnership structure, and how the Tribune Company would proceed in the face of such a conclusion. There are always appeals processes, so a resolution in 2015 may not actually be forthcoming. When the IRS report is released, however, this will all be discussed once again, and we could get a great deal more information. Of course, the hope is that, by that point, the Cubs will be winning (attendance up), the new TV will be inked (massive influx of revenue locked down), and the renovation of Wrigley Field will be well underway (new revenue opportunities and less maintenance expense), and maybe this will all merely be an interesting footnote.

As I said: this is a small update, but, since the broader financial issues are important, I thought you should know.

  • DarthHater

    “Of course, the hope is that, by that point, the Cubs will be winning (attendance up), the new TV will be inked (massive influx of revenue locked down), and the renovation of Wrigley Field will be well underway (new revenue opportunities and less maintenance expense), and monkeys will be flying outta my butt.”

    FTFY

  • J

    Brett, if I recall your analysis, the Cubs/Ricketts have various restrictions in place necessitated by the tax scheme. Do those restrictions end early if the IRS rejects the structure and deems it a true sale? Or does it merely mean the Tribune owes a ton of cash to the IRS?

    • J

      I know the above mentioned “complexities,” I was just looking for a best guess.

    • http://www.bleachernation.com Brett

      I couldn’t even guess. The partnership is governed, presumably, by its own creation documents, which may not contemplate this kind of IRS decision (and thus would be unchanged by it). If the reason for the partnership goes away (i.e., Tribune has to recognize a sale and pay the taxes), does the partnership go away?

      Like I said, I couldn’t even guess. But you’re definitely onto the meatiest question. I suspect that, when the report is released, the involved parties will have some thoughts. Until then, though, I’m not sure how much anyone is going to talk about an ongoing IRS investigation. I probably wouldn’t.

  • CubFan Paul

    The IRS should hire GE’s accountants

  • Diehardthefirst

    Hope I am wrong but you long timers know my take on the 5% being a cahoots move implicating the Ricketts- but if I’m right then will be CF of all CFs

    • TWC

      You’re not right. You can let it go. Struck didn’t stick. This one won’t either.

  • Jon

    Is it weird I’m siding with the IRS? Zell is a tax cheat and I hope they get him.

    • Diehardthefirst

      Be careful what u wish for unless you want Mark Cuban to own Cubs- I do

    • itzscott

      Zell has made a fortune by creatively interpreting the tax laws in ways they weren’t intended when they were written. I think The Tribune owns 5% of the Cubs and that 5% was ONLY to be able to dodge some tax consequences of the transaction.

      I’m wondering if the IRS determines this was an actual sale and not one of Zell’s usual smoke & mirrors structured deals if the 5% ownership becomes meaningless to The Tribune, Zell sells the 5% back to Ricketts who then turns around and sells that 5% to those new silent partners he was taking about so he can use those funds to retire some of the debt, which would put the Cubs in a better position financially than they are now?

    • J

      Fyi, the tax liability is the Tribune’s not Zell. He may be a tax cheat, but he did it with the Trib’s taxes not his personal taxes.

      • itzscott

        The Tribune’s on the hook for a deal structured by Zell to dodge the tax consequences of a company he is the majority owner of.

        • J

          Zell does not own the Tribune.

          • Diehardthefirst

            MLB approved sale of Cubs- if IRS presses for criminal charges then Bud legacy to new low- hard to believe

            • DarthHater

              You must not have been at the Wrigley anniversary event or you would know that Bud is the greatest commissioner in history.

              • Diehardthefirst

                Knew that beforehand because he has said so for many years

  • Darth Ivy

    I wonder if the commissioner’s office is talking with the IRS to get the desirable outcome for baseball

    • Diehardthefirst

      Mr Issa’s committee is still empaneled – even Bud would shy away

      • Darth Ivy

        Congress is powerless. The IRS will do what it wants.

  • 1060Ivy

    So if the investigation proceeds and finds that transaction is a sale, what expected outcomes should Cub fans expect?

    Zell’s tax bill increases, Ricketts are allowed to considerably lower their debt position and …

    As reported Ricketts is already considering selling off minority stakes in Cubs to potential finance Wrigley renovation. Should we expect that the family will pay down debt while also seeking financing for renovation?

    The IRS ruling might have assist Ricketts if they want to lower the leverage ratio but that assumes that the Ricketts have means to pay down the debt and/ or Cubs debt is placing restrictions on their capacities as owners. Believe your earlier article shows that on paper the Cubs have been in default of MLB leverage covenant rule but MLB hadn’t taken actions against the team / family

    • Diehardthefirst

      Consider this scenario also- IRS refers to DOJ for criminal charges

      • baldtaxguy

        Really doubt this

  • Pepitones wig

    I really don’t like the IRS, but I dislike that elf Zell even more. I hope the IRS rules it a sale.

  • Diehardthefirst

    Klein IRS 371 rule is the piano on a string over their heads

    • baldtaxguy

      Really doubt we are at this standard, assuming disclosures were complete within the Trib’s tax return. I would think it is hard to prove a criminal conspiracy when the tax issue is uncertain.

      “9.1.3.4.8 (05-15-2008)
      18 USC §371- Conspiracy to Commit Offense or to Defraud the United States

      Title 18 USC §371, the general Federal conspiracy statute, defines the crime of conspiracy as follows: “If two or more persons conspire either to commit any offense against the United States, or to defraud the United States, or any agency thereof in any manner or for any purpose, and one or more of such persons do any act to effect the object of the conspiracy, each shall be [guilty of a felony].… If, however, the offense, the commission of which is the object of the conspiracy, is a misdemeanor only, the punishment for such conspiracy shall not exceed the maximum punishment provided for such misdemeanor.”

      The criminal statutes in Title 26 of the USC do not include the crime of conspiracy. Therefore, tax-related conspiracies are generally prosecuted under 18 USC §371.”

  • Isaac

    Any possible implications for the Cubs/Ricketts’ in this?

  • bnile1

    I suspect there would be implications for Rickets. Hard to argue you didn’t have any idea why they wanted you to borrow a bunch of money and structure a deal a certain way. I don’t know that I’ve heard of the IRS going after a buyer on this as they would not get money from the buyer(unless they do fines etc).

    • Pat

      There will be no problems for Ricketts. The buyer is never responsible for making sure if a seller pays taxes on gains. Nothing remotely illegal about the structure of the deal, it’s just a matter of if it qualifies as a sale.

  • sunshine and rainbows

    I’ll admit I’m not an expert on IRS law, but I don’t see how the Trib can seriously contend that this was anything but a sale. I can’t imagine the IRS is dumb either here. I just hope they can’t weasel their way out of it, or delay it long enough that it’s not a huge difference from when they’d have to pay the taxes anyway.

    • Diehardthefirst

      Many inferences–One is The 5% hold back was agreed to by the buyer with full knowledge of its sole purpose to allow seller to avoid taxes by creating a fictitious ownership stake–another is that the buyer truly wanted seller as partner to take advantage of his expertise in real estate and used 5% as incentive —there are many other inferences which the IRS is looking at- hopefully there is no one with knowledge offering to talk for immunity

  • baldtaxguy

    “It remains unclear, however, how such a decision would impact the current partnership structure, and how the Tribune Company would proceed in the face of such a conclusion. There are always appeals processes, so a resolution in 2015 may not actually be forthcoming.”

    I would expect that the resolution of the Newsday transaction will dictate the timing of the Cubs transaction – probably similarly structured, same tax position by the parties, same tax issue. Not knowing when the Newsday case was placed in Appeals, know that the process …….drags……… in terms of timing. The process is a series of meetings and more meetings, and back and forth. Higher profile case means more cooks in the kitchen for both sides, making the logistics of scheduling complicated. Assuming resolution does not happen at Appeals, there are a few post-appeals programs that can be utilized by the parties, mediation being the most popular. That process can ……….drag………. as well. Then, if Tribune does not achieve the settlement its desires, litigation is the next and final step. But “final” is relative in terms of timing – Tax Court (or equivalent jurisdiction), then Appellate Court, than writs to the Supreme Court are all available “days in court” in the process, where each step also ……..drags………. The Cubs transaction could be settled independent of the Newsday transaction, but I would doubt it. The timing for Tribune to say “Uncle” could be lengthy and depends on how much more $$ they want to throw at it, which combined with the potential liability of Cubs transaction, could be enough to take them through the process pretty far.

    • http://www.bleachernation.com Brett

      Pfft. How would *you* know?

      • baldtaxguy

        :)

        I was a bit disappointed at myself as to how excited I was to read Tribune tax footnote.

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