I 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.