Report: IRS Likely to Come After Tribune Company for Sale of Chicago Cubs

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Report: IRS Likely to Come After Tribune Company for Sale of Chicago Cubs

Chicago Cubs

MoneySometimes you see a report, and you can’t immediately tell whether it’s a huge bombshell that’s going to blow the doors off the place, or whether it’s a whole lot of nothing. This is one of those reports. Tentative early read: whole lot of nothing.

Today, Fortune’s Allan Sloan reports that the IRS is going after the Tribune Company for the way it unloaded Newsday, a newspaper in Long Island, back in 2008 under the leadership of Sam Zell. The IRS is taking issue with the structure of the deal, which was not a “sale,” but instead was a “partnership” between TribCo and Cablevision, which saw Cablevision get 97% of Newsday, and TribCo receive a bundle of cash and a tiny stake in Newsday. Under this approach, in theory, TribCo avoided a substantial capital gains tax bill, but still got its cash.

If that transaction sounds familiar, it should: it is essentially the same structure the Tribune Company used to “sell” the Chicago Cubs to the Ricketts Family back in 2009. That structure, which also required the Ricketts Family to use a great deal of debt for the purchase (which they may not have otherwise preferred to use), was a condition of the Tribune Company’s selection of a particular Cubs buyer. It is rumored to have scared off a number of other prospective buyers.

That structure, and the accompanying debt, has been the subject of a great deal of discussion and debate in recent months as the Cubs look to increase revenues (see the Wrigley Renovation and Cubs TV Deal story lines) in the wake of rapidly falling payroll (which Tom Ricketts called unsustainable in the late Tribune Company ownership era).

Sloan’s report concludes that, if the IRS is going after TribCo for the Newsday deal, the Cubs deal is probably next. Indeed, Sloane noted that in a tax footnote to a TribCo financial report released yesterday, the Tribune Company’s returns for the 2009 year – the year that included the Cubs deal – are being audited. If the Cubs deal is challenged in the same way as the Newsday deal, the bill TribCo might face could approach $300 million.

What you’re wondering: is there an impact to the Cubs and/or the Ricketts Family?

At first blush, it would seem the answer is “very little” or “very unlikely.” As the “buyer” in the deal, it wasn’t the Ricketts Family’s obligation to pay the capital gains taxes that the Tribune Company sought to avoid. Then again, because the deal was not a traditional sale – the Ricketts Family, in essence, formed a partnership with the TribCo (who got the cash) – maybe the Ricketts Family is still nominally on the hook. I’m neither privy to the particulars of the deal, nor am I an expert on the tax implications of complex transactions. I won’t pretend to be either thing here.

Which is not to say, at bottom, that I’m worried for the Ricketts. Say what you will about the IRS, but I really doubt they’d be looking to put the screws to the Ricketts on this one when the entity that avoided a “sale” and got the cash is the Tribune Company.

That said, because of the wonky structure of the deal, and the desirability of the Cubs that led the Ricketts Family to agree to it, almost anything is possible. I can’t claim to have knowledge of any shifty provisions in the sale (indemnity clauses, for example) that could implicate the Ricketts Family in the event of this kind of IRS audit. Maybe, as a condition of the transaction, the Ricketts Family took on some of the risk of tax penalties. I doubt it, but, as I said, I don’t know. I also don’t know to what extent the Ricketts Family has been prepared for this situation for years. Given the nature of the deal, I’d like to the family’s legion of advisors and lawyers would have alerted them of this possibility way back when.

Further, I don’t know the implications of the fact that the Cubs “sale” emanated from the Tribune Company’s bankruptcy proceedings, and was blessed by a federal bankruptcy judge. I tend to think that doesn’t really matter here. Taxes are always still owed, and I don’t think there’s a good argument that the Tribune Company defrauded creditors through the “sale” (after all, it generated a whole lot of cash for TribCo, which, I presume, went to creditors).

I also don’t know how successful the IRS is going to be. Evading taxes is unlawful. Avoiding taxes is not. Without knowledge of the particulars, I can’t quite say where this falls, but with multiple hundreds of millions of dollars on the line, there might be an incentive for both sides to just agree to a small settlement. In other words, we might never really hear about this again.

A Cubs spokesperson said that the team has no comment, indicating that this is a Tribune Company issue. That sounds about right to me, and I very much hope that’s where this ends, as far as the Cubs and Ricketts Family are concerned.

Author: Brett Taylor

Brett Taylor is the Editor and Lead Cubs Writer at Bleacher Nation, and you can find him on Twitter at @BleacherNation and @Brett_A_Taylor.