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Reducing the Debt, the IRS Audit, and Spending Out of Pocket
So, we’ve established that the Chicago Cubs’ debt is something of a restrictive element when it comes to spending. Can’t the Ricketts Family just get rid of the debt? Just pay it all off and be done with it?
No, not really. Remember the structure of the Tribune Company/Ricketts Family transaction involving the Cubs? The leveraged partnership? Here’s the thing about a leveraged partnership that is designed to defer taxable consequences: it can’t look like a sale that’s been dressed up as something else.
Indeed, there are “disguised sale” rules that govern these kinds of partnership transactions, and if it quacks too much like a sale, the IRS will pounce. I can only imagine that if the “buyer” in a leveraged partnership immediately paid off the debt – you know, the debt that made the whole partnership transaction not look like a sale – the deal would look fishy real quick. Further, the entire point of the leveraged partnership transaction was to defer the taxable consequences of the sale of the Chicago Cubs. Once the debt is paid off, by rule the deferral ends, and the taxes must be paid.
The partnership, which will own the Cubs through 2019, will also be carrying debt for that period. That, simply put, is that.
An interesting sub-wrinkle: 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.
Circling back to the Cubs’ debt load. So if the existence of the massive debt is at least partly artificial, and if it isn’t within the Ricketts Family’s power to make it go away on their own, here comes the obvious question: why can’t the Ricketts Family just spend out of pocket to increase payroll until the debt is paid down?
Well, technically they could. It’s worth pointing out, however, that the ownership structure of the team (and, well, prudence) doesn’t make things quite as simple as “billionaires own the team, spend some money, damn it.”
Recall, the Chicago Cubs are owned by a partnership (Chicago Baseball Holdings, LLC) between Ricketts Acquisition, LLC (95%) and the Tribune Company (5%). Ricketts Acquisition, in turn, is 100% owned by the Joe and Marlene Ricketts Grandchildren’s Education Trust (the “Ricketts Family Trust”). The Ricketts Family Trust, which obviously does not exist solely to fund the Chicago Cubs, much as the fans may wish it so, is operated by RPTC, Inc. as Trustee. And RPTC’s President is Joe Ricketts, with attorney David Larson, and Tom, Pete, Todd and Laura Ricketts serving on the board. So, although there are interrelations between the persons running the Cubs and the entities on up the chain, those entities are distinct, serving different purposes. The Cubs are, in some ways, a self-contained – and, thus, self-reliant – entity.
Furthermore, to the extent the Ricketts Family – in whatever its corporate incarnation – desired to spend out of pocket on the Chicago Cubs, I’d expect them to do so in ways that would further the long-term baseball and business goals of the organization. For example, financing the renovation and development of Wrigley Field, as the Ricketts Family has pledged to do, is an investment that returns money to the organization every year, rather than a one-time free agent expense that guarantees nothing. From a purely selfish standpoint as a Cubs fan – one with a very long view – even I would rather the Ricketts opt for the former over the latter.
Of course, even if the Ricketts Family were in a position to spend lavishly out of pocket on payroll right now, it may not be the wisest strategy anyway …
I'm of the belief this is Tommy's toy. He got his seed money and now has to make it work on his own.
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