Steve Ballmer gets billion dollar tax write off for buying the Lakers

[dmcowen674]

10-27-2014

http://beta.slashdot.org/story/209015

Steve Ballmer Gets Billion-Dollar Tax Write-Off For Being Basketball Baron



Billionaire Steve Ballmer will be able to write off about a billion dollars of his basketball team's purchase price from the taxable income he makes over the next 15 years. "Under an exception in US law, buyers of sports franchises can use an accounting treatment known as goodwill against their other taxable income. This feature is commonly used by tax specialists to structure deals for sports teams. Goodwill is the difference between the purchase price of an asset and the actual cash and other fixed assets belonging to the team."

 

[dmcowen674]

Of course the Corporate Thug supporters in here will be perfectly fine with this.

 

[Greenman]

I'm not fine with it. He shouldn't be able to write off a single cent of the price.

It's another aspect of the insanity surrounding ball games. I don't understand it at all.

 

[Zaap]

I think Ballmer should be forced to give you that billion dollars instead, McOwned.

In the middle of your off the hook celebration party, just as you're signing the bill for yet another crazy-expensive delivery... the IRS guy will whip out his calculator, and hit you with a tax bill that leaves you with exactly $12.57.

Everyone gets what they deserve.

You get $12.57, the party planners get you scrambling to pay the $20,000 bill you rang up, and your precious government gets its billion dollars, saving them from the brink of poverty. Win-win.

 

[TheSlamma]

He is creating all those concessions jobs though!

 

[MongGrel]

He is creating all those concessions jobs though!

()

More service jobs, right

:sneaky:

 

[cubby1223]

?

There are rules against ownership in competing franchises.

 

[trenchfoot]

Which just goes to show that buying off the folks who legislate tax code laws that are "fair and balanced" (as far as the very rich are concerned) is money well worth spending.

Why rob banks for chump change when you can legally rob the gov't of $$$$billions$$$$ via tax laws that treat the rich like they own the IRS. Well, on second thought, I guess they do own the IRS.

 

[MustISO]

Can't put my finger on it but that just seems wrong. Certainly not his fault because he's simply taking advantage of a system that exists. Maybe he'll give the money to charity. You could do a lot of good with that much money.

 

[Matt1970]

Why Not? We already heavily subsidize the arena's and parks they build to play in only to have ticket prices that rival what a lot of people pay in rent and 1000% markup on snacks and refreshments.

 

[Strk]

I care less about his writeoff and more about the subsidies sports teams get.

 

[Fern]

Can't put my finger on it but that just seems wrong. Certainly not his fault because he's simply taking advantage of a system that exists. Maybe he'll give the money to charity. You could do a lot of good with that much money.

Yes, there is something "wrong".

As usual, the article gets it wrong. Here's a decent article by a CPA on the deduction (amortization in our lingo) for good will: http://cpawilmingtonnc.org/cpa-tax-...ation-and-amortization-amortization-schedule/

It's a normal deduction available to all businesses, not just for sports franchises as the article suggests.

The article fails to mention that the person or business receiving the payment for the goodwill pays tax on it now. The other party, Ballmer in this case, has his deduction dragged out over 15 years. For many business transactions both the buyer and seller have their deduction and income on the tax returns in year 1. In this case, the US Treasury gets the 'time value' of money.

I do business sales/acquisitions in my profession. Most buyers don't want goodwill. I.e., people in Ballmer's position would rather that part of the purchase price be allocated to a different asset since the write off/deduction would happen much faster than 15 years.

TL;DR - The article has it all wrong. This is no loophole, and certainly not one just for sports franchises. This is not advantageous to Ballmer.

Fern

 

[Don Vito Corleone]

He didn't buy the Lakers.

 

[bradley]

I'm fine with the 1B write-off. You need to spend money in order to make money. I also am fine with any extortion employed to acquire the team. To the victor go the spoils. I'm also fine with the total autonomy given to sports franchises borne out of corporate welfare. Don't hate the playa, hate the game.

 

[Sulaco]

He didn't buy the Lakers, you derelict.
He bought the Clippers.

I've never seen someone self-own themselves on such a consistent basis.
I guess that's how you get the nickname like.....

 

[trenchfoot]

Yes, there is something "wrong".

As usual, the article gets it wrong. Here's a decent article by a CPA on the deduction (amortization in our lingo) for good will: http://cpawilmingtonnc.org/cpa-tax-...ation-and-amortization-amortization-schedule/

It's a normal deduction available to all businesses, not just for sports franchises as the article suggests.

The article fails to mention that the person or business receiving the payment for the goodwill pays tax on it now. The other party, Ballmer in this case, has his deduction dragged out over 15 years. For many business transactions both the buyer and seller have their deduction and income on the tax returns in year 1. In this case, the US Treasury gets the 'time value' of money.

I do business sales/acquisitions in my profession. Most buyers don't want goodwill. I.e., people in Ballmer's position would rather that part of the purchase price be allocated to a different asset since the write off/deduction would happen much faster than 15 years.

TL;DR - The article has it all wrong. This is no loophole, and certainly not one just for sports franchises. This is not advantageous to Ballmer.

Fern

Thanks for posting this, it's quite informative.

I am curious though ref. the bolded, if this is a normal deduction as you referred it as, and if Ballmer would rather have had the purchase handled differently tax-wise, then why did he choose this "option"(?) in the first place?

 

[glenn1]

10-27-2014

http://beta.slashdot.org/story/209015

Steve Ballmer Gets Billion-Dollar Tax Write-Off For Being Basketball Baron



Billionaire Steve Ballmer will be able to write off about a billion dollars of his basketball team's purchase price from the taxable income he makes over the next 15 years. "Under an exception in US law, buyers of sports franchises can use an accounting treatment known as goodwill against their other taxable income. This feature is commonly used by tax specialists to structure deals for sports teams. Goodwill is the difference between the purchase price of an asset and the actual cash and other fixed assets belonging to the team."

 

[Greenman]

Yes, there is something "wrong".

As usual, the article gets it wrong. Here's a decent article by a CPA on the deduction (amortization in our lingo) for good will: http://cpawilmingtonnc.org/cpa-tax-...ation-and-amortization-amortization-schedule/

It's a normal deduction available to all businesses, not just for sports franchises as the article suggests.

The article fails to mention that the person or business receiving the payment for the goodwill pays tax on it now. The other party, Ballmer in this case, has his deduction dragged out over 15 years. For many business transactions both the buyer and seller have their deduction and income on the tax returns in year 1. In this case, the US Treasury gets the 'time value' of money.

I do business sales/acquisitions in my profession. Most buyers don't want goodwill. I.e., people in Ballmer's position would rather that part of the purchase price be allocated to a different asset since the write off/deduction would happen much faster than 15 years.

TL;DR - The article has it all wrong. This is no loophole, and certainly not one just for sports franchises. This is not advantageous to Ballmer.

Fern

Thanks for the info. I should have known Dave would get it wrong.

 

[Fern]

Thanks for posting this, it's quite informative.

I am curious though ref. the bolded, if this is a normal deduction as you referred it as, and if Ballmer would rather have had the purchase handled differently tax-wise, then why did he choose this "option"(?) in the first place?

(I'll get to directly answering your question below.)

First, as background to help understand, the situation must be viewed from the perspective of both the seller and buyer. What is advantageous to the one is a disadvantage to the other (tax-wise).

From the seller's point of view allocating the purchase price to goodwill is advantageous because this results in LTCG treatment. Of course, this is the lowest tax rate possible.

Goodwill is not generally advantageous to the purchaser because (s)he will stuck writing it off over a long period of 15 years. I.e., (s)he has to come out of pocket for $1B but must spread the deduction out in equal amounts over 15 years.

(So it was the seller, Sterling, who actually benefits here. The article got it completely backwards.)

Non Goodwill. If the purchase price is not allocated to goodwill where it be allocated etc?

Generally the other choice is hard assets. (I've not worked on a sports franchise, but will guess they have other choices such as player contracts etc.) On the business sales/acquisitions I have worked on this generally means more of the purchase allocated to machinery and equipment.

This is a disadvantage to the seller and an advantage (tax wise) to the buyer. Generally the buyer will have to recognize some of the income as ordinary income, instead of the lower rate LTCG, thus paying more income tax on the sale. The buyer will get to deduct expenses for equip and machinery faster. I.e., a shorter period than 15 years. A tax deduction today is generally more valuable than one next year or 15 years from now due to the 'time value of money'.

How did they arrive at $1B for goodwill? Likely a combination of a couple of things:

1. Negotiation. The tax lawyers and CPA's for both sides will control this valuation, each one advancing their client's interest.

2. Facts/reality. Eventually one must be prepared to support this valuation to the IRS and/or courts. E.g., I can't value the team's water cooler at $1B just because I can write it off over the much shorter period of 3 yrs. So, the parties are constrained by the boundaries of 'reasonableness'.

Fern

 

[trenchfoot]

(I'll get to directly answering your question below.)

First, as background to help understand, the situation must be viewed from the perspective of both the seller and buyer. What is advantageous to the one is a disadvantage to the other (tax-wise).

From the seller's point of view allocating the purchase price to goodwill is advantageous because this results in LTCG treatment. Of course, this is the lowest tax rate possible.

Goodwill is not generally advantageous to the purchaser because (s)he will stuck writing it off over a long period of 15 years. I.e., (s)he has to come out of pocket for $1B but must spread the deduction out in equal amounts over 15 years.

(So it was the seller, Sterling, who actually benefits here. The article got it completely backwards.)

Non Goodwill. If the purchase price is not allocated to goodwill where it be allocated etc?

Generally the other choice is hard assets. (I've not worked on a sports franchise, but will guess they have other choices such as player contracts etc.) On the business sales/acquisitions I have worked on this generally means more of the purchase allocated to machinery and equipment.

This is a disadvantage to the seller and an advantage (tax wise) to the buyer. Generally the buyer will have to recognize some of the income as ordinary income, instead of the lower rate LTCG, thus paying more income tax on the sale. The buyer will get to deduct expenses for equip and machinery faster. I.e., a shorter period than 15 years. A tax deduction today is generally more valuable than one next year or 15 years from now due to the 'time value of money'.

How did they arrive at $1B for goodwill? Likely a combination of a couple of things:

1. Negotiation. The tax lawyers and CPA's for both sides will control this valuation, each one advancing their client's interest.

2. Facts/reality. Eventually one must be prepared to support this valuation to the IRS and/or courts. E.g., I can't value the team's water cooler at $1B just because I can write it off over the much shorter period of 3 yrs. So, the parties are constrained by the boundaries of 'reasonableness'.

Fern

Thanks much. :thumbsup:

 

[werepossum]

Thanks for the explanation Fern. One question though - is this necessarily disadvantageous to Ballmer? I'd have thought even he would have limits as to how large a tax break he could use, and aren't there limits on how long such an expenditure can be carried forward?

One aside - my initial reaction is amazed respect for anyone who can build something whose goodwill alone is worth a billion dollars. I suppose I can thank Donald Sterling for disabusing me of that principle.

 

[alcoholbob]

Ballmer would have had to cough up at least 5 billion for the Lakers. He bought the Clippers.

 

[Fern]

Thanks for the explanation Fern. One question though - is this necessarily disadvantageous to Ballmer? I'd have thought even he would have limits as to how large a tax break he could use, and aren't there limits on how long such an expenditure can be carried forward?

One aside - my initial reaction is amazed respect for anyone who can build something whose goodwill alone is worth a billion dollars. I suppose I can thank Donald Sterling for disabusing me of that principle.

You're welcome.

(You can skip to the bottom for answers to your direct questions.)

I've been trying to keep this is as simple as possible and spoke in generalities in order to illustrate the more relevant points. Things that complicate the matter, particularly as regards his individual situation are:

1. How is his ownership structured? Is it held in a regular corporation, a partnership or even a trust? I don't know. If a corporation then there will be little to no direct impact on his own personal tax return. It will pay its own income tax. If held in a partnership entity he owns, the income and expenses will flow directly onto his personal tax return (I'll mention a bit more about this below). If held in a trust for others' benefit the income/deduction may flow to others' tax return and not his.

2. If the income/deductions flow to his own tax return then obviously his other tax attributes affect any benefit/disadvantage. E.g., if the expense of goodwill results in a loss for basketball operations and he has no other income then the expense results in no immediate benefit and is carried forward. If he has a lot of regular income from other sources then that expense from goodwill would be worth 39.6% (plus CA's rate). If instead he has a bunch of LTCG the deduction would be worth 20% (plus CA's rate).

Now to further complicate matters, let's say the items of income/deduction flow to his personal tax return because the ownership is in a partnership or S corp. If so, the question becomes does he 'materially participate' in running the franchise. If he does it's (income/expenses) treated like any other (trade or) business. If he does not, then he cannot deduct the expenses/losses from the franchise. They will be carried forward until he sells it. (Please note I'm simplifying, particularly as regards the latter.)

Now as to your direct questions:

1. Yes, there may be limits on the tax breaks. E.g., if he doesn't sufficiently work in the franchise he may get none until such time as he sells it ("Passive Activity Loss Limitation'). Otherwise, if the franchise produces losses in excess of his other income he will get no benefit from that excess loss/deduction and it will be carried forward until he has sufficient income to absorb them (NOL carry forward). And again, if the franchise is held in a corporation or a trust for others he gets nothing personally because nothing flows to his own personal tax return.

2 As regards limits on amounts carried forward: If it's a Net Operating Loss from the franchise that's in excess of his other taxable income it can be carried forward indefinitely until used up. If the franchise produces a loss that is limited by the Passive Activity Loss rules he must carry the losses forward until such time as he gets other Passive Activity Income to offset the PAL loss (unlikely IMO) or he sells the franchise and gets to take the deduction.

My apologies if that's confusing. I don't write tax law, I just try to understand it.

Fern

 

[werepossum]

You're welcome.

(You can skip to the bottom for answers to your direct questions.)

I've been trying to keep this is as simple as possible and spoke in generalities in order to illustrate the more relevant points. Things that complicate the matter, particularly as regards his individual situation are:

1. How is his ownership structured? Is it held in a regular corporation, a partnership or even a trust? I don't know. If a corporation then there will be little to no direct impact on his own personal tax return. It will pay its own income tax. If held in a partnership entity he owns, the income and expenses will flow directly onto his personal tax return (I'll mention a bit more about this below). If held in a trust for others' benefit the income/deduction may flow to others' tax return and not his.

2. If the income/deductions flow to his own tax return then obviously his other tax attributes affect any benefit/disadvantage. E.g., if the expense of goodwill results in a loss for basketball operations and he has no other income then the expense results in no immediate benefit and is carried forward. If he has a lot of regular income from other sources then that expense from goodwill would be worth 39.6% (plus CA's rate). If instead he has a bunch of LTCG the deduction would be worth 20% (plus CA's rate).

Now to further complicate matters, let's say the items of income/deduction flow to his personal tax return because the ownership is in a partnership or S corp. If so, the question becomes does he 'materially participate' in running the franchise. If he does it's (income/expenses) treated like any other (trade or) business. If he does not, then he cannot deduct the expenses/losses from the franchise. They will be carried forward until he sells it. (Please note I'm simplifying, particularly as regards the latter.)

Now as to your direct questions:

1. Yes, there may be limits on the tax breaks. E.g., if he doesn't sufficiently work in the franchise he may get none until such time as he sells it ("Passive Activity Loss Limitation'). Otherwise, if the franchise produces losses in excess of his other income he will get no benefit from that excess loss/deduction and it will be carried forward until he has sufficient income to absorb them (NOL carry forward). And again, if the franchise is held in a corporation or a trust for others he gets nothing personally because nothing flows to his own personal tax return.

2 As regards limits on amounts carried forward: If it's a Net Operating Loss from the franchise that's in excess of his other taxable income it can be carried forward indefinitely until used up. If the franchise produces a loss that is limited by the Passive Activity Loss rules he must carry the losses forward until such time as he gets other Passive Activity Income to offset the PAL loss (unlikely IMO) or he sells the franchise and gets to take the deduction.

My apologies if that's confusing. I don't write tax law, I just try to understand it.

Fern

Thanks again, and no, that was quite clear. (By which I mean that while I still don't know the answer to my question, I can follow why I don't know and how the answer would change depending on his behavior and structuring. )

 

[ElFenix]

posrep, fern