A Tax Court battle over whether Tribune Media Co. owes more than $200 million in taxes and penalties on the sale of the Chicago Cubs baseball team began October 28.
The dispute in Tribune Media Co. v. Commissioner turns on whether Tribune’s guarantees of debt enabled it to effectively sell the Chicago Cubs to the Ricketts family in 2009 without triggering the built-in gain on the sale of the team and its associated assets by using a leveraged partnership structure.
Tribune filed for chapter 11 bankruptcy during the period when bidding was open for the Cubs in 2008, but in an opening statement on behalf of the taxpayer, Joel V. Williamson of Mayer Brown LLP said the bankruptcy court found that the debt guarantees were valid and enforceable.
In its opening statement, the government said the guarantees at issue in the case were a “facade,” and that they “strike out” for several reasons, one of which is that the guarantees were for collection, not payment. That means lenders had to jump through several additional hoops before they could go after Tribune for the amounts owed.
The case, which is slated to last two weeks, involves several witnesses and loads of documents. The exhibits were so voluminous that they were tucked under the courtroom benches stretching to the back wall.
Tribune is no stranger to the use of leveraged partnerships to avoid gain on the sale of businesses. In 2015 the company settled a long-running dispute with the IRS over the use of a partnership and debt guarantees to sell Newsday Media Group. According to a 2016 Form 8-K, its total tax payment related to the transaction was $239 million.
Chicago Cubs Sale
Tribune acquired the Cubs, Wrigley Field, and other assets associated with the team in 1981 for $20.5 million. At the time, Tribune was a C corporation.
In 2007 investor Samuel Zell organized a leveraged buyout of Tribune stock, and on January 1, 2008, he organized the company as an S corporation that was wholly owned by an employee stock ownership plan, according to the government’s September 27 pretrial memorandum.
At the time of the conversion to an S corporation, Tribune had an unrealized built-in gain on its assets in the hundreds of millions of dollars. If the company disposed of the assets within a 10-year period, it would owe an entity-level tax under section 1374(a).
Shortly after the conversion, Tribune wanted to sell the Cubs and opened a bidding process. According to the government’s memorandum, the company laid out its plan: There would be a debt-financed purchase of the Cubs’ assets by a partnership, Tribune would guarantee debt, there would be a special distribution to Tribune equal to 95 percent of the Cubs’ assets, and there would be an agreement not to sell the Cubs’ assets until after January 1, 2018.
Tribune filed for bankruptcy, and about the same time, the Ricketts family agreed to purchase the Cubs. To effectuate the sale, Chicago Baseball Holdings (CBH) was formed as a partnership. Tribune contributed the Cubs' assets to the partnership, and the Ricketts family, through associate entities, put up $150 million in cash for beneficial use of the assets. CBH borrowed more than $650 million in senior and subordinated debt and distributed proceeds to Tribune, which attempted to avoid $181 million of built-in gains tax, according to the government.
Tribune Weighs In
In a September 27 pretrial memorandum, the taxpayer said that under reg. section 1.707-5(b)(1) the distribution to Tribune is tax deferred to the extent of its allocable share of CBH's indebtedness. And to the extent that the distribution exceeds the taxpayer’s allocable share, the transaction is taxable as a disguised sale under reg. section 1.707-3(b).
The case turns on whether the guarantees are disregarded under the antiabuse test of the section 752 rules, the taxpayer said.
“In the end, all of respondent’s arguments about guarantees boil down to the observation that CBH was unlikely to default, its assets were highly valuable, and the guarantees were unlikely to be called,” the taxpayer argued in its memorandum. “None of these contentions is relevant under the constructive liquidation test or the anti-abuse rule.”
A year after the sale of the Cubs, the Tax Court ruled against taxpayers that engaged in a leveraged partnership business sale in Canal Corp. v. Commissioner, 135 T.C. 199 (2010).
In his opening statement, Williamson said the Cubs case was different from Canal for several reasons, one of which is that in Canal, a thinly capitalized subsidiary provided a guarantee in the form of an indemnity on the debt used to provide the distribution. In Tribune, Williamson noted that the parent provided the guarantee.
The case is Tribune Media Co. v. Commissioner, No. 020940-16 (T.C. filed Oct. 28, 2019).