The IRS has launched a campaign to investigate whether wealthy taxpayers are breaking the law when they use their sports team ownership to save millions of dollars in taxes.
The effort will focus on sports industry organizations reporting “significant tax losses” and “determine whether the income and deductions causing the losses are lawful,” according to an IRS announcement earlier this year. That's what it means. The announcement consisted of a single sentence on a webpage dedicated to the IRS division's compliance campaign focused on large corporations, without specifying what types of fraud the agency would investigate. .
The effort comes after ProPublica used leaked IRS data to reveal that billionaire team owners frequently reported incomes that were significantly lower than their real-world incomes.
When you purchase a business, you can often deduct nearly the entire sale price from your income for several years afterwards. This allows them to pay less tax. The underlying logic is that the purchase price consists of assets such as buildings, equipment, and patents, which deteriorate over time and should therefore be counted as expenses. Sports franchise owners routinely take advantage of such deductions, which can amount to hundreds of millions of dollars.
But there are few industries whose tax treatment is as divorced from economic realities as professional sports. Because sports franchises are essentially monopolies, a team's most valuable assets, such as television contracts and player contracts, are virtually guaranteed a turnaround. There is little risk that players will stop playing on their teams or that television stations will stop showing games. But team owners will still have the value of those assets deducted from their taxable income over time, in some cases worth billions of dollars.
This allows billionaire sports team owners to pay much lower income tax rates than the athletes they employ and even the low-wage workers who sell food and clean stadiums.
A 2021 article in ProPublica describes how owners convinced the IRS to accept “gimmicks” that allowed them to take huge depreciations, starting decades ago with the late baseball impresario Bill Veeck. I followed him.
Among those who benefited was Steve Ballmer, the billionaire owner of the Los Angeles Clippers and former CEO of Microsoft. His tax records show that his basketball team reported $700 million in tax losses in recent years, even though the Clippers' actual financial results often showed they were in the black. It has been found.
This allowed Ballmer to legally pay no taxes on his real-world Clippers profits and offset his other income to reduce his taxes. A spokesperson for Ballmer said at the time that Ballmer “has always paid the taxes due.”
This practice helps create a counterintuitive tax picture that overturns conventional wisdom about how taxation works in America. ProPublica notes that billionaire owners like Ballmer consistently pay lower income tax rates than billionaire players, often at rates paid by concession workers who staff stadiums. was found to be lower than
The IRS did not immediately respond to questions from ProPublica about the impetus for the effort or the fraud being investigated.
Law firm Morgan Lewis said in an analysis for clients that the IRS' campaign is driven by several factors, including an increase in enforcement budgets, criticism that it doesn't do enough audits of wealthy taxpayers, and ProPublica reporting. It is said that there was.
“The IRS may be acting on its promise to restore 'fairness' to tax compliance by increasing its attacks on partnerships and wealthy individuals, including sports team owners,” the company said. writing. “With the Sports Industry Loss Campaign, it looks like the sports industry will be his next enemy in the IRS arena.”
Clay Hodges, a tax planning expert at Moss Adams, said in an interview that the IRS typically chooses areas to focus enforcement on based on evidence of unpaid taxes. He noted that it's impossible to determine the IRS' motives based on public disclosures, but that headlines about sports team owners selling their teams for huge profits regularly appear.
“The IRS is very strategic when announcing these campaigns,” he says. “This is more than just a fishing expedition. They think it's going to pay off.”
