The Upcoming Baltimore Orioles Sale Is Structured To Avoid Capital Gains Taxes

The Baltimore Orioles, the 2023 champions of the American League East Division, might quickly have a brand new proprietor. The present proprietor, Peter Angelos, by way of his household, is reportedly promoting the staff to billionaire David Rubenstein and his funding group (who additionally consists of Orioles Corridor of Famer Cal Ripken Jr.) for $1.725 billion.

However it’s not an easy sale. Rubenstein and his group will initially buy 40% of the staff. The remaining 60% shall be bought, reportedly for tax causes, after 94-year-old Angelos passes away. Angelos bought the staff in 1993 for $173 million. If the sale have been to happen now, Angelos would face an estimated $250 million capital positive aspects tax on the roughly $1.5 billion revenue. However by ready till after his passing, the premise step-up rule would enhance his price foundation to present market worth as a substitute of his authentic buy worth. If the staff is bought instantly thereafter, there shall be little to no capital positive aspects tax on the sale.

Rubenstein and his group would additionally get pleasure from some tax advantages as the brand new house owners. In response to Forbes, if the consumers are capable of construction this as an asset sale, they are going to be capable of make the most of any losses incurred to offset different revenue. Nevertheless, buyers who don’t materially take part within the staff administration can solely use their losses to offset passive revenue equivalent to actual property rental revenue.

What is just not clear is who will management the Orioles after Rubenstein’s preliminary 40% buy. On one hand, the Angelos household may nonetheless management the staff by way of its majority possession. Then again, the Angelos household may enable Rubenstein to regulate the staff after the preliminary buy. If this occurs, the IRS might attempt to reclassify the transaction as if 100% of the staff was bought whereas Peter Angelos was nonetheless alive and thus set off the capital positive aspects tax. The IRS may argue that this two-step transaction was purely tax motivated, particularly to keep away from the capital positive aspects tax.

The IRS has recharacterized transactions no matter authorized type if the general objective of the transaction was to keep away from taxes. This was generally called the “substance over type” doctrine. However they might additionally use the codified “financial substance doctrine” the place a transaction has no financial or enterprise function apart from to keep away from taxes. Or if a number of transactions are concerned, the IRS might use the step transaction doctrine to mix all of those transactions into one, significantly the place every transaction by itself has no enterprise function.

However in recent times, courts have been skeptical of the use by the IRS of recharacterization arguments, significantly the place the tax legislation permits deferral or avoidance. In 2017 and 2018, the First, Second, and Sixth Circuit Courts of Enchantment determined three separate however associated instances the place the taxpayers used each a Roth IRA and Home Worldwide Gross sales Companies (DISC) to keep away from taxes on company income. The IRS conceded that the taxpayers correctly adopted the legal guidelines on Roth IRAs and DISCs however used them to get round an easy taxable company distribution of income. The appellate courts sided with the taxpayers stating that whereas the substance over type doctrines enable the IRS to recharacterize sham transactions, it doesn’t give the IRS the facility to second-guess the intent of Congress and proper their oversights. In 2021, the Ninth Circuit equally held for the taxpayer who used each a Roth IRA and a Overseas Gross sales Company to keep away from taxes.

Even when the sale avoids capital positive aspects tax, Peter Angelos’s property shall be topic to federal property taxes which is as excessive as 40% on the prime bracket. Additionally, Maryland additionally has its personal property tax.

Nevertheless, the transaction is just not but full. The league should carry out due diligence, and 75% of MLB house owners should approve the sale.

Steven Chung is a tax lawyer in Los Angeles, California. He helps individuals with fundamental tax planning and resolve tax disputes. He’s additionally sympathetic to individuals with giant scholar loans. He might be reached by way of e-mail at stevenchungatl@gmail.com. Or you possibly can join with him on Twitter (@stevenchung) and join with him on LinkedIn.