Ex-Grizzlies Owners Lose $10.7M Tax Claim From Mike Conley Play
The former owners of the Memphis Grizzlies have come up short again in their attempt to claim a $10.7 million tax deduction for deferred compensation owed to Mike Conley and Zach Randolph.
The U.S. Court of Appeals for the Seventh Circuit on Wednesday affirmed a ruling by the U.S. Tax Court to uphold an IRS disallowance of Hoops LP deduction claimed at the close of the 2012 tax year.
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The dispute, now more than a decade old, centers around how the deferred compensation liability was handled before and after Memphis Basketball (a group led by Robert Pera) purchased the team in 2012 from Hoops, a group led by Michael Heisley, who passed away in 2014. The deferred compensation stemmed from the play of Conley and Randolph in the 2009, 2010 and 2011 seasons.
A three-judge panel held that under federal tax law, Hoops could only deduct deferred compensation expenses when it pays the employees or contributes to a trust, pension fund or other qualified plan.
“Hoops did not do either,” Judge Michael Scudder wrote.
Hoops sees the situation and legal consequences differently. The group stresses that Memphis Basketball assumed the liability to pay Conley and Randolph as part of the purchase, and this assumption was reflected in a lower purchase price for the franchise, which sold for a reported $377 million. If this $10.7 million obligation didn’t exist, Hoops contends, Memphis Basketball would have paid $10.7 million more for the team.
Hoops maintains that under a treasury regulation, the buyer’s assumption of the liability counts as an ordinary business expense that is deductible at the time of the sale. As Hoops sees it, the $10.7 million should be viewed as a (deductible) “deemed payment” in an asset-sale transaction, not as a (non-deductible) deferred compensation liability.
The IRS, U.S. Tax Court and now a three-judge appellate panel disagrees with Hoops’ interpretation.
Scudder wrote that the federal law in question provides “plain and highly specific direction.” The judge stressed that there was no economic barrier for the team to pay Conley and Randolph since “both players had played in past seasons and thereby earned the deferred compensation.” The team deciding not to pay them for services already rendered doesn’t mean it can take a deduction, Scudder emphasized.
“Given the flurry of franchise sales in recent years,” Robert Raiola CPA, the director of the Sports and Entertainment Group at PKF O’Connor Davies and a Sportico contributor, said in an interview, “The case serves as timely precedent, and warning, for owners who are looking to sell and who have deferred compensation liabilities.”
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