When Steve Ballmer agreed to pay $2 billion to buy the Los Angeles Clippers, just about everybody agreed that a club located in the L.A. media market with signature stars like Chris Paul and Blake Griffin represented an attractive investment. Many observers wondered, though, whether the former Microsoft CEO had drastically overvalued the franchise that Donald and Shelly Sterling had owned since 1981; he had, after all, paid nearly four times as much for the Clippers as anyone had ever paid for any NBA franchise.
Some concerns about the future profitability of such a high-priced enterprise were allayed by the NBA's monstrous new nine-year, $24 billion broadcast rights deal, of course. As it turns out, though, Ballmer's massive outlay might have been a savvy business move for an entirely different reason.
The famously boisterous billionaire "stands to gain as much as $1 [billion] in tax benefits as a result of his $2 [billion] purchase," according to Arash Massoudi and Alan Livsey of the Financial Times:
An FT analysis of US tax laws shows that Mr Ballmer could claim about half of the purchase price in current terms over the next 15 years against his taxable income. The deduction can be claimed under a little-known feature of the tax code covering so-called active owners of sports franchises.
The exemption for sports teams was brought into law about a decade ago to resolve concerns over how media rights were accounted for, tax experts said. But they also create a powerful incentive for wealthy individuals to indulge in projects they are passionate about, in effect subsidised by the US government. [...]
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.
In this case, Mr Ballmer can spread the goodwill over 15 years and reduce his tax liability on his other income by a certain amount for each of those years.
Using a conservative model that assumes Mr Ballmer could account for $1.5bn in goodwill and a re-investment rate of 7 per cent, the potential tax shelter equates to about $1bn in current terms. Representatives for the LA Clippers and Mr Ballmer declined to comment.
As we consider this "goodwill" clause — rather amazing that something capable of allowing a billionaire to land such a write-off has the same name as the nonprofit retail thrift store chain, isn't it? — it's hard not to think of Washington Wizards owner Ted Leonsis' comments at the press conference announcing the NBA's new TV deal with ESPN and Turner Sports.
"There's never been a better time to be an owner of an NBA franchise or frankly any professional sports team," Leonsis said. And if you can halve a multibillion-dollar shell-out just through some creative accounting, I mean, it's hard to disagree.
Even independent of the tax implications, Ballmer has been bullish on the prospect of his $2 billion investment paying major dividends. A recent feature in Bloomberg BusinessWeek said he "figures the Clippers investment will match or outperform a Standard & Poor’s 500-stock index fund," and quoted him as saying, “We will make good money.”
He struck similar notes during interviews with ESPN.com's Ramona Shelburne and Charlie Rose, trumpeting the "real earnings" of the Clippers, the potential for bolstering revenues just by optimizing business practices after years of mismanagement by the Sterlings, the new TV rights windfall, and the tremendous value of the L.A. market as reasons why the franchise will wind up being well worth its remarkable sticker price.
"I think a lot of people would tell you I paid an L.A. beachfront price, not a Seattle beachfront price, for the team," Ballmer said in August.
Apparently, that beach can be found in the Cayman Islands.
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