Court Rules Robert Pera And Michael Heisley Can’t Get Tax Deduction From Sale Of Memphis Grizzlies

In 2012 Robert Pera purchased the Memphis Grizzlies from Michael Heisley for $377 million. At the time of the sale, the team owed deferred compensation to Zach Randolph and Mike Conley of $10.7 million. Pera assumed the deferred compensation liability and ultimately made the payments to the two players, some years after the sale. 

 Heisley sought to claim a tax deduction for the deferred compensation but yesterday the court ruled against him. Why? Deferred compensation is only deductible in the year in which the beneficiaries of the deferred compensation receive it. In this insance, Randolph and Conley had not received the compensation in the year in which the sale took place. 

 Moreover, Pera was not entitled to deduct the compensation in the year it was paid, because he merely “assumed” the seller’s liability, and did not “incur” the liability, such that he could deduct it when it was finally satisfied. 

So now we have a situation where nobody gets a tax deduction for the deferred compensation. To add insult to injury, the seller had to take the assumed liability into account in computing his gain from the sale of the Grizzlies, which, by the way, was a tidy $300 million. 

 It’s hard to believe that the sophisticated owner of the Grizzlies got himself into this situation. In 1989, the I.R.S. had issued a ruling presaging the court’s decision.

Explains tax expert Robert Willens, “The moral of the story is that, in connection with a sale of a franchise, the seller should always, without fail, discharge all of his or her deferred compensation liabilities. This will provide the seller with a much needed tax deduction in the year of the sale. Naturally, since the buyer will be relieved of the responsibility of assuming that liability, he or she will pay more for the team, which is now free of the liability.”

For Pera, the solace is the Grizzlies are now worth $1.5 billion.