Big Win: When Josh Harris, owner of the Philadelphia 76ers, purchases the Washington Commanders later this year, he could expect a massive tax write-off.
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The new ownership group of the Commanders—which includes two billionaires and Magic Johnson—are set to receive major tax write-offs as part of the $6 billion purchase.
The pending $6 billion purchase of the Washington Commanders by a group led by Josh Harris from Dan Snyder could come with hundreds of millions of dollars in tax deductions.
When a business is acquired, U.S. tax law requires that the intangible assets are amortizable for tax purposes under Sec. 197(a) “ratably over 15 years, beginning in the month of acquisition, regardless of the useful or legal life of the underlying assets.” For the purchase of a sports team, typically at least 80% of the price is allocated to intangible assets. For the sale of the Commanders, this would mean at least $4.8 billion could be written off (deducted from earnings) over 15 years.
It’s a nice tax advantage but there are certain stipulations.
One is how the deal is structured. As tax expert Robert Willens points out: “The buyer will want to structure the deal as an ‘asset acquisition’ and that will be easy to do so long as Mr. Snyder owns the team in his individual capacity or through a partnership or ‘S’ corporation, as opposed to a ‘C’ corporation. With the deal structured as an asset acquisition, those owners who will be materially participating in the operation of the team, those tax deductions, on a present value basis, probably reduce the effective cost of the purchase, vis a vis the ‘advertised’ cost [$6 billion], by about 15% to 20% [$900 million to $1.2 billion].” That’s not an issue as the Commanders are a owned individually by Dan Snyder, his wife, Tanya, and Dan’s sister Michelle.
Also, the tax “savings” only come into play if there are earnings to write down, The earnings can be at the business being acquired (in this case the Commanders) or other earnings from the operators of the NFL team. This should also not be a problem for the Commanders. For the five years through 2021, the team generated aggregate operating income—earnings before interest, taxes, depreciation and amortization—of $530 million, according to Forbes’ figures. And according to the document the Harris group provided to potential investors, the Commanders had an operating income of $87 million in 2022 and will have over $100 million in operating income this year. By 2031, that figure should approach $260 million even without a new stadium, according to the document.
Moreover, the buyers of the Commanders could also apply the write off of the purchase of the football team to their earnings outside of football. Billionaire Josh Harris, who would be the managing partner of the Commanders if the deal is consummated, earns most of his wealth from Apollo Group Management. Harris, who Forbes estimates is worth $6.4 billion, is also the owner of the NBA’s Philadelphia 76ers and the NHL’s New Jersey Devils. Mitchell Rales, who would be the largest limited partner among the 20 LPs, would have a 15% stake. Rales makes his $5.5 billion fortune from Danaher.
In terms of the members of the Harris group that would be “materially participating in the operation of the team,” that participation is a function of the amount of time the individual devotes to the activity, not his or her percentage ownership.
As the general partner, Harris, with a 30% stake, would certainly qualify. Rales, with 15%, would likely be part of running the team. As for Magic Johnson, who has a minority stake in the Harris group, it seems unlikely that the NBA legend will be a material participant. Willens believes Johnson can probably use any tax losses from the Commanders, even though they are passive in nature, to shelter his passive income from the Los Angeles Dodgers.
Assuming a $1.1 billion take write off (the midpoint of $900 million to $1.2 billion), Harris would have a real cost savings of $315 million and Rales would save around $158 million. Johnson would receive an estimated $42 million write-off. So even if the other 19 limited partners are not material participants in running the Commanders, all told, the new owners should get aabout $500 million of tax deductions.
The NFL could vote on the sale of the Commanders in late July.
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Source: https://www.forbes.com/sites/mikeozanian/2023/06/22/harris-group-will-get-half-a-billion-dollars-of-tax-deductions-from-buying-washington-commanders/