Tax Expert Weighs In On Fate Of Tampa Bay Rays Lawsuits

The nasty legal battle that began in May 2021 between Tampa Bay Rays principal owner Stuart Sternberg and a group of the baseball team’s limited partners—Robert Kleinert, Markel Gary, the MacDougald Family Limited Partnership, Stephen M. Waters and a trust in Waters’ name—has become public in recent days.

The LPs’ biggest gripes in their three lawsuits are that Sternberg transferred the Rays into a different business entity, the Rays Baseball Club, without their knowledge; that they have had to pay taxes on profits for which they received no distribution from the team (partnership agreements often require the partnership to make distributions at least in a sufficient way to allow the partners to fund the tax liability they are expected to incur); and that Sternberg did not disclose that a $376 million payment from the sale of the team’s share in regional sports network Fox Sports Sun (now known as Bally Sports Sun) had been received and transferred to the new entity. The LPs are also seeking $30 million in damages.

The fight between Sternberg and LPs aside, the dispute is tarnishing the Rays’ image at a time when the team has been seeking a lot of public money for a new ballpark. The lawsuits are complicating ballpark discussions, and without a new place to play, the Rays—kept afloat by $30 million or so in revenue sharing from baseball’s richest teams—might be forced to move.

Five days ago, the Rays released a statement on the lawsuits that in part says: “The allegation that a simple and commonplace corporate reorganization stripped the limited partners of the value of their investments and their rights and protections is patently false, and the limited partners know that. The reorganization was approved by Major League Baseball and the team’s lenders, among others. It had no impact on any aspect of the limited partners’ ownership interests or partnership rights.”

A day later, the LPs issued a statement via their lawyers: “We are disappointed that Sternberg and Rays Baseball Club have resorted to attempting a public character assassination of these limited partners for exercising their legal rights under Florida statutory and common law. Our clients stand by their claims and have certainly never made any allegations that they know to be false. As is apparent from the face of the complaints, the lawsuits appropriately assert different claims, both procedurally and substantively.”

Which side is likely to prevail in this brouhaha? We put that question to tax and accounting guru Robert Willens.

“If he (Sternberg) simply transferred his partnership interest to a controlled entity, thus interposing an entity between him and the partnership, without more, then it seems to me the minority partners have a weak case since such a transfer would seem unlikely to adversely affect their interests in the team,” Willens says. But there’s more: “On the other hand, if, after conveying the interest to the controlled entity, he caused the partnership to distribute the controlled entity’s share of the partnership assets to it, which certainly might be the case, then their case gets a lot stronger since ‘stripping’ the partnership of its assets, by moving them upstream into an entity controlled by the majority partner, could, as their complaint alleges, turn the partnership into a mere shell, without real substance, a partnership ‘in name and semblance only.’”

Does Sternberg’s assertion that MLB and bankers gave the Rays’ reorganization a stamp of approval mean much? “I’m not sure that getting MLB and the bankers’ seal of approval means much from the point of view of the minority partners,” says Willens. “MLB, you would think, is solely concerned with the question of whether the reorganization affects the team’s ability to operate, and the banks are concerned with ensuring that the reorganization does not impair the collateral for the loans. I don’t think either MLB or the banks are particularly concerned with the interests of the minority partners.”

Even if the LPs were to prevail, sports bankers say it’s unlikely Sternberg would lose control of the Rays given the LPs involved own only 9.6% of the team combined. But it certainly doesn’t help the team’s image.