Unsportsmanlike Conduct: How Sports Team Owners Avoid Tax Liability

By: Emma Bertsch*                                                                            Posted: 2/25/2024

The tax system is an unfair playing field where high-income taxpayers often come out on top.[1]  However, in 2022, Congress passed the Inflation Reduction Act (“Act”), providing the Internal Revenue Service (IRS) with funds to level that playing field.[2]  The IRS then used these additional funds from the Act in an effort to promote fairness in the tax system by increasing the scrutiny placed on high-income taxpayers.[3]  One of the ways the IRS is putting wealthy taxpayers under the microscope is by launching its Sports Industry Losses campaign.[4]  This initiative will allow the Large Business and International (“LB&I”) division of the IRS to investigate sports industry owners that report “significant” tax losses.[5]

Amortization

Ordinarily, the word “loss” carries a negative connotation; however, thanks to a provision in the tax code called “amortization,” the bigger the loss is, the bigger the benefit the sports team owner incurs.[6]  Amortization provides for the depreciation of intangible assets.[7]  In the context of sports teams, these assets are things such as player and television contracts, the franchise itself, and season ticket holder lists.[8]  Despite the fact that these assets do not depreciate in the way that a physical asset, such as a car, would, the tax code treats them almost identically.[9]  Unlike a car, these assets typically gain, not lose, value over time.[10]  However, even though a team will likely become more valuable over time, its owner can still claim losses through amortization deductions.[11]

To illustrate the concept of amortization, imagine purchasing a sports team for $2 billion.[12]  About ninety percent of that original purchase price ($1.8 billion) is amortizable; therefore, the tax system views it as an asset that will lose value over time.[13]  That $1.8 billion “expense” is dispersed over fifteen years, so each year the owner of the team can deduct a $120 million expense.[14]  Now, considering the income side of the equation, imagine the owner has two sources of income: $50 million from the sports team and $150 million from another source, totaling $200 million of income.[15]  That large sum of money equates to a large tax burden; however, the team owner can subtract that $120 million expense from the $200 million total, and will only have to pay taxes on $80 million of income.[16]

Where the Benefit Culminates: Pass-through Entities

This occurrence highlights one of the benefits that pass-through entities, such as sports partnerships, regularly abuse.[17]  In a pass-through entity, income and losses flow from the entity directly to the entity’s partners, which are the team’s owners.[18]  Thus, if the entity itself incurs a loss in the year, that loss will flow to the partner’s taxable income (which includes sources of income other than the entity), and reduce it, which subsequently reduces their tax liability.[19]  For example, Steve Ballmer, the owner of the Los Angeles Clippers, was recently able to write off $700 million in income, despite the team’s profitability.[20]    

The Predicted Effectiveness of the IRS Campaign

As stated above, the LB&I Division of the IRS plans to scrutinize partnerships that report significant, and thus, suspicious, tax losses.[21]  It is unlikely that the IRS will find that these team owners are not complying with the tax code, as it is the tax code itself that allows them to take these losses in the first place.[22]  This increased scrutiny will merely cause the partners of sports teams to be more diligent in their record keeping to demonstrate to the IRS that the deductions they take are proper.[23]  The only real price owners pay for utilizing the “pass-through” method materializes when they sell the team, as the deductions they have previously taken reduce their cost basis and in turn increases the gain they will have to pay taxes on.[24]  However, most owners hold on to their teams until death and pass the ownership rights to their heirs, who receive a “stepped-up basis” in the entity equal to its fair market value, and allows the heirs to evade liability on the increased value of the team.[25]  Therefore, real change must take place within the tax code itself, by ensuring that “the wealthiest Americans are paying their fair share of taxes.”[26]  However, the overturning of Chevron U.S.A., Inc. v. Natural Resources Defense Council, Inc.[27] has put the IRS in a vulnerable position where it may incur challenges to its authority.[28]  Thus, although the IRS is focusing its efforts on regulating wealthy taxpayers, those same wealthy taxpayers may be able to weaponize courts’ potential willingness to overturn or modify IRS regulations to their advantage.[29]  Although it may be difficult to actually find these sports team owners non-compliant with the law, the new campaign will hopefully shed light on the regressive elements of a so-called “progressive” tax code.[30] 

*Staff Writer, Jeffrey S. Moorad Sports Law Journal, J.D. Candidate, May 2026, Villanova University Charles Widger School of Law.

[1] See Guinevere Moore, IRS Tells Sports Owners to Get Ready for the Full Court Press, Forbes (Feb. 13, 2024, 3:11 PM), https://www.forbes.com/sites/irswatch/2024/02/13/irs-tells-sports-owners-to-get-ready-for-the-full-court-press/ (noting inequity in IRS enforcement efforts between high and low-income taxpayers).  “The IRS is routinely criticized for focusing enforcement on low-income taxpayers who claim tax credits unavailable to high-income taxpayers, such as the Earned Income Tax Credit.”  See id. (noting ease and lack of resources needed to scrutinize issues central to low-income taxpayers).

[2] See Arianna Fano, Breaking Down the Federal Tax Gap, Bipartisan Pol’y Ctr. (June 27, 2024), https://bipartisanpolicy.org/explainer/breaking-down-the-federal-tax-gap/ (describing Act as increasing IRS funding by $80 million).  Since the law’s enactment, $20 million have been rescinded.  See id. (contributing reduction in funds to Congress’s appropriations agreement for 2024 fiscal year).

[3] See id. (noting before Act was officially passed, IRS planned to put funds towards auditing high-income taxpayers); see also Moore, supra note 1 (noting Act provided “much needed funds” to IRS).

[4] See Sheri A. Dillon, Jennifer Breen, James G. Steele III & Eric J. Albersfiedler, High-Stakes Game: IRS ‘Goes on the Offense’ Against Sports Industry Partnership Losses, Morgan Lewis & Bockius LLP (Feb. 6, 2024), https://www.morganlewis.com/pubs/2024/02/high-stakes-game-irs-goes-on-the-offense-against-sports-industry-partnership-losses (describing IRS’s intention as investigating whether taxpayers are in compliance with tax law).

[5] See id. (noting IRS’s suspicion that large tax losses indicate significant noncompliance).

[6] See 26 U.S.C. § 195(b)(1)(A)(i)–(ii) (1980) (allowing initial deduction of $5,000 when team is purchased); see also id. § 195(b)(1)(B) (allowing deduction for remainder of intangible assets attributed to purchase of team over fifteen years).

[7] See Robert Faturechi, Justin Elliot & Ellis Simani, The Billionaire Playbook: How Sports Owners Use Their Teams to Avoid Millions in Taxes, ProPublica (July 8, 2021, 5:00 AM), https://www.propublica.org/article/the-billionaire-playbook-how-sports-owners-use-their-teams-to-avoid-millions-in-taxes (describing amortization as “depreciating nonphysical assets”). 

[8] See Miri Forster, Murray Solomon & Cindy M. Levine, Full Court Press: IRS Targets Compliance in the Sports Industry, EisnerAmper LLP (May 22, 2024), https://www.eisneramper.com/insights/tax/sports-industry-compliance-0524/#:~:text=Sports%20teams%2C%20while%20often%20profitable,of%20intangibles%20over%2015%20years (describing intangible assets attributable to sports teams); see also Clay Hodges & Daniel Quintanta, Sports Team Owners Can Still Win on Taxes Despite IRS Scrutiny, Bloomberg Tax (Apr. 26, 2024, 4:30 AM), https://news.bloombergtax.com/tax-insights-and-commentary/sports-team-owners-can-still-win-on-taxes-despite-irs-scrutiny (noting because most sports franchises have monopolies in their local areas, franchise and TV rights are extremely valuable).

[9] See Faturechi et al., supra note 7 (noting tax law allows billionaires to treat assets that do not lose value as deteriorating over time).

[10] See Sarah Anderson & Bob Lord, Sports Teams; The Everlasting Tax Shelter for Billionaires, Inequality.org (July 12, 2021), https://inequality.org/article/sports-teams-tax-shelter-billionaires/ (noting commonality of intangible assets increasing in value rather than decreasing).

[11] See id. (noting consistent increase in major sports franchises over past twenty years); see also Dan Lyons, How Private Equity Can Rewrite the Financial Playbook for Sports Franchises, PWC (Dec. 18, 2024), https://www.pwc.com/us/en/industries/tmt/library/private-equity-in-sports.html (noting average value of NFL franchise increased by $1.2 billion from 2013 to 2024).

[12] See Faturechi et al., supra note 7 (providing example of mechanisms of amortization); see also Amy Fontinelle, What is an Amortization Schedule? How to Calculate with Formula, Investopedia (Oct. 24, 2024), https://www.investopedia.com/terms/a/amortization.asp (explaining intangible assets are amortized using straight-line method); Straight Line Amortization Definition, Acct. Tools (Nov. 3, 2024), https://www.accountingtools.com/articles/straight-line-amortization.html (describing straight line amortization as expensing intangible asset at consistent rate).

[13] See Faturechi et al., supra note 7 (noting because “the asset” purports to lose value over time, it can be treated as expense).  But see Bryce Erickson, An Investor’s View of Major League Sports Franchises: Outsized Returns or a Risky Play?, Mercer Cap., https://mercercapital.com/article/investors-view-major-league-sports/ (last visited Feb. 7, 2025) (noting significant increase in value of MLB and NHL TV contracts).

[14] See Faturechi et al., supra note 7 (explaining total amortization amount is about $1.8 billion, which equals $120 million per year for fifteen years); see also Amortization in Accounting 101, Thomson Reuters (Oct. 5, 2023), https://tax.thomsonreuters.com/blog/amortization-in-accounting-101/ (describing amortization period as amount of time asset is expected to generate revenue).

[15] See Faturechi et al., supra note 7 (introducing concept of pass-through entities); see also Adam Hayes, What is a Flow-Through (Pass-Through) Entity, Types, Pros & Cons, Investopedia (Aug. 31, 2024), https://www.investopedia.com/terms/f/flow-through.asp (noting it is partners, shareholders, or investors who are taxed on entity revenues, not entity itself).  “Flow-through entities are sometimes referred to as disregarded entities because the IRS effectively ignores them.”  See id. (explaining how pass-through entities are used to avoid being taxed on earnings twice).

[16] See Faturechi et al., supra note 7 (noting deduction of $120 million saves about $45 million in taxes per year); see also Julia Kagan, Tax Shield: Definition, Formula for Calculation, and Example, Investopedia (Dec. 13, 2023), https://www.investopedia.com/terms/t/taxshield.asp (describing amortization as “tax shield”).

[17] See Forster et al., supra note 8 (noting sports partnerships are identical to partnerships in other industries).

[18] See id. (noting items such as income, loss, and deduction all “pass-through”).

[19] See id. (describing ability of owners to use team losses to offset other income).  Therefore, the entity’s losses can be used to offset the partner’s total taxable income, which includes income derived from other sources.  See id. (noting this benefit has increased value of sports teams).

[20] See Scott Simon, Buying Losing Sports Teams is Still Great for Business – Thanks to the Tax Breaks, NPR (July 15, 2023, 8:05 AM), https://www.npr.org/2023/07/15/1187929847/buying-losing-sports-teams-is-still-great-for-business-thanks-to-the-tax-breaks (explaining Ballmer used tax write-off to lessen his income from other sources).

[21] See Susan Elizabeth Seabrook, James N. Mastracchio, Karl Kurzatkowski & Nicholas Netland, Taking Aim: IRS’s Compliance Campaign Makes Sports Industry Target of Enforcement Measures, Winston & Strawn LLP (Apr. 9, 2024), https://www.winston.com/en/blogs-and-podcasts/tax-impacts/taking-aim-irss-compliance-campaign-makes-sports-industry-target-of-enforcement-measures (noting that significant losses may indicate non-compliance with Internal Revenue Code).

[22] See Simon, supra note 20 (noting tendency of owners to take advantage of loopholes in United States tax code).

[23] See Hodges et al., supra note 8 (noting partners should prepare for increased scrutiny by keeping adequate documentation of records).

[24] See Anderson et al., supra note 10 (describing how amortization expenses come back as income); see also Adam Hayes, Know Your Cost Basis for Bonds, Investopedia, https://www.investopedia.com/articles/investing/061013/know-your-cost-basis-bonds.asp#:~:text=If%20you%20purchased%20the%20bond,the%20par%20value%20at%20maturity (last visited Feb. 11, 2025) (describing how amortization reduces cost basis, which increases amount of gain that one would receive upon sale of team). 

[25] See Anderson et al., supra note 10 (describing another tax loophole wealthy taxpayers can take advantage of using); see also 26 U.S.C. § 1014(a)(1) (1954) (providing heir with basis equal to fair market value of property at date of decedent’s death).

[26] See Progressive Principles for Tax Reforms, Cong. Progressive Caucus, https://progressives.house.gov/progressive-principles-for-tax-reform (last visited Feb. 8, 2024) (explaining how wealthy taxpayers receive tax breaks that they do not need).

[27] Chevron, U.S.A., Inc. v. NRDC, Inc., 467 U.S. 837 (1984).

[28] See Joseph A. Peterson, How the Reversal of Chevron Will Impact the IRS, Plunkett Cooney PC (Sept. 9, 2024), https://www.plunkettcooney.com/dontbetthebusinessblog/Chevron-decision-impacts-IRS#:~:text=The%20reversal%20of%20Chevron%20places,through%20the%20issuance%20of%20regulations (noting taxpayers “may benefit from new opportunities to challenge unfavorable IRS regulations”).  The overturning of Chevron marks a significant shift in IRS’s regulatory power, as courts are now tasked with determining the “best” interpretation of the statute, rather than deferring to the agency’s interpretation; this shift gives taxpayers a much better opportunity to succeed in their challenges.  See id. (noting impact Chevron will have on how IRS resolves disputes with taxpayers); see also Timothy S. Shuman, Susan E. Ryba, Parisa M. Griess & Samuel J. Preston, Supreme Court Overrules Chevron, Opening Door for New Tax Reg Challenges, McDermott Will & Emery (July 10, 2024), https://www.mwe.com/insights/supreme-court-overrules-chevron-opening-door-for-new-tax-reg-challenges/ (“Challenges to some regulations that would have failed in the Chevron era may now succeed after Loper Bright.”).

[29] See Peterson, supra note 27 (noting potential of Chevron’s overturning reducing tax liabilities or compliance burdens).

[30] See Nick Buffie, 5 Little-Known Facts About Taxes and Inequality in America, Am. Progress (Aug. 30, 2022), https://www.americanprogress.org/article/5-little-known-facts-about-taxes-and-inequality-in-america/ (analyzing highly regressive elements of tax code).  “Americans with less than five-figure incomes pay an effective payroll tax rate of 14.1 percent, while those making seven-figure incomes or more pay just 1.9 percent.”  See id. (explaining low-income Americans paying higher payroll tax rates than wealthy Americans).  Other elements of the tax code that are highly regressive include those pertaining to the state and local tax deduction, the mortgage interest deduction, and long-term capital gains and qualified dividends.  See id. (noting wealthy taxpayers’ use of deductions for “pass-through income, state and local taxes, and mortgage interest payments”).