NFL Preparing for Owners To Restructure As Election, Possible Tax Changes Loom
The NFL is gearing up for the possibility that teams may rush to make ownership changes before the end of the year.
The league sent a memo Wednesday to executives at all 32 teams, reminding them of the approval process for ownership transactions, including those within families. In the memo, which was reviewed by Sportico, league lawyers said they understood there could be more year-end transactions in 2020 than in years prior, and urged teams to contact the league office “as soon as possible” so that it can review and approve those changes by the end of the year.
When asked about the memo, NFL spokesman Brian McCarthy said it was an annual reminder, part of standard information gathering at a busy time for owners. A handful of team executives and people who represent owners, however, say the unwritten subtext is the upcoming election.
Democratic presidential nominee Joe Biden has proposed a federal tax plan that varies significantly from current Republican president Donald Trump’s, particularly for the wealthiest Americans. Under Democratic leadership, capital gains tax, estate tax and gift tax could all increase, which means NFL owners and their families might save millions by making changes now. The league denies the Nov. 3 election had an impact on the memo.
It’s “not what you think it is,” McCarthy said. “It’s an annual memo the league sends to clubs as a reminder that if clubs have transactions (usually smaller limited partners) they want to consider to inform the league before the end of the year. That’s it.”
The memo is clear that this year could differ from a typical year. The league didn’t explain why it used that language.
Looming tax changes have been a consideration across the business and sports worlds for many months. As the Wilpon family was preparing to sell the New York Mets, it was their desire to complete the transaction in 2020 to avoid the possibility of a higher tax bill. New owner Steve Cohen is likely to be approved this week.
It’s a logical move, according to Robert Raiola, a tax expert and director of the Sports & Entertainment Group at PKF O’Connor Davies. “With the presidential election days away,” he said, “pro team owners are going to scrutinize different legal scenarios related to their assets.”
Should Biden and the Democrats win big next Tuesday, a number of NFL owners may choose to restructure ownership before the end of the year so as to take advantage of current tax rates, according to two people familiar with the memo. That could include minority stake sales, or changes like putting the team in a trust or gifting equity to children, both of which are common for NFL franchises.
The goal would be to complete those transactions before Dec. 31, according to one of the people. Should they happen in 2021, any Biden tax changes passed in his first year could be made retroactive to include the entire calendar year. They would likely not apply retroactively to transactions that occurred in 2020.
The value of an estate is currently subject to a tax rate of up to 40%, and the value is determined before distributions are made to heirs. Gifts are also subject to a tax rate of up to 40%. However, these taxes are levied only after a sizable exemption is exhausted. For 2020, the inflation-adjusted estate and lifetime gift tax exemption is $11.58 million ($23.16 million for a married couple). These thresholds reflect changes made by President Trump’s signature tax law, the Tax Cuts and Jobs Act of 2017.
According to a new Tax Policy Center study of Biden’s tax plan (which is not fully defined and would need congressional approval), Biden would attempt to reduce the estate exemption amount to $3.5 million ($7 million for a married couple) and shrink the lifetime gift exemption to $1 million. Also, these amounts would no longer be indexed for inflation. Meanwhile, the highest applicable rate would rise from 40% to 45%. These changes would generally resemble the tax treatment of estates and gifts under the Obama administration.
The Tax Policy Center further predicts that, based on what is known about Biden’s tax plan, he would seek to tax unrealized capital gains at death and repeal the step-up basis. This is significant for assets that have appreciated in value, such as an NFL franchise.
Under current law, inherited assets are valued at the time of death. This is significant for owners. While high-wealth inheritances often have complicating factors, including those related to state laws and use of family trusts, consider the following simplified example:
Imagine an owner bought an NFL team for $800 million, and when the owner dies the team has a fair market value of $2.5 billion. If the heir later sells the team for $3.2 billion, the taxable gain is $700,000 ($3,200,000 – $2,500,000) under current law compared with $2.4 billion ($3,200,000 – $800,000) if the step-up basis is repealed.
Sports team owners tend to give more money to conservative candidates and PACs. A recent study by ESPN and FiveThirtyEight found that owners and commissioners across the NBA, NFL, NHL, WNBA, MLB and NASCAR have donated $10 million to Republican causes during the 2020 election cycle and $1.9 million to Democratic causes. Those owners have contributed more than four times as much money to Trump’s campaign as they have to Biden’s.
Should a team want to make changes, it will need approval from either the league’s finance committee or its membership, depending on the nature of the proposal. Another major question will be how to finance the restructuring. While owners and their families may save money in the long run by restructuring in 2020, it also means they would need to foot the tax bill now. That might be a big ask at a time when finances are stressed due to COVID-19. Considerations will need to be made regarding cash on hand, and how close the team is to the NFL’s debt ceiling.
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