Cubs Sale Tax Issues

In case anyone missed this tangle. The Trib detailed some of the issues with the Cubs sale structure last week.

I think it sheds some light on why Zell really wants the team and the stadium to be sold separately. For the new team owner, that's like the biggest Xmas or birthday present disappointment ever.

"Mom, IT SAYS BATTERIES SOLD SEPARATELY! WAAAAAAA"

"Let me see if I can find some AAs upstairs in Mommy's bedroom"

Anyway....

Trib Co wants to create a leveraged financing structure in order to limit the taxes they would pay on the sale. The Cubs were purchased for $20.5 million in 1981 and are likely to sell for around $1 billion. The tax burden on that gain is estimated to by up to $400 million.

Zell and friends still have debt to pay from the $8.2 billion buyout of the Trib in December of 2007. The upshot is the concept of a leveraged partnership, which can distribute borrowed money tax-free. The partnership (Trib Co and New Owner) borrows the money to buy the team and the proceeds from the loans go to the Trib. Trib Co would retain a small ownership in the team.

This kind of deal isn't that uncommon, but it is for the likes of MLB, which limits club debt to 10-15 times cashflow (Cubs cashflow is estimated at around $31 million in 2007). The limits are intended to ensure financial stability. MLB could, under its own rules, provide for this sort of deal but probably not at the terms Zell would want.

Also coming into play is that the New Owner could not pay down debt until 2018, 10 years after Zell's Trib purchase. Zell converted his new company to an S corporation from a C corp. The requirement of an S corp to pay taxes an asset distributions expires after 10 years.