Tribune Media Co. v. Comm'r of Internal Revenue
| Decision Date | 26 October 2021 |
| Docket Number | 20941-16,20940-16 |
| Court | U.S. Tax Court |
| Parties | TRIBUNE MEDIA COMPANY f.k.a. TRIBUNE COMPANY & AFFILLIATES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent CHICAGO BASEBALL HOLDINGS, LLC, NORTHSIDE ENTERTAINMENT HOLDINGS, LLC, f.k.a. RICKETTS ACQUISITION, LLC, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
Joel V. Williamson, Thomas Lee Kittle-Kamp, Peter M. Price Anthony D. Pastore, Daniel S. Emas, James B. Kelly, Scott M Stewart, John W. Horne, Elizabeth P. Mazzocco, and Phillip M Goldberg, for petitioners.
Justin D. Scheid, Thomas F. Harriman, William Benjamin McClendon James M. Cascino, Grubert R. Markley, Rogelio A. Villageliu, and Brandon S. Cline, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
In 2009, Tribune Media Co. f.k.a. Tribune Co. & Affiliates (Tribune) formed Chicago Baseball Holdings, LLC (CBH), with the Ricketts family, with Tribune contributing the Chicago Cubs Major League Baseball team (Chicago Cubs or Cubs) (and related assets) and the Ricketts family contributing cash. CBH then distributed cash to Tribune. This type of transaction is a "disguised sale," which neither party disputes. Although the name "disguised sale" might seem pejorative, disguised sales are well recognized, and they are taxable.[1]
CBH entered into two tranches of debt, one funded by a commercial lender and the other funded by the Ricketts family. Tribune guaranteed collection of the debt. To the extent Tribune is deemed ultimately responsible for the debt, the distribution would be considered debt financed and would not be taxable.
The Commissioner issued a notice of deficiency to Tribune and a notice of final partnership administrative adjustment (FPAA) as to CBH for 2009. In those notices, the Commissioner determined that the series of transactions was taxable.
In support of those notices, the Commissioner argues that the debt funded by the Ricketts family is not bona fide debt and thus should be disregarded for purposes of the debt-financed distribution rule. The Commissioner further argues that the likelihood that Tribune would ever be called upon to satisfy its guaranty is so remote that the guaranty should be disregarded.
Tribune entered into a bona fide guaranty of the debt, and the fact that having to fulfill that guaranty is remote is not sufficient to disregard it. The debt funded by the Ricketts family, however, is not bona fide debt for tax purposes and will be disregarded.
President Ronald Reagan has often been referred to as "the Gipper." This nickname came about from his role as an actor in "Knute Rockne: All American", a 1940 Warner Brothers movie about the legendary football coach from Notre Dame. Reagan played George Gipp, an all-American football player who died prematurely. Legend has it that, from his hospital bed, Gipp implored his coach to tell the team to "win just one for the Gipper."[2] Reagan delivered that poignant line in the movie, and from then on, he was associated with both football and the Gipper.
President Reagan arguably had much closer ties to baseball, and one could credibly argue that it was his involvement with the Chicago Cubs that launched his acting career. After graduating from college, Reagan sought to enter the field of sports broadcasting.[3] His first job landed him in Davenport, Iowa, and later Des Moines, Iowa, where he did play-by-play announcing of a wide variety of sports.[4] One of the sports he called was baseball, more specifically, Chicago Cubs baseball.
Announcing a Chicago Cubs game was particularly challenging because Reagan was sitting in a studio in Des Moines while the Cubs were playing in Chicago. And in the 1930s, there was no broadcast television for Reagan to watch. In fact, Reagan wasn't watching the games at all. The studio would receive reports of what was happening in the game by Morse code via a ticker.[5] Aided by a telegraph operator, Reagan would turn the dots and dashes into an enthralling play- by-play that had many people believing he was reporting live from the game.[6] For effect, he would add recorded crowd applause from a record turntable.[7] He became "'the voice of Chicago baseball' throughout the prairie states."[8]
One game was uniquely challenging to call. As the story goes, it was in the mid-1930s when the Cubs were playing their arch[9] rival, the St. Louis Cardinals. It was 0-0 in the ninth inning, and Billy Jurges was batting against Dizzy Dean, who was pitching for the Cardinals. And the ticker went out.[10]
But the young announcer didn't miss a beat. If he told the listeners the ticker stopped working, he would have lost his audience. If he announced a hit or an out, the actual game result might be different from what he announced. So instead, Reagan improvised foul ball after foul ball, the inaccuracy of which would be immaterial to the outcome of the game. His improvised play-by-play included a would-be home run that went foul by a foot and a scuffle in the stands as two kids fought over another foul ball. When the ticker began working again, it turned out that Jurges had popped out on the first pitch.[11] Reagan's listeners were none the wiser.
By all appearances, Reagan called a live baseball game.[12] It's only by digging into what really happened that the appearances give way to reality.[13] So with that in mind, we dig into what really happened with the sale of the Cubs.[14]
In 1847, Tribune began publishing the Chicago Tribune newspaper. Tribune went public in 1983. During the year at issue, Tribune was organized as a corporation under the laws of Delaware and filed its Federal income tax return as a consolidated group with Tribune as the parent company. When it filed its petition, Tribune's principal place of business was Chicago, Illinois.
In 1981, Tribune bought the Chicago Cubs baseball team from the Wrigley family for $21.1 million; it also purchased Wrigley Field for $600, 000. Tribune held the Cubs in its wholly owned subsidiary, Chicago National League Ball Club, LLC (CNLBC).
In September 2006, the Tribune board of directors explored "strategic alternatives" to Tribune's existing business model. In April 2007, Tribune accepted an investment proposal from Sam Zell. Under this proposal, Tribune's Employee Stock Ownership Plan (ESOP) would buy Tribune's outstanding stock for $34 a share. Tribune had to borrow the funds to repurchase its shares as part of the ESOP transaction, and when the transaction closed in late 2007, Tribune was $12.8 billion in debt.
Mr. Zell invested $315 million during the ESOP transaction; in exchange he received a warrant to acquire 40% of Tribune's common stock and became Tribune's president and chairman. As part of the ESOP transaction, Tribune converted from a C corporation to an S corporation effective December 31, 2007.
The Ricketts family has considerable wealth. Joe Ricketts started TD Ameritrade, a discount brokerage firm, which grew significantly before it merged with Toronto-Dominion Bank. The family's primary source of wealth stems from TD Ameritrade and their ongoing partial ownership of the company.
Along with their significant wherewithal, the Ricketts family has an enduring love of Cubs baseball. In the mid-2000s, Thomas Ricketts, Joe Ricketts' son, noticed Tribune's financial troubles and convinced his family that if Tribune ever put the Cubs up for sale, they should compete to buy the team. Thomas Ricketts lined up a bank to support the family in such a transaction and identified an appropriate family trust that could finance an acquisition. When Tribune announced the sale of the Cubs, the Ricketts family was already prepared.
Tribune's plan to sell the Cubs was announced at the same time as the company's leveraged buyout. The announcement stated that Tribune would use the proceeds from the sale to pay down the debt it incurred for the leveraged buyout. During its financial troubles, Tribune decided to focus on its "core assets," which did not include the Cubs; so Tribune chose to sell the team. At the time, Tribune considered itself a media company. Although the Cubs are a legacy team in the Major League Baseball (MLB) organization, the team was not a significant source of cashflow for Tribune.
Tribune began to solicit interested buyers in April 2007. In May 2007, Tribune hired J.P. Morgan Securities, Inc. (J.P. Morgan), to assist with selling the Chicago Cubs and related assets (collectively, Cubs assets). The Cubs assets included the Chicago Cubs, its Dominican baseball operations, Wrigley Field, Tribune's interest in Comcast SportsNet Chicago, LLC (CSN Chicago), and its interests in other related partnerships.
J.P. Morgan gauged buyers' interest in two kinds of ownership structures: (1) a single partnership owning all Cubs assets and (2) two separate partnerships, one holding the Chicago Cubs and the other holding Wrigley Field. Over 100 parties expressed interest in the single partnership structure and 60 expressed interest in the dual partnership structure.
Bidding on the Cubs assets went through three phases. The first phase began in the latter half of 2007 when MLB reviewed the financial information and initial applications of interested buyers. MLB cleared 10 bidding groups. Tribune provided these 10 groups a descriptive memorandum that outlined Tribune's desire to sell a 95% interest in the Cubs with an option for the 95% interest holder to buy the remaining 5% interest after 12 years. Tribune prepared the descriptive memorandum...
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