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June 26, 2006

The Ledger Domain

Sale of the Braves is a Tax(less) Situation

by Maury Brown

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Let me tell you how it will be;
There's one for you, nineteen for me.
'Cause I'm the taxman,
Yeah, I'm the taxman.

--The Beatles

Hi. Come on in and take a seat.

What's that? Yes, I got your call, and no, I'm not a CPA, but I did stay at a Holiday Inn Express last night, so I'll see if I can address your questions.

So… (opens file) you are Time Warner, and Liberty Media. Well, let me say that it's nice to get such high profile clients.

The reason that you two need to see me is that this sale of the Atlanta Braves… if you two are involved, the deal has a whole lot to do with saving you some money, if you look at this from a tax dodge perspective.

What's that? How much do you stand to save on this transaction due to tax loopholes? Well, how does over $700 million sound?

See, what we've got here is a prime case for exploiting the Tax Increase Prevention and Reconciliation Act of 2005. Yes, that tax cut that President Bush pushed in 2005 will work so perfectly in your favor that it's nearly impossible to resist.

Let me tell you how this all works.

See, Time Warner, you take the Braves and just about $1.38 billion dollars in cash and roll it into a newly created subsidiary. Then Time Warner, here, does a transfer of the subsidiary to Liberty Media. Liberty, in turn, does a transfer of about $1.84 billion worth of Time Warner shares back to Time Warner (they've held these stock holdings for nearly 20 years).

Here's why the scheme saves you bu-ku bucks. (Pulls out diagram to illustrate)

tax scheme chart

If these transactions were done separately, there are taxes you'd have to pay on them.

Look at #1 on the diagram… In the case of the sale of the Braves, Ted Turner bought the club for around $12 million in 1976. Since the club's value has increased to anywhere between $450 million and $460 million, the taxes on a straight sale would be around $170 million.

Now, look at #3 on the diagram. See, Liberty wants to sell a bunch of the Time Warner stock that they've had for around 20 years. And, when I say "a bunch" I mean they want to unload about $1.84 billion worth of stock. Since they purchased the stock nearly two decades ago, the stock has appreciated from its initial value. How much would Liberty Media wind up paying in taxes if they did that as a straight sale? About $600 million.

Pretty clever deal we got going here, huh?

What's that? Oh, you heard that the White House and the Congressional Joint Committee on Taxation was upset with this kind of deal. That they wanted to restrict the cash portion to just under 50% of the total of the deal. Well, Time Warner and some others took care of that by lobbying--that limit is now 75%. Good going there, Time Warner… that's just about the value of the deal you want to make with the Braves involved.

Come again? You say that there are others working to bid on the Braves? Arthur Blank, the owner of the NFL Atlanta Falcons? Well, ask yourself if this deal isn't just the cat's meow for you two, and maybe the Lords of Baseball. After all, they can see that there's not going to be any cash flow issues around this deal.

Now here's some advice that I'll give for free…

You see, I heard that Commissioner Selig went on record when the Washington Nationals were sold to Ted Lerner, saying that Lerner represented the kind of ownership that he liked to see in MLB. Said Lerner reminded him of John Fetzer, the former owner of the Tigers and someone that Selig admired greatly. See, Selig saw that ownership as more of a "family deal," and not a deal like we've seen with Fox owning the Dodgers, or the Tribune Company owning the Cubs, or you, Time Warner, owning the Braves… no offense. Not that corporate ownership is bad… it's just, well… Selig said he liked the local family ownership, but he never said he didn't not approve of corporate ownership, either.

Now, it may seem that Selig is saying that he'd rather have an "Arthur Blank" type owner for the Braves. You know, local owner, and all. But, that's not always the case with MLB and Selig. See, every transaction is different. Each has to be viewed on its own.

So now, Liberty Media, I have a question for you…

See, I'm a Braves fan. I have to ask if this whole deal has nothing to do with owning and running a baseball team where fans live and die by them, but is rather an appendage in a larger money making transaction. After all, owning a sports franchise is a little different than owning any other business holding. You're going to be front and center in the business section, and now the sports section, as well.

Now, here's my bill for the advice you just received: Try and do your best to run the Braves in a responsible fashion for the fans first and foremost. You'll make more money looking at the Atlanta Braves that way than just one more business holding.

(Points to the door) Now, I hope you two have a nice day with this news. And please pick up your jaws off the ground thinking of all the money in taxes you just dodged.

Maury Brown is an author of Baseball Prospectus. 
Click here to see Maury's other articles. You can contact Maury by clicking here

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