Monday, February 22, 2010

Debt and taxes.

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Two parts of Jamie's most recent filing have folks sort of rankled up. The first has to do with Jamie's assertion of how much the McCourts have taken out of the franchise (and how little they've given back):
From 2004 through 2009, the McCourts received in excess of $108,000,000 in what was characterized as "ownership distributions" from the McCourt Enterprise. . . . Further, those funds were not reduced by any income tax liabilties because the parties have not paid any federal or California income taxes since they moved to California in 2004.
Now, this seems awfully inappropriate, doesn't it? However, everything's not quite what it seems. The "ownership distributions" don't come from profit, but from debt. Basically, proceeds from loans aren't taxable as income. And what's more, paying off debt is an expense which can be used to offset income. So what is this mystery debt?
On a recurring and systematic basis, large loans have been obtained, several of which were secured and/or paid by such future income streams. Substantial portions of the proceeds of those "monetizations" and other capital events then were used in whatever manner directed by the McCourts. When needed by the parties, millions of dollars of those funds were distributed to them. 
So what exactly was going on? The Dodgers would incur massive amounts of debt --  $390 million to this date, with another $125 million facility structured but mothballed for now -- secured by ticket sales and other revenue streams. A large portion of the loan proceeds would then be paid directly to the McCourts for their personal use. Of the most recent $140 million loan, for example, $20 million went to the McCourts. The debt service on this $390 million, which comes to about $30 million annually, is then a deductible business expense for the McCourt Enterprise.

At the end of the day, this arrangement works for everyone involved. Frank and Jamie got tax-free cash. The McCourt Enterprise enjoys tax benefits. And it's difficult to see how this could have a negative impact on the team. Yes, borrowing money costs money. But so does incurring tax liability. As structured, this monetization of future ticket sales serves to push the tax bill back to the time at which the assets are sold. And an expensive sale it would be; Frank's CPA estimates that disposing all of the McCourt Enterprise assets would result in a $113 million tax hit.

This is just one piece of the financial workings of the Los Angeles Dodgers (and the McCourt Enterprise in general). "Debt" is a scary word, but from my perspective, there's nothing overly concerning about this. Sure, it might be a little frustrating to hear that Frank and Jamie have taken $108 million out of the Dodgers without paying a dime in income tax, but that's a systematic issue not unique to this couple.

There's oodles more to talk about, Shaikin's latest detective work being on the front burner. Doubling ticket costs without raising payroll? That's not going to sit well.
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3 comments:

  1. Actually, I don't think their "doubling of ticket prices by 2018" is all that scary, unless we're talking about inflation-adjusted dollars (which is unlikely). It's hard to see how the U.S. is going to avoid massive inflation between now and then. In real terms, that's 9% annual ticket price hikes, and if you discount what I would consider a fairly reasonable amount for inflation moving forward (4%, but I grew up in the 70's, so 20% isn't unknown to me), that's only a 5% increase in adjusted terms.

    There'll undoubtedly be some pushback with the economy as the long decession continues, but I don't see his price hikes as intrinsically unreasonable.

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  2. Maybe you can explain this to Michael Hiltzik, who does not seem to know the difference between "not paying taxes in 2010" and "not paying taxes, ever".

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  3. Forget INCOME TAXES for a moment. With their lavish lifestyle, how much of the following taxes did the McCourt's pay?

    Accounts Receivable Tax
    Building Permit Tax
    Capital Gains Tax
    CDL License Tax
    Cigarette Tax
    Corporate Income Tax
    Court Fines (indirect taxes)
    Dog License Tax
    Federal Unemployment Tax (FUTA)
    Fishing License Tax
    Food License Tax
    Fuel Permit Tax
    Gasoline Tax (42 cents per gallon)
    Hunting License Tax
    Inheritance Tax
    Interest Expense (tax on the money)
    Inventory Tax I
    RS Interest Charges (tax on top of tax)
    IRS Penalties (tax on top of tax)
    Liquor Tax
    Local Income Tax
    Luxury Taxes
    Marriage License Tax
    Medicare Tax
    PROPERTY Tax
    Real Estate Tax
    Recreational Vehicle Tax
    Road Toll Booth Taxes
    Road Usage Taxes (truckers)
    SALES Taxes
    School Tax
    Septic Permit Tax
    Service Charge Taxes
    Social Security Tax
    State Unemployment Tax (SUTA)
    Telephone Federal Excise Tax
    Telephone Federal, State and Local Surcharge Taxes
    Telephone Federal Universal Service Fee Tax
    Telephone Minimum Usage Surcharge Tax
    Telephone Recurring and Nonrecurring Charges Tax
    Telephone State and Local Tax
    Telephone Usage Charge Tax
    Toll Bridge Taxes Toll
    Tunnel Taxes
    Trailer Registration
    Tax Utility Taxes
    Vehicle License Registration Tax
    Vehicle Sales Tax
    Watercraft Registration Tax
    Well Permit Tax
    Workers’ Compensation Tax

    Considering their lavish lifestyle, I bet they paid a gigantic amount of property and sales taxes (that 9.75% in LA County on each purchase can add up). So they may have avoided income tax, but that doesn't mean they didn't pay lots of other taxes. The question is: how much in non-income taxes did they pay?

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