IRS Strikes Out

Next week marks Major League Baseball's 2011 "Midsummer Classic" — the All-Star Game between fan favorites from the rival National and American leagues. Baseball is making the usual headlines on the field this year, with tight races in most divisions. And it's making headlines off the field, too — especially in Los Angeles, where Dodgers owners Frank McCourt and his wife Jamie are contesting an especially bitter divorce.

Frank McCourt is decidedly behind the count in this at-bat. He's accused of borrowing more than he could afford to buy the team in the first place, then using the team as a personal ATM to finance an extravagant lifestyle. That lifestyle included seven homes costing just over $99 million — two houses on Cape Cod, two houses next door to each other on Malibu's famed "Millionaire's Beach," two more houses next door to each other in LA's affluent Holmby Hills neighborhood (right down the street from the Playboy Mansion), and a $6 million condo in Vail. It also included $225,000 per month for a private jet, $10,000 per month for Jamie's hair stylist, and $386 per month for her makeup for Dodgers events. (Just weeks ago, the pair signed an agreement awarding Jamie $650,000 per month in spousal support plus ownership of the homes — one of which she uses just for swimming laps and another just for storing furniture.)

And so, McCourt's mountain of debt has finally loaded the bases against him. Earlier this year, Baseball Commissioner Bud Selig balked at McCourt's plans to make payroll and appointed a trustee to take over the team's finances. And last month, McCourt threw a beanball of his own, defying MLB rules and filing bankruptcy while he works to sign a television deal which he says will let him pay all his creditors. In the meantime, season ticket sales are down, and some say he's the worst owner since Red Sox skipper Harry Frazee sold Babe Ruth to the Yankees for $125,000.

But there's one opponent who's batting zero against the McCourt's, and that's the tax man. Court papers filed last February show that from 2004-2009, the McCourts drew $108 million from their various businesses — and paidzero taxes to the IRS or State of California. Zip. Zilch. Nada. How the heck does a family make $108 million and pay zero taxes?

McCourt began his career developing commercial real estate. Real estate developers frequently fund their lifestyles primarily from tax-free loans secured by the equity in their properties. In fact, McCourt used a loan secured by a 24-acre parking facility in Boston to finance his original purchase of the team. And he continued that strategy even after taking over the team, borrowing $390 million against future revenues, in part to finance tax-free distributions for himself and his family.

McCourt also benefits from generous depreciation deductions against his properties. Depreciation is a "paper" deduction representing wear and tear on a property; however, in the right circumstances, it's available to offset ordinary income. Court papers reveal that the McCourts arrived in California with over $100 million in net operating loss carry-forwards; thus, they can expect to continue paying little or no taxes for quite some time.

There's nothing illegal about the McCourts' strategy. The loan proceeds represent advances against future income that will be taxable, even if they're offset by the real estate losses. And those real estate losses are part of a long-established tax rules designed to spur real estate development that drives economic growth. The legislators who write the tax laws probably never imagined anyone would be living quite so well while paying quite so little tax. But we use some of the same strategies ourselves — for the right clients. So call us when you need a strong closer to save your game!

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