In This Episode
Thanks for listening to another Bonus Episode of Takeline! In this episode Jason talks to investigative reporter Robert Faturechi of ProPublica about his bombshell article on billionaire NBA owners and how they use professional sports teams to avoid paying millions in taxes
Please read the fascinating article (link below) and support more work like Robert’s at Propublica.org
Transcript
Jason Concepcion: Hey, everyone. We’re bringing you another bonus episode today. Today, I spoke with investigative reporter for ProPublica, Robert Faturechi. He is a Pulitzer Prize-winning journalist who’s covered military, L.A. County inmate abuse, and most recently, how professional sports owners use their teams to avoid millions in taxes. We spoke about what he found and what the greater impact of these loopholes mean for the business of sports in general. Take a listen:
Jason Concepcion: Robert, you include your really eye-opening piece, a quote from former Cleveland Indians, and later Chicago White Sox owner Bill Veeck, who said, look: we play The Star-Spangled Banner before every game, you want us to pay income taxes too? Veeck, you credit with being the innovator in this particular space. Could you talk us through how a Veeck’s innovations in terms of tax—I don’t want to say manipulation—but how to pay the least amount of taxes as a sports owner, and how that has evolved to the present day?
Robert Faturechi: Yeah. So he’s sort of considered the trailblazer. But the way it works now, there have been several evolutions, but essentially, let’s say you buy a sports team for two billion dollars, over the course of the next 15 years you can write off that two billion dollars from your taxes. So what that means is, you know, you could potentially be profitable, right? Your team could be profitable and you could report to the IRS that you’re actually losing money, which means not only do you not have to pay taxes on the money you make from the team, but you can also cancel out money that you’re making from other ventures and not pay taxes on that either.
Jason Concepcion: And this is done through a process called amortization, which basically says that like, say, a car is an asset, you drive it off the lot, it loses a portion of its value and you drive it over time and the parts need to be replaced, etc., etc., the finish dulls. This is accomplished through applying that idea, the depreciation of an asset to assets that don’t really depreciate in the way that a car or a machine would. Is that is that right?
Robert Faturechi: Yeah. So like, if I were to buy, you know, like a widget business, right. Part of the purchase price of that widget business was like the widget maker, the widget conveyor belt and over time, those things actually break down and lose value, right? But with sports teams, the assets are almost entirely intangible. So we’re talking about like media rights deals, player contracts, franchise rights. If you’re a major sports team, there’s little chance that you’re going to stop being on TV. Right? Or the players won’t play for you because there’s a finite number of teams they can play for. So not only do these assets typically not lose value, they sort of automatically regenerate and typically gain in value. But nonetheless, you’re able to sort of write them off as if they’re worthless.
Jason Concepcion: How was this accomplished? What was, obviously the argument would have been had to sports team’s owners, excuse me, would have made this argument, hey, we have these assets, they depreciate to Congress, to lawmakers, to the people who designed the tax code. And this was accepted. How, what was the argument they used and how did that happen? How is, how is it decided that these are assets like any other asset?
Robert Faturechi: It didn’t always work this way. Previously, the IRS and the law required these sports teams to actually only write off things, assets that they could argue really had a definable lifespan and we’re actually losing value. But in 2004, Congress basically sort of like opened up the doors to them amortizing all sorts of assets, even assets that weren’t losing value. And that bill was signed into law, actually, by George W. Bush, who himself was previously a sports team owner.
Jason Concepcion: How does, could you put this in the context of the kind of the larger dynamic of billionaires being able to move around their money in such a way that they pay a tax rate that is much less than one would expect, much less than, say—you used an example of LeBron James, who is a multi, multi, millionaire, paying an approximately 40% tax rate, while Steve Ballmer, who is a multi, multibillionaire, I think the 12th richest man in the world right now, pays at about 11$. Put that in the context of this kind of larger, larger world of billionaires in general.
Robert Faturechi: Yeah, I mean, so basically the tax code favors people who own things, over people who work, is is the way you could think about it. And like you said, we illustrated that in our story by looking at Steve Ballmer, owner of the Clippers, LeBron James, you know, star basketball player, obviously, and Adelaide Avila, who is concessions worker at Staples Center. And as you’d expect, LeBron pays a higher federal income tax rate than the concessions worker but he actually even though he makes much less than Steve Ballmer, he pays a much higher tax rate. The most shocking thing, though, was that Adelaide Avila, the concessions worker who makes about $15,000 times less than Steve Ballmer does, was actually paying a higher tax rate than him as well.
Jason Concepcion: Wow.
Robert Faturechi: So and one of the reasons among many is that Steve Ballmer gets to write off the entire two billion dollars, or almost the entire two billion dollar purchase price of the Clippers. So even if that team is profitable, he gets to tell the IRS we’re losing lots of money. And if they lose money, he can tell the IRS they’re losing vastly more money than they actually are. You know, in fact, over a five-year span or data show that he had reported $700 million in losses from the Clippers to the IRS.
Jason Concepcion: Wow. This is a particularly notable to me as a fan of the National Basketball Association because in 2011, I don’t know if you’re aware, but that the NBA and the players were arguing about the the split of the revenues basically from basketball-related activities. It was formerly, I believe, 57%. It is now moved to about 51% to the owners and 49% of the players with some movement in there. I might be wrong on those numbers, but it was formally 57% to the players. The owners came in and they argued, hey, we’re losing money, man. We’re losing money hand over fist. It’s crazy. The players argued that you’re not losing money. The books are extremely opaque. Please open them to us. There was some back and forth. This is not the kind of topic that really pierces the public consciousness because, you know, from the perspective of the average sports fan, it’s like I just want my sports back. And there are other issues at play with rich Black men asking for more money that that can shift public opinion. That said, viewing, taking your story and looking back at the 2011 lockout or any kind of like a pay dispute between owners and players, what can we say about those kinds of issues when we understand that this kind of creative accounting is going on from the perspective of the owners?
Robert Faturechi: Yeah, I mean, so tax accounting, right, is very different than sort of like real world numbers. So what we know from looking at this tax data and we reviewed the tax return data for many owners is that, you know, they can basically like, you know, even if they’re losing money, right, like I said, they can report that they’re losing vastly even more money. And what that does right is that allows them like, let’s say, they’re a sports team owner but then they’re also, you know, they have, I don’t know, just making something up like a massive shipping business, right? Like they can then cancel out a lot of the money they’re making from that other business using these losses from the sports team, and overall pay much less in taxes. You know, I’m not sure that the players unions are taking that, you know, that incredible tax advantage into account when they have these negotiations. So basically, what that tells you is, you know, even when a sports team owner is losing money, that’s not entirely a bad thing. There are still financial advantages that come with owning that team.
Jason Concepcion: The response from the spokespeople for the owners who are quoted in your piece is in line with the response with these kind of stories outside of the sports world, whether it’s Jeff Bezos or Steve Ballmer in regards to the Clippers. And it’s often something along the lines of: we follow the law, we pay the amount of taxes as mandated by the law, and we respect, you know, the tax code in the United States of America. I find that an unfortunately compelling argument, because that is what the rules say. How does this change? Obviously, I think public opinion would play a huge role. And maybe you see some of the beginnings of the strands of the kind of public opinion shifts that might signal tax reform in the future, whether it’s sports or the world in general, but how does how does one how does one change this? And if, you know, and what are the kind of forces that people that are interested in reforming our tax code might face as they try to take this on?
Robert Faturechi: Yeah, well, I mean, you know, you mentioned the responses from the owners, like one of the most aggressive and animated responses came from the lawyer for Dan Gilbert, owner of the Cleveland Cavs. And what they were arguing was, without this tax benefit amortization, you know, the whole, it would be, you know, it would be fatal to the American economy. The whole economy would collapse, right? And then the counterpoint to that is not, you know, it wasn’t always this way. In fact, very recently it wasn’t this way. And you could not write off assets that weren’t actually losing value, and the American economy survived. So, you know, there are these very sort of forceful counter arguments that the people who enjoy these benefits and their representatives make about the sort of wider consequences that would come by taking these benefits away from them, and it wouldn’t just be these wealthy team owners who’d be hurt but, you know, the impact would be much larger and hit more people than just them. As far as what can be done to change this, it takes the US Congress, you know, writing and passing a law and the president signing it. We have not seen any movement on, at least yet, you know, of Congress being interested in changing the rules around how businesses are able to take these write-offs. So at least at the current moment, I don’t see this changing. So, again, it could and it has been different in the past.
Jason Concepcion: Right. I often think of them kind of like mafia trope of nice family, it’d be a shame if anything happened to it. Nice economy, would be a shame if anything happened to it, is very often the response, whether it’s like, you know, international hedge funds or sports team owners. But I guess how did that—finally, last question you mentioned this was different in the past, that the tax code has changed quite a bit. There was once a time, you know, Teddy Roosevelt was president when it seemed like people in the country was kind of primed up for taking on the wealthy and the kind of privileges that they enjoyed and clawing those things back in decades-long struggle, that seems like it’s definitely shifted towards the more powerful. Like what, why did it shift away from this kind of like antagonism towards people who were once termed “robber barons” and are now kind of held up as, by and large, the ideals that everyone should aspire to—we should all aspire to be as successful as Jeff Bezos. You know.
Robert Faturechi: Well, I mean, one of the significant changes is over time there’s been sort of this demonization of the IRS and funding from Congress that’s been withheld. And what you see is that the IRS over time is far less frequently scrutinizing the tax returns of wealthy people and sort of just don’t have the staffing and know-how to do so like they did in the past. And the latest development on the reform front from the Biden administration and Congress is that there was some talk that the IRS was going to get new funding, and the thinking is for every dollar you fund the IRS, you know, you get multiples of added tax revenue that sort of pays for itself. It looks like at least the most recent reporting is that that’s off the table. So, you know, the entity that’s sort of tasked with being the watchdog for, you know, sort of abuses in general and illegal tax evasion in general, is slowly getting weaker and weaker and weaker. And it doesn’t look like that’s going to change, at least not now, despite there being, you know, sort of a push to do so and, you know, an administration that seemed open to doing so when it first started out. So, you know, how does this change moving forward? You know, I don’t know. Like I said, it wasn’t always this way.
Jason Concepcion: Robert, thank you. Finally, did you, who do you root for? You following any sports yourself?
Robert Faturechi: Yeah, I actually, I root for the Clippers, so uh . . . [laughs] Yeah. So it was it was a very interesting reporting experience for me to be, you know, closely looking at their finances and their owner, and, you know? It’s an unfortunate life choice I made to be a Clippers fan, but here I am.
Jason Concepcion: One more question. I just, you know, it’s like it strikes me that, like, when you have these kind of, like, rules that are easily manipulable in any kind of system—for instance, the NBA free agency is currently going on and teams are not supposed to contact players until the moratorium lifts, but the speed with which contracts and deals are announced minutes after the moratorium lifts strongly suggests the teams are talking to players. Contracts, don’t just, 90-page contracts don’t just appear in five minutes. Strongly suggests that people are talking and you can’t actually compete unless you, unless you do that. Is it, we’ve basically created that kind of dynamic here. Like if let’s say if you were, if you were a billionaire owner of a sports team and you said, you know, I want to do the right thing and I want to, I want to pay my fair share of taxes, you would you would be at an extremely competitive disadvantage.
Robert Faturechi: Yeah. So, I mean, the way it’s talked about by tax accountants and tax lawyers, the people who represent these wealthy people is you’re essentially, you know, if you’re in the gray area like, or beyond that, if you’re past the gray area, you’re playing the audit lottery, right? And like chances are you’re going to win audit lottery because like people at that level get audited at sort of vanishingly low levels. So, you know, that’s human nature, right? Like you made the comparison to free agency, right? Like, if there’s not much enforcement and you don’t have to worry about consequences, that really opens up the doors to all sorts of abuse.
Jason Concepcion: He’s an investigative reporter for ProPublica. Please support his work and more journalism like this at ProPublica dog org. Robert, thanks so much for joining me on Takeline.
Robert Faturechi: Thanks so much, Jason.
