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Tuesday, February 23, 2010

The Dodgers' Poison Debt Pill?

Dodger Divorce has an interesting wrinkle in the McCourt divorce saga that other owners may not appreciate much. The McCourts are apparently avoiding income taxes by paying themselves out of loan distributions. There's nothing wrong or illegal about this, but what it does do is reduce the value of the franchise to a potential buyer because all those loans become due at the time of sale (or at least have to be renegotiated), with McCourt's accountant estimating a $113M tax hit at the time of sale. Or maybe I'm reading this wrong, and it's only a problem for the McCourts.

Update: Michael Hilzik proves that the Bill Plaschke disease is not confined to the sports desk. Not only is the Times' business columnist apparently unaware that "not paying taxes in 2010" is not the same as "not paying taxes on anything, ever", he manages this feat despite this being his beat. Must bloggers explain everything to every benighted Times columnist, or is there some limit to the ignorance that parades itself as populism over there? Frank is playing a game of high-stakes poker with the IRS and the next owner of the Dodgers, who will almost certainly have to pay a premium for the team to recover all this salary he's paying himself when it comes due at the time the team's sold.

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it's only a problem for the McCourts and their various holding vehicles. However, it is common practise for the acquirer to swallow portions of the tax debt load, which would increase the sales price.
That's what I was thinking. The net acquisition cost goes up, because McCourt won't have the cash after sale to clear his tax liability, so the acquirer will have to do it for him. And since tax debts can't be voided in bankruptcy, this is a very hard liability that must be serviced if the team is sold.
Yes, more than probably that is going to be the situation but generally, tax liabilities are paid for out of net proceeds but the Dodgers are going to have to be sold for a ton of money for the McCourts to swallow that tab.

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