Yesterday a federal bankruptcy judge approved Sam Zell's Tribune Co. sale of the Chicago Cubs and Wrigley Field to the Ricketts family, of TD Ameritrade, for $845 million. Everyone, including the bankruptcy judge, is calling it a "sale" except Sam Zell and his tax advisors. They're calling it a "leveraged partnership transaction," wherein Zell will retain a 5% interest and avoid paying the tax on the sale. Reporter Allan Sloan called Zell out on the tax dodge in Tuesday's Washington Post.
The Zell structuring of the Cubs sale is just another example of why we need the "economic substance" doctrine in the tax code. The economic substance doctrine has been developed over the years by the courts to disallow losses or deductions that have no economic substance apart from their tax benefits. In other words, if the only reason someone would do a deal a certain way is to avoid taxes, then the court ignores it and looks at the real underlying transaction. Clearly, a court looking at the Zell deal would find that it was, in substance, a sale of the Cubs to the Ricketts family. And Zell would owe millions of dollars of tax on the deal.
Unfortunately, different courts have developed different interpretations of the rule and courts do not apply the doctrine uniformly. That's why there have been repeated calls for strengthening the doctrine's basis in statute, including in President Obama's budget proposal. Tax avoidance transactions rely upon the interaction of highly technical provisions of the Internal Revenue Code to produce a tax result not contemplated by Congress. In developing the tax laws, Congress cannot possibly foresee all the ways the rules might be abused.
But tax lawyers figure it out for their wealthy clients -- at fees upwards of $500 per hour. If the economic substance doctrine is codified, taxpayers would be required to show that a transaction had a substantial non-tax purpose and had real economic consequences apart from the federal tax benefits. It would give the IRS a way to fight any tax avoidance scheme, whether or not the law specifically addressed it.
The American Society of CPAs recently wrote a letter to the Assistant Treasury Secretary for Tax Policy, Michael Mundaca, arguing against the rule's enactment (subscription required). To be fair, the letter raised a few good points that should be considered in crafting the final legislation. The letter is nonetheless a study in how self-interest can cloud one's perception. The big accounting firms might have a little more trouble selling their tax shelter deals if an economic substance rule is enacted into law. The IRS would be able to quickly challenge the next abusive tax shelters that tax professionals are surely already dreaming up.