Further to the immediately preceding blogpost, here’s the follow-up on Tribune Company & Affiliates, 2021 T. C. Memo. 122, filed 10/26/21*.

The Newspaper of Chicagoland owned the Cubs, but wanted out. The Tribune went bankrupt because overleveraged from a buyout while negotiating the sale, but as their then-CFO said “there’s a big difference between filing for bankruptcy and being bankrupt.” 2021 T. C. Memo. 122, at p. 12.  As this is a nonpolitical blog, I’ll say no more.

Meantime, the Ricketts family wanted the Cubs. Since the Ricketts family owned a piece of TD Ameritrade, they could afford a MLB legacy team. Reminds me of J P Morgan’s remark when shown the stockbrokers’ yachts: “Where are the customers’ yachts?”

There was wheeling and dealing and then some, but the Rickettsians won. The deal shook out with a multi-member partnership, the Tribunals kicking in the baseball stuff, and the Rickettsians put in USD150 million. Immediately after, the Tribunals got a $704 million special distribution, as required by the formation agreement. Capital was 95% to the Riockettsians, 5% to the Tribunals; apparently MLB went along with the deal because the Tribunals were in for the stated 5%.

I told you there was wheeling and dealing. “Despite the interest percentages amounting to 95% for [Rickettsians] and 5% for Tribune, common capital shows a different ownership scheme. Of the total common capital, $150 million is attributable to [Rickettsians] and $20,986,843 is attributable to Tribune. This translates to Rickettsians]’s owning 87.726% of common capital and Tribune’s owning 12.274%. At trial, Thomas Ricketts did not know why, and he appeared surprised to learn that the common capital percentages did not match the ownership interest percentages.” 2021 T. C.Memo. 122, at p. 15. Tom should’a done deals with some of my former clients.

To satisfy MLB, the Rickettsian family trusts had to provide financial backstop to the Cubs, to safeguard players’ salaries and operating expenses if the new owning partnership cratered.

Needless to say, the $704 million required distribution came from borrowed money. This was a dealbreaker for the Tribunals, as they needed the tax deferral generated by a debt-financed distribution. The money came from the newly-created partnership-LLC, which borrowed $425 million from unrelated third parties, and enough to pay the balance of the distribution to the Tribunals from a Rickettsian. Everybody agrees the $425 million is bona fide debt, but disagrees whether it is nonrecourse to the Tribunals. The other debt ($248 million) came from Ma Ricketts, who funneled the cash through a family LLC, which got a promissory note from the partnership. Question is whether this is debt or equity.

Thoroughly confused yet? Wait a while, it gets better. The $248 million debt is subordinated to the $425 million debt by an agreement, which prevents Ma and the LLC from sneezing until the senior debt is paid in full. The agreement also provides for a cash waterfall, which directs how all the baseball revenue gets spent; needless to say Ma and the Rickettsian LLC get nada until the $425 million crew are paid in full, and can’t sue if the partnership doesn’t pay them.

But Ma and the LLC did get “…17 specified privileges…. These privileges include the right to use Wrigley Field for private functions, clubhouse access, complimentary premium seating, season ticket options, hospitality benefits, premier parking, and the right to participate in postseason award ceremonies.” 2021 T. C. Memo. 122, at p. 23. The privileges are not transferable to any person who was not Ma or the LLC. Judge Buch thinks this is a sign of equity.

And the $248 million debt has no fixed maturity, since the $425 million crew can extend or modify the terms of their debt how they want, without asking Ma or the LLC, and Ma and the LLC don’t get paid until the $425 million crew get paid in full.

The partnership’s debt-to-equity ratio was 4 to 1. Ma and the LLC tried to sell some of their interest in the note, but their private placement memo in support thereof sounded more like an equity investment than an interest-rate deal. And nobody bought it, anyway.

The Tribunals guaranteed both debts, but as they were then in bankruptcy their credit was a trifle impaired. And they only guaranteed collection, not payment. That means the creditor has to sue, win, and when the sheriff comes back with nothing, only then must the guarantor cough up.

The Rickettsians could buy out the Tribunals, and they did.

The question is whether the Tribunals are really on the hook for the $700 million in aggregate debt. A partner getting an immediate distribution after contributing property to the partnership has sold the property to the partnership. If the partnership borrowed the money to distribute to the partner, and the distributee-partner remains on the hook for the borrowed money, the sale is not taxable to the distributee-partner. But if the distributee-partner has shifted the obligation to repay to someone else, or has no obligation to repay, then the disguised sale is taxable.

So we come to the usual factors for debt vs. equity.

Yes, the $248 million note is called a note, but that matters little. The lack of a fixed maturity date hurts, because of the $425 million crew’s ability to shift repayment of their note, thus extending Ma’s and the LLC’s maturity date. But repayment of principal is not conditioned upon the revenue stream from baseball; the waterfall only talks about interest, so more like debt. True, not all subordinated debt is equity, but here the subordination is so extensive that it ties Ma’s and the LLC’s hands to such an extent that Judge Buch finds it’s equity. Participation in management is neutral. Judge Buch is as confused as I am when it comes to preference over trade creditors, so leaves that as neutral. As for intent of the parties, that private placement memo sinks the Rickettsians; too much discussion of investment risk. But I can’t fault Ma’s lawyers; the deal is sufficiently dodgy to warrant top-class disclaimers. And the Tribunals insisted upon the debt, but when you fold the $248 million “debt” back into capital, the mismatch that surprised Tom Ricketts is no mismatch at all; both capital and percentage interests line up. Moreover, the buyout of the Tribunals was based on capital of 5%; if the Tribunals’ capital had truly been the 12%, why did they take less for their interest?

Because the Rickettsians own the partnership (the Tribunals had only 5%), and Ma and the LLC are family also, this is equity. That doesn’t mean that family members cannot have debt among themselves, and enforce the debt; but this is too close. The note wasn’t sold and no institutional lender would purchase the note. The proceeds were used to acquire capital, not to pay operating expenses. The $248 million is equity, not debt.

OK, so the $425 million is debt, so that part of the $700 million the Tribunals got counts toward a debt-financed distribution. But was it really the Tribunals debt? Are the Tribunals truly on the hook?

First, the Section 752 constructive liquidation test, which presumes that the obligor will pay. And the obligor is assumed to pay in the worst-case scenario: the partnership is bust, its assets are worthless (cash included), the creditors have sued all and sundry to no effect, and guarantor is last man standing.  And that the Tribunals are the last man standing doesn’t make their obligation contingent; if it did, no collection guarantee would survive Section 752, and they do.

The Rickettsians were not the real guarantors under the constructive liquidation test of Section 752. They weren’t partners, their LLC was. The cash reserve required by MLB couldn’t be used to pay the $425 million crew. And IRS’ unlikelihood arguments are irrelevant under the worst-case scenario, which is Murphy’s Law codified: if it can go wrong, it will.

The only analogy is our old friend Canal Corp., 135 T. C. 9. The supposed obligor there was undercapitalized, and couldn’t pay, so the true obligor had to pick up the tab. And in Canal, the undercapitalized “obligor” got a piece of the deal if it paid, whereas the Tribunals get nothing.

The anti-abuse regs (Section 701) do not require that each element thereof have a substantial business purpose, only that the whole deal does.

“The Cubs transaction was a disguised sale in both form and substance. The economic reality of this transaction lies squarely within the intent of the disguised sale statute. The parties to the transaction formed a bona fide partnership that operates the Cubs franchise with assets contributed by Tribune. And the partnership in fact distributed cash to Tribune. This transaction also substantively fits into the debt-financed distribution exception for a disguised sale, receiving the distribution tax free up to the amount of the senior debt guaranteed by Tribune. [Partnership] borrowed the senior debt, and Tribune guaranteed the senior debt. When such a transaction is explicitly provided for by Congress and followed by a taxpayer in both substance and form, we will not recharacterize it. The doctrine of substance over form is applied to prevent taxpayers from mislabeling transactions to achieve a desired tax consequence. Petitioners did not mislabel the transaction here; the economic substance of the Cubs transaction is a disguised sale with a debt-financed distribution, a structure contemplated by both the statute and the regulations.” 2021 T. C. Memo. 122, at pp. 118-119. (Footnotes omitted).

The Tribunals tried to deduct the break-up fee they paid to a proposed successor suitor when it looked like the Rickettsians might bail. The Tribunals claimed this as an abandonment fee, but the deal wasn’t abandoned, it closed.  Had the Tribunals closed with the successor suitor, they would have had to capitalize those expenses.

And just as I was about to close out my file on the Tribunals, who were good for five (count ’em, five) previous blogposts, where I conflated the Cubs with the White Sox, Judge Buch tells us, after 127 pages of text and 214 (count ’em, 214) footnotes, that he still has the chops to work on.

I guess I’ve got another all-nighter coming up.

*Chicago Tribune Media 2021 T C Memo 122 10 26 21