Might the tax-loss gravy train for sports team owners be stymied by new IRS compliance effort?

Sports Team Owners Face New Scrutiny From IRS Over Tax Avoidance, ProPublica reported May 2, citing a new Internal Revenue Service effort generated by a previous ProPublica investigation of how sports such owners could generate tax losses from their properties, despite their growing value.

(See: the amortization bonus and ProPublica's previous coverage of depreciation write-offs.)

From ProPublica:

The effort will focus on sports industry entities that are reporting “significant tax losses” to “determine if the income and deductions driving the losses” are lawful, according to the IRS announcement earlier this year. That announcement, which consisted of one sentence on a webpage devoted to compliance campaigns by the IRS division that focuses on large businesses, did not specify what kinds of abuses the agency will be looking for.

ProPublica's earlier report relied on leaked tax documents, such as that of Steve Ballmer, owner of the Los Angeles Clippers, who reported "$700 million in losses for tax purposes, despite indications that the Clippers’ real-world financial results were often profitable."

No tax records for Joe Tsai, owner of the Brooklyn Nets and Barclays Center operating company, were leaked, but it's a reasonable bet he benefited similarly. After all, as I wrote, the arena company reports steady losses from depreciation and amortization, separate from operating results.

Advice to owners

“The IRS may be acting on its promise to restore ‘fairness’ in tax compliance by taking more shots at partnerships and high-wealth individuals, including sports team owners,” the law firm Morgan Lewis wrote, as noted by ProPublica. “With the Sports Industry Losses campaign, the sports industry looks to be the next opponent in the IRS arena.”

That syntax suggests skepticism of what seems, from my vantage point, a reasonable inquiry.

Added the firm, "To be in the best position to play defense, partnerships and their partners will, at a minimum, need to know the rules."

It alerted potential clients:

To prepare for a BBA partnership and/or a Global High Wealth Program examination, sports team partnerships and sports team owners should be proactive in developing an examination defense that:

identifies the income and deduction items that are driving losses, which for a sports team can include, among other things: depreciation of an arena or other fixed assets, amortization of intangible assets such as brand and broadcasting rights, and interest on indebtedness; evaluates whether allocated partnership losses are subject to limitations under the passive activity or at-risk limitations; and includes contemporaneous documentation, explanations of the strengths and weaknesses of relevant tax return positions, and an evaluation of the accounting methods adopted for income and expense items for compliance with the Internal Revenue Code.