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Steve Ballmer Gets Billion-Dollar Tax Write-Off For Being Basketball Baron
McGruber (1417641) writes "According to a report published by The Financial Times (paywalled), ex-Microsoft CEO Billionaire Steve Ballmer will be able to write off about a billion dollars of his basketball team's purchase price from the taxable income he makes over the next 15 years. "Under an exception in US law, buyers of sports franchises can use an accounting treatment known as goodwill against their other taxable income. This feature is commonly used by tax specialists to structure deals for sports teams. Goodwill is the difference between the purchase price of an asset and the actual cash and other fixed assets belonging to the team."
There is no loophole here.
Imagine buying a truck to use in a business. The cost of the truck can be written off against earnings over a number of years instead of all at once. The accounting principle here is to spread the cost of the asset over its useful life.
Goodwill is also an asset that can be written off over a number of years. It's an intangible asset with a more ambiguous useful life. The mechanism for writing it off over 15 years instead of, say, 40 years may be questionable. Government policy to attract investment may have led to the 15-year period.
So long as Ballmer is forced to follow the government's rules and he spreads the cost over many years, I see no problem..
Kids, this is basic accounting 301 (Intermediate management accounting).
If it were basic accounting 301, then you would have learned that "goodwill" does not equate to the purchase price minus the "fair market value" of the asset. Goodwill represents the "fair market value" of the asset minus the value of the tangible assets -- the inventory, machinery, real estate, etc. that can be quantitatively and qualitatively priced by sales or marking to a known market.
If you were to purchase the Coca-Cola corportion, then you would be spending an enormous amount on "goodwill." That is because the value of the trade secret for the formulation of Coca-Cola, the value of the brand recognition for Coca-Cola, and the value of the bottler network relationships are all intangible assets that do not have a concrete or easily ascertainable value. A significant part of the value of Coca-Cola lies not in the value of the HQ building (real estate), the office computers, lab, and pilot plant equipment (you don't think the actual corporation owns very many bottling lines and delivery trucks, do you?), but in the value of being Coca-Cola and not Royal Crown Cola.
That's goodwill. You didn't necessarily make a bad decision buying Coca Cola because you didn't buy it for the price of RC Cola, you paid for intangibles that contributed to the medium term P/E ratio (or similar metric) that you actually used to detemine the price tha you were willing to pay. If you try to pack that value into the tangible assets of the corporation, which depreciate over time and must be replaced (note, also over much shorter depreciation scales), then you end up with silly values that are way above market. If you offer a price only based on "real" values of the physical assets, the seller is going to tell you to take a long walk off a short pier.
The difference between (1) the price of the tangible assets and (2) the price the buyer is willing to pay and the seller is willing to accept, i.e., the very definition of a "fair market value," is the value of the intangible assets. Some of those you can estimate a value for, if need be, but frequently they are all lumped together as "goodwill." Sure you can overpay and make a bad decision, but that's because you eff'ed up the value of the revenue stream you could generate versus the cost of the debt you took on(or the opportunity cost of the money you took out of whatever other investment you shifted out of to) to buy it, not simply because you spent money on goodwill.
Signed,
A guy who does M&A work
Thank you. I am a tax attorney. People who rant about "tax loopholes" rarely understand what they are talking about. When people talk about loopholes, they can describe any of the following:
1) A logical flaw in the wording of the code allowing very low tax for a transaction or allowing a transaction to "shelter" other income. This would be something like the way Subchapter K was worded (portion of the tax code governing partnerships) allowing the Son of BOSS tax shelter. I would consider these this a "true" loophole. However, when this happens, the IRS will (usually successfully) challenge the transaction under various anti abuse rules in the tax law.
2) Tax preferences. These are things that can be as common as the home mortgage interest deduction or as esoteric as the special dispensation for non-profits that host bingo games. The government is trying to encourage home ownership or VFW halls and writes something into the tax code. Tax preferences can also be the result of lazy budgeting by Congress, describing what is really a spending measure as a tax cut.
3) Provisions of the tax code that apply to certain complex business transactions. Things like the tax deferral for controlled foreign corporations, or as we have here, the amortization of goodwill. Business transactions can be really complex, which means the tax code tends to have to follow suit with complexity. Sometimes these provisions can produce really good results for the business. Often, they can produce very bad results if you aren't careful as a tax planner. When they produce favorable results (or what seems like favorable results) we call them "loopholes". But really, it's just an attempt to accurately measure and tax "income", which can be a very difficult thing to do.
4) Tax evasion. People talk about things like undeclared offshore accounts as a "loophole". It's not really a loophole. It's just tax evasion that is rather hard to catch.
No. Valuation only combines identifiable tangible and intangible assets. If you do not break out and assign distinct values to intangible assets like copyrights, trademarks, patents, or especially other intangible assets such as distribution contracts, those items do not fall within "book value," but rather the goodwill account. Read your own link. There are times that this needs to be done -- for certain tax benefits -- but otherwise you try to avoid this exercise.
To assign a book value to an intangible asset you have to be able to demonstrate that you've given it a so-called "fair value" . For intangible assets that can extremely difficult to do. The value of the "Coke" trademark is not traded on a market, or readily comparable to equivalents, or entirely described by a separate revenue stream (it is in part - licensing revenue for merchandise - but it is also inextricably part of the value of the base product). The entire point of "goodwill" is to provide an account mechanism for that portion of the fair market price -- the non-book value -- that cannot be marked to an asset market like most physical goods.