Most sports franchises have limited partners with no say in management. Often they are wealthy people who dally in sports, knowing that any losses can be used to offset earnings from other sources. But the new law, which takes effect gradually over four years, says that such "passive" investors will no longer be able to deduct these losses from nonpassive earnings. So, for example, limited partners in a money-losing baseball franchise will only be able to use those losses to offset gains from other similar kinds of investments (another limited partnership, for instance) or when they sell their interest.
Corporations don't fall under this rule, and some experts think that will lead to more corporate ownership of sports franchises and facilities. (The NFL still doesn't permit corporate ownership of teams, although the matter is currently under serious consideration.) Indeed, a current case suggests this is already happening. The city of Pittsburgh lobbied on Capitol Hill for an exemption from the passive investment rule to help it sell the financially troubled Three Rivers Stadium to a limited partnership. "We needed the exemption to conclude a sale to some individuals," says Ronald Schmeiser, the city's finance director. Denied the exemption, the investors backed off. So, says Schmeiser, "We turned to a corporation [which he won't name] and we are negotiating the sale."
One very special exemption was gained by those in the show horse and racehorse business. Under the new law, occupations must produce a profit in at least three of five years or be labeled a "hobby" by the IRS. Hobbies do not qualify for business expense writeoffs. By contrast, those involved with horses will be allowed to show a profit in just two of seven years and still qualify as a business, with all the attendant tax benefits.
If the new tax law left sports executives generally relieved, it did produce one nagging concern: the future of expense-account ticket buying. The drop in the entertainment deduction from 100% to 80% may not be so bad, considering the alternative, but the precedent is worrisome to sports administrators. Sure, corporate spenders will still buy blocks of tickets even though they have lost 20% of their deductions. But what if such deductions are decreased on the next go-around to 70 or 60 or even 50%?
It is because of such concerns that in the aftermath of passage of the Tax Reform Act of 1986, Big Sports, like Big Steel, Big Autos and Big Electronics, has become even more of a fixture on the Washington scene than it was before, as its lobbyists remain poised, waiting for the next battle. Says Joan Cavanagh of the now-permanent MainStreets Coalition, "This thing can be tinkered with."
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