CHICAGO (CN) — Amid ongoing legal battles over the accessibility of Wrigley Field, the Chicago Cubs were at the center of another federal case on Thursday, this one probing the Tribune Media Company's 2009 sale of the team to the billionaire Ricketts family.
The Tribune was in dire financial straits at the time, having filed for bankruptcy in 2008. In 2009, it formed a partnership with the Ricketts known as Chicago Baseball Holdings LLC, and through that business sold the majority of its interest in the team, as well as Wrigley Field, to the Ricketts for about $714 million.
As the name suggests, the Tribune Co. was at one point the main publisher for the Chicago Tribune and other Tribune papers. The 2009 cubs sale wasn't the end of the company's financial woes. In 2014 it split into Tribune Publishing, which runs the Chicago Tribune and other papers, and is currently owned by Alden Global Capital, and the Tribune Media Company, currently owned by Nexstar Media Group.
U.S. attorneys with the Department of Justice, alongside the commissioner of Internal Revenue Service, argue the Tribune used a complex financial scheme to avoid paying taxes on some $425 million of the sale. They brought the case to trial in the U.S. Tax Court, which in October 2022 ruled mostly on the Tribune's side: It found the $425 million in question, financed mostly by "senior debt" from outside parties, to be a "nontaxable debt-financed distribution."
In layman's terms, it was tax-free money for the cash-strapped media company.
The government appealed the case in January 2023, arguing the Tax Court misinterpreted anti-abuse rules laid out in the U.S. Treasury regulations. It claimed the Cubs owners' financial gymnastics were an abuse of tax law that would open the door to worse offenses.
"The Tax Court’s erroneous regulatory interpretation led to the wrong result here — and also created a roadmap for future tax abuse," the government wrote in its appellate brief.
A month later the Tribune Company, Ricketts Acquisition LLC and Chicago Baseball Holdings filed their own cross-appeal.
While the Tax Court had largely decided in the once-and-current Cubs owners' favor, it disagreed with the company's argument regarding an additional $248.75 million leveraged to finance the sale — the so-called "subordinated debt." The Ricketts personally supplied that money for the Chicago Baseball Holdings partnership, and while the Tribune argued it should also count as a nontaxable distribution, Tax Judge Ronald Buch ruled that it was taxable equity.
"Tribune’s 2009 disposition of the Chicago Cubs was a disguised sale to the newly formed partnership CBH," Buch wrote in his 2022 decision. "The advance characterized as sub debt was equity for tax purposes, and the portion of the distribution attributable to the sub debt cannot offset Tribune’s recognized gains from the disguised sale."
"The parties to the transaction always treated the subordinated debt as debt. Both Tribune and CBH always reported the subordinated debt as debt in their audited financial statements and tax returns," the Cubs owners countered in their own appellate brief. "And like the senior debt, Tribune guaranteed the subordinated debt, so that the debt would be repaid even if CBH did not pay."
On Thursday, both sides tried to sway the appellate panel into reversing the portion of Buch's ruling their clients opposed. The discussion got deep into the weeds on tax law and whether the Tribune faced genuine economic risk to pay back the senior debt loans.
Department of Justice Attorney Norah Bringer claimed it never did, arguing that under U.S. tax law this lack of risk should put the company on the hook for the taxes it wished to avoid.
"Under the party's arrangements for the Cubs transaction... the Tribune's risk from the senior guaranty was as low as 0%, and a maximum of 0.43% of the senior debt," Bringer argued.
The Tribune Company's own attorney Nicole Saharsky instead urged the panel to affirm the tax court's ruling on the $425 million, citing that a ten-day trial with multiple expert witnesses preceded Buch's decision. She also pushed back against the notion that the Tribune never faced risk over the senior debt, arguing that the debt's lenders could have called for repayments at any time.
"The bottom line is the Tribune's guarantees were real guarantees that could have been called," she said, comparing the $425 million to a life insurance policy rather than proceeds from a sale.
"You hope you don't have to pay out on it, but if you need it, it has significant value," Saharsky said.
She also argued for a reversal on Buch's ruling on the subordinated debt, claiming there was a "mountain of objective evidence" that all the parties involved in the 2009 sale understood the Ricketts' $248.75 million in funding to be debt, not equity.
U.S. Circuit Justice Frank Easterbrook, a Ronald Reagan appointee, interjected at numerous points to question the attorneys' use of language and legal terminology, but raised relatively few substantive issues. The panel was rounded out by Chief U.S. Circuit Judge Diane Sykes, a George W. Bush appointee, and U.S. Circuit Judge Thomas Lee Kirsch, a Donald Trump appointee. Both remained comparatively quiet during the proceedings.
The panel took the case under advisement but did not say when it would issue a ruling.
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