Dive into the fast-paced world of mergers and acquisitions with our latest blog post as we unravel the complexities of a legal showdown in the sale of the NBA Memphis Grizzlies. Explore the strategic dance between buyer, seller, and the ever-watchful IRS, where tax intricacies take center stage. Discover why engaging expert tax counsel early in the deal structuring process is crucial and learn valuable lessons from the Hoops case. Don’t miss out on insights that can make a difference in the intricate game of M&A. #MergersAndAcquisitions #LegalShowdown #TaxStrategies #BusinessInsights #HoopsCase.
M&A Stories
March 6, 2024
In the dynamic world of mergers and acquisitions, there are always more than two players on the field. Beyond the buyer and the seller, there’s a third formidable contender – the IRS. Today, we delve into a case that unfolded in the courts, involving the sale of the NBA Memphis Grizzlies team, where tax intricacies took center stage.
Back in 2012, the asset seller opted for an asset sale, parting ways with the Memphis Grizzlies for a cool $201 million in cash. The deal also involved the buyer assuming $219 million of the seller’s liabilities. Among these obligations was a noteworthy $12.9 million in deferred compensation owed to two former players, carrying a present value of $10.7 million.
Initially, the seller included the $10.7 million in its 2012 return as part of the gain from the team’s sale. However, a change of heart led the seller to amend the return, seeking to deduct the deferred compensation amount. Cue the IRS, which disallowed the deduction, triggering a legal showdown in both the Tax Court and the Federal Seventh Circuit Court of Appeals.
The seller’s argument was straightforward – if taxed on the deferred compensation in 2012, a compensation deduction in the same year should be permissible. Despite the seller’s practical reasoning that the government’s technical stance would ultimately disallow deductions for both parties when the compensation was paid out, the courts remained unmoved.
The key takeaway? Engage expert tax counsel early in the deal structuring process. By doing so, potential pitfalls become apparent, and viable solutions can be explored. In the intricate game of M&A, strategic planning, and foresight can make all the difference.
For those eyeing the M&A court from the sidelines, the Hoops case serves as a cautionary tale and a reminder that the IRS is an ever-watchful player in the business arena.
Case Reference:
Hoops, LP v. CIR, No. 22-2012, United States Court of Appeals, Seventh Circuit, (Argued January 19, 2023. Decided August 9, 2023).
Case Reference:
Hoops, LP v. CIR, No. 22-2012, United States Court of Appeals, Seventh Circuit, (Argued January 19, 2023. Decided August 9, 2023).
Thank you for reading this blog. If you have any questions, insights, or if you’d like to engage in a more detailed discussion on this matter, I invite you to reach out directly.
Feel free to send me an email. I value thoughtful discussions and am always open to connecting with business owners management, as well as professionals who share an interest in the complexities of M&A law.
By John McCauley: I write about recent legal problems of buyers and sellers of small businesses.
Email: jmccauley@mk-law.com
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Check out my books: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles and Selling Assets of a Small Business: Problems Taken From Recent Legal Battles
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