The Baltimore Orioles, acclaimed champions of the American League East Division in 2023, may be headed for a change in ownership. Current owner Peter Angelos is in talks to sell the team to investment group led by billionaire David Rubenstein and Orioles Hall of Famer Cal Ripken Jr. for a sum of $1.725 billion. However, the structure of the deal is far from traditional. Rubenstein’s group plans to initially buy only 40% of the team, with the remaining 60% expected to be sold following the death of 94-year-old Angelos. This unconventional setup is reportedly designed to bypass a hefty capital gains tax bill.
Peter Angelos first acquired the team back in 1993 for $173 million. If the team’s sale was to be executed immediately, Angelos could be confronted with an estimated $250 million capital gains tax on the profit of around $1.5 billion. By delaying the bulk of the sale until after Angelos passes away, the basis step-up rule would elevate his cost basis to the current market value as opposed to his original purchase price. Therefore, should the team be sold shortly after, minimal or potentially no capital gains tax would be incurred from the sale.
New owners Rubenstein and his consortium could also reap tax-related benefits. According to Forbes, if the purchase is structured as an asset sale, any losses encountered could be leveraged to offset other income. Nonetheless, investors who do not meaningfully participate in the team’s management can only employ their losses to offset passive income such as that obtained from real estate rental.
Ambiguity prevails regarding who will wield control of the Orioles post Rubenstein’s initial 40% acquisition. While the Angelos family could retain control of the team through their majority ownership, they might also choose to hand control over to Rubenstein following the initial purchase. If this eventuates, the IRS could attempt to reclassify the transaction as if 100% of the team was exchanged whilst Peter Angelos was alive, which could trigger the capital gains tax. The IRS might argue that this two-step transaction was purely engineered to sidestep the capital gains tax.
It is important to remember that the IRS has been known to recharacterize transactions disregarding their legal form if the primary goal of the transaction was to evade taxes. In the past, courts have been wary of the IRS’s use of recharacterization arguments, particularly when tax laws permit deferral or avoidance. Despite this, Peter Angelos’s estate will still be subject to federal estate taxes, which can reach up to 40% in the highest bracket, in addition to Maryland’s own estate tax.
However, the transaction is not yet complete. Due diligence by the league and approval by 75% of MLB owners are still pending.