I've read a few articles on the internet lately, including this one at MLB.com, which report that Drayton McLane, owner of the Houston Astros, is selling the team for "Estate Planning Reasons".Now, I've never met the man, and I do not know the man's business nor do I know much about the man's personal wealth other than what is in the public domain, but something really bugs me about the reason he is giving for wanting to sell the team. Frankly, I think it is a public relations snowjob - and here's why:1) Drayton McLane has been trying to sell the team for years, unsuccessfully. He had a deal fall through just a few years ago because the buyer, Jim Crane, was concerned about the economy.2) There may be a very large estate tax when the SURVIVOR of Drayton and his wife, Elizabeth, dies - but there will be a large capital gains as soon as he sells the team. Moreover, the Drayton family will still have a super large taxable estate. So let's talk taxes:- Let's say the McLanes are worth about $1.5 Billion. and the Astros make up about $450 million of that. If they were both to pass in 2012, and the estate tax law reverts to pre-2001 levels, they would owe an estate tax of about $825 million assuming nothing goes to charity. (Incidentally, I believe that they would donate substantial sums to charity.)
- Now let's say Drayton McLane sells the team for $450 million and pays a $70 million capital gains tax (because he bought the franchise for about $100 million and there is a 20% capital gains tax in 2011). The McLanes would then have an estate worth $1.43 Billion. If they were both to pass in 2012, then the estate tax would be $786.5 million - a savings of $38.5 Million. However, because of the payment of the capital gains tax, there is a net loss of $31.5 million in taxes.
- If the McLanes wait until Drayton passes before selling his interest in the Astros, it will receive a step-up in basis. This means that there will not be any capital gains tax due because the team will receive a basis equal to the fair market value on Drayton's death.
- One might argue that if Drayton McLane does not sell the team while he is alive, his estate must sell it in a firesale to raise capital to pay the taxman. This argument really only works if Drayton and Elizabeth die in the same year because if they were working with even a semi-competent estate planning attorney, they could guarantee the tax gets postponed until the second to die.
- Well - what if they did both die within the next two years, then there would be a firesale and they wouldn't receive as much for the team. This may be true, but would that firesale cost them $38.5 million PLUS the time value of the interest? Probably not.
3) There is a throwaway line at the end of the MLB article which reports that Drayton's children "never entertained taking over the club." To me, this is far more important than any tax planning reason they could have for selling the team. If the children wanted the business, Drayton and his attorneys could easily have found a way. Most likely he would have borrowed heavily against the team to reduce its value, transferred it in a part sale-part gift transaction, and then used the liquidity to pay any taxes.
There are many reasons to sell an asset like a baseball team, but estate planning should not be one of them - except to the extent that the McLanes wish to simplify their life and have come to the realization that their children do not wish to be in the family business.
So why does the MLB article upset me so? Mainly because of the implication that he's selling off the team to avoid the estate tax and for the reasons stated above, I think that would be a bad decision. Since I believe Mr. McLane is a smart man who doesn't make many bad decisions, I think he's selling the team for personal and business reasons - not estate planning reasons.
I recently came across a very thoughtful law review article by Daniel Hauptman arguing that Major League Baseball (MLB) should have a worldwide draft. Currently, MLB only drafts players from the United States of America, Canada, Puerto Rico and other U.S. territories.
The crux of Hauptman's argument is that since MLB does not have a worldwide draft, they are engaged in a type of reverse discrimination.
Background
The MLB draft acts as an orderly way for teams to bring in new talent. It has the effect of reducing competition for a particular player. Normally this would be an anti-trust violation, but MLB enjoys a long-standing exemption from the anti-trust laws.
No super talented player actually wants to be drafted. MLB has rules, both formal and informal, that dictate how much a drafted player should be compensated. If a players signed as a free agent, the player would be have more control over the team he signs with, the salary and the contract terms. The effect of this for very talented players is that they could earn a lot more money if there were no draft because there would be competition for their services.
Since the MLB draft only affects players from the United States of America, Canada, Puerto Rico and other U.S. territories, they are at a competitive disadvantage compared to players from other parts of the world who can sign as free agents.
To be clear though, free agency really only helps top athletes. Everyone else has to take what they can get and teams will not bid up these players.
The Law
The draft, as it stands, is something that arrived at as part of the collective bargaining agreement between MLB and the Major League Baseball Player's Association (MLBPA). It is important to note that players who have not signed a major league contract can not be part of the union.
Collective bargaining agreements are governed by federal labor law and it has been traditionally very difficult for individuals who are not a party to the agreement to affect them. Read Hauptman's article for more details.
One argument that can be made to challenge the agreement is that the draft violates a federal or state employment discrimination law. However, these anti-discrimination laws may be preempted by the national labor law which encourages employers and employees to come up with their own agreements - i.e. the collective bargaining agreement.
Non-Legal Issues
Hauptman goes to great lengths in discussing the history of the draft and the effect of the draft on the economies of Latin American countries. In particular, MLB teams used to spend a lot of money developing players in Puerto Rico. Once teams could draft players from Puerto Rico instead of having to bid on their services, teams stopped investing time and resources there and moved to places like the Dominican Republic.
In these Latin American countries where there is no draft, teams are able to sign many players as free agents, but terms and conditions highly favorable to the teams and at very low cost. It also gives large market teams a tremendous advantage because they can sign more players hoping a tiny fraction of them work out.
What a Worldwide Draft Would Accomplish
In the end, Hauptman argues it would be a good idea to have a worldwide draft. He thinks it would result in players being treated equally regardless of where they are from. He also believes it would result in better competition on the field. This is not to say that the draft itself is fair, but it would level the playing field for teams and the individual players.
What if we Did Not Have a Draft?
If a draft bad for the players, many argue we should get rid of it. After all, it suppresses competition for the player's services. The problem with getting rid of the draft is that it serves one very important legitimate purpose - it provides for competitive balance. For that reason alone, MLB will never give it up. The fact that they use it to keep salaries down and provide an orderly method of hiring players is merely a great side benefit.
Final Thoughts
Although MLB and the MLBPA has stated publicly since 2002 that they want a worldwide draft, there are no plans at this time to introduce one. I personally don't see anyone challenging baseball's draft because of the cost of a suit and the potentially deleterious affect it might have on the player filing the suit.
Regardless of whether you are a Yankees fan or not, we should all pause for a moment to reflect on the valuable contributions that Mr. Steinbrenner has give to baseball. He was a great promoter who heavily invested in his team. He single handedly reshaped the way owners thought about free agency and owning their own television rights. And, perhaps most importantly for other owners, he helped steer baseball into its greatest era of profitability.
George Steinbrenner, and minority partner E. Michael Burke, bought the New York Yankees (and some parking garages) from CBS in January of 1973 for $10 million. In 2009, the Yankees were valued at $1.5 billion by Forbes magazine. I am uncertain as to how much of the franchise Mr. Steinbrenner owned at his death, but according to the Forbes 400, he was worth $1.15 billion in 2009.
It is interesting to note that the Yankees franchise itself is very heavily leveraged, and that most of his wealth is tied up in the YES Network. I'm sure that this was done on purpose so that the franchise could be passed on to his children more easily.
It is a bit gruesome to think about, but by George - he passed away in the correct year as far as taxes go. This year, there is no federal estate tax (unless Congress tries to enact a retroactive tax). Moreover, since Mr. Steinbrenner passed away while he was domiciled in Florida, his estate does not owe a state Estate tax either.
What does this mean? Well - in almost any other year his estate would owe the federal government upwards of $500 million in estate taxes. Instead, his heirs merely have to pay a modified capital gains tax when and if they sell George's assets.
Proper estate planning is important, but sometimes it helps to be lucky too.
