Larry Bird of the Boston Celtics may have lost a step or two going to the basket, but the guys who run the business side of the team are as quick as ever at dribbling around the tax code.
In a move that will enshrine them among the immortals in the Tax Avoiders Hall of Fame, the Celtics' three principal owners have managed to keep possession of a multimillion-dollar tax break while diversifying from professional basketball into broadcasting. To tax-avoidance fans, that maneuver is equivalent to a Julius Erving 360-degree, in-your-face slam dunk.
To appreciate the beauty of this transaction, which was completed last week, it helps to know something about the business side of the Celtics, whose financial maneuverings have been a lot more successful in the past few years than its basketball moves.
For starters, even though pieces of the Celtics can be bought and sold on the New York Stock Exchange, the Celtics aren't a stockholder-owned corporation. The team is actually a partnership -- a master limited partnership, to be precise. Although almost everyone calls the pieces of the team "shares," they are really partnership units.
What's the difference? In a word, taxes. By not being a corporation, the Celtics save big tax bucks. General Motors Corp., for example, pays corporate income tax on its profits, and then pays some of its after-tax earnings as dividends to its shareholders, who pay personal income tax on them. This makes Uncle Sam a big dipper, giving him two bites at the same dollar -- double taxation, as it's known.
But Uncle Sam gets only one dip out of the Boston Celtics Limited Partnership. Unit holders pay income tax on their share of the team's profits, but the holders' tab is little more than half of what the total taxes would be if the Celtics were a corporation that paid out all its profits as dividends.
Here's how it works. In the year ended June 30, the Celtics earned $8 million before taxes. If the team were a corporation paying out all of its profits, Uncle Sam would make off with more than half of the money -- $2.7 million in corporate taxes from the team and another $1.5 million in personal income taxes on dividends received by the team's stockholders. Instead, Uncle Sam's only cut is $2.2 million from Celtic unit holders. A $2 million savings. Pretty slick.
The only problem with being a master limited partnership -- a tax loophole opened by the 1986 tax law, but slammed shut by the 1987 tax law -- is that it's, well, limiting. An MLP, which under the 1987 law can keep its favorable tax treatment until 1998, loses it immediately if it adds "a substantial new line of business."
This caused problems when the Celtics' three principal owners -- Don Gaston and Alan Cohen of New York and Paul Dupee Jr. of England -- decided to have the team buy its Boston broadcast outlets: WEEI-AM and WFXT, Channel 25. WFXT was owned by Rupert Murdoch's News Corp., which had to sell the station to keep the Boston Herald newspaper -- which means the Celtics presumably got the station cheap. Especially since they gave News Corp. a chance to buy back 37.5 percent of the station, which most buyers wouldn't be willing to do.
But the stations are "a substantial new line of business," and the Boston Celtics Limited Partnership would lose its special tax treatment by buying them. Why give money to Uncle Sam when you can keep it for yourself?
So the principal owners came up with a brilliant game plan. They set up something called the Boston Celtics Communications Limited Partnership and offered Celtics holders the chance to buy one unit of Communications for each Celtics unit they own. The Communications units cost $1.20 each -- and the Celtics paid their holders a special $1.20-a-unit distribution. You don't have to pay tax on that $1.20 until (and unless) you sell your Celtic unit. All you have to do is put the $1.20 in your bank account and write a $1.20 check. In your face, IRS.
I'll spare you the complications, such as the fact that to keep their tax breaks intact, the Celtics have made it very difficult to buy or sell units of Communications, and that the Celtics' tax break expires after 1997, like all other master limited partnerships.
How do I know all this stuff? From reading the score card -- the 155-page Communications prospectus the Celtics sent to their unit holders last month. And from listening to Robert Willens of Lehman Brothers, a tax genius and Larry Bird fan who owns Celtics units, and who called this deal to my attention. "I was wondering how they were going to get around the 'substantial new line of business' problem," says Willens. "Some tax attorney somewhere pulled off a beautiful piece of work."
Alan Cohen, a Celtics principal owner who was a tax lawyer at the beginning of his career, wouldn't talk about the tax aspects of this deal. Or about much of anything. All I could get out of him was variations of, "We bought these stations because we think we got a good deal." You can see why he wouldn't talk. Why give IRS supervisors inflammatory quotes to post on bulletin boards?
As you can see from Cohen's restraint, we are dealing here with very savvy people. After all, principal owners Cohen, Gaston and Dupee did buy the whole team for $18 million in 1983, and got $45 million by selling 40 percent of it as a master limited partnership three years later. If the players can learn to dodge defenders the way the owners dodge taxes, the Celtics would have one helluva team.
Allan Sloan is a columnist for Newsday in New York.