IRS Files Pretrial Memorandum in Tax Dispute Over Chicago Cubs Sale

TRIBUNE MEDIA COMPANY F.K.A. TRIBUNE COMPANY & AFFILIATES, ET AL.,
Petitioners,
v.
COMMISSIONER OF INTERNAL REVENUE,
Respondent

Special Trial Calendar: Washington, D.C.
Date: October 28, 2019

PRETRIAL MEMORANDUM FOR RESPONDENT

NAMES OF CONSOLIDATED CASES:

Tribune Media Company f.k.a Tribune Company and Affiliates

Chicago Baseball Holdings LLC, Northside Entertainment Holdings, LLC f.k.a. Ricketts Acquisition, LLC Tax Matters Partner

ATTORNEYS:

Petitioners:
Joel V. Williamson
(312) 701-7229

Thomas L. Kittle-Kamp
Peter M. Price
Daniel S. Emas
Anthony D. Pastore
James B. Kelly
John W. Horne
Scott M. Stewart

Respondent:
Justin D. Scheid
(630) 493-5372

G. Roger Markley
W. Benjamin McClendon
Rogelio A. Villageliu
Brandon S. Cline
Thomas F. Harriman

AMOUNTS IN DISPUTE:

For the Notice of Deficiency issued to Tribune Media Company ("Tribune"):

Taxable year	Deficiency	Penalty I.R.C. § 6662(h)
12/27/2009	$181,661,831	$72,664,732

For the Notice of Final Partnership Administrative Adjustment issued with respect to Chicago Baseball Holdings LLC ("CBH"), respondent determined adjustments to certain partnership items of CBH relating to the Cubs transaction (described below) and determined a penalty under section 6662(h) of the Internal Revenue Code.¹

STATUS OF CASE: Definite Trial

CURRENT ESTIMATE OF TRIAL TIME: 2 weeks

The deficiency and the penalty issues will be bifurcated for trial, with the present trial starting October 28, 2019 limited to the deficiency. A date and time certain for a trial on the penalty will be set after the Court's entry of an Order on the parties' pending cross motions for summary judgment relating to respondent's compliance with the written supervisory approval requirement in section 6751(b). Accordingly, this pretrial memorandum is limited to discussion of the deficiency.

MOTIONS RESPONDENT EXPECTS TO MAKE:

Motion in limine to exclude Tribune credit rating information prepared after the Cubs transaction.	Requests exclusion at trial of evidence and argument relating to all Tribune credit rating information prepared after October 27, 2009, the date of the Cubs transaction, as irrelevant.
Motion in limine to exlude portions of opening report of petitioners' expert Anil Shivdasani.	Requests exclusion at trial of portions of Shivdasani's opening report concerning Tribune credit rating information prepared after the date of the Cubs transaction because it is irrelevant to the stated opinions.
Motion in limine to exclude portions of opening and rebuttal reports of petitioners' expert William Chambers.	Requests exclusion at trial of portions of Shivdasani's opening and rebuttal reports concerning Tribune credit rating information prepared after the date of the Cubs transaction because it is irrelevant to the stated opinions.

Respondent reserves the right to file any further motions in limine or any other pre-trial motions in accordance with the scheduling order, dated June 20, 2018, entered in the consolidated cases.

STATUS OF STIPULATION OF FACTS: In Process

The parties have prepared, executed and lodged with the Court First, Second, Third, Fourth and Fifth Stipulations of Facts, consisting (in total) of paragraphs 1 through 339, together with (in total) associated exhibits 1-J through 594-J. The parties have reserved objections to certain stipulated exhibits. The parties are continuing to negotiate Sixth, Seventh, Eighth and Ninth Stipulations of Facts, all or a portion of which respondent expects to be executed and lodged prior to the calendar call of the consolidated cases.

ISSUES

1. Whether the CBH subordinated debt is properly treated as equity such that the subordinated debt cannot be allocated under Treas. Reg. § 1.752-2.

2. Whether Tribune realized built-in gains in the amount of $739,509,665 on the disguised sale of the assets of the Chicago Cubs business during the taxable year 2009 because:

3. Whether Tribune properly deducted an expense in the amount of $2,500,000 for a payment made to Marc Utay in connection with the sale of the Chicago Cubs business during the taxable year 2009.

4. Whether respondent correctly determined the adjustments to capital contributions, recourse liabilities, non-recourse liabilities, basis, and other affected items in the Notice of Final Partnership Administrative Adjustment issued with respect to CBH and the Notice of Deficiency issued to Tribune for the taxable year 2009.

WITNESSES RESPONDENT EXPECTS TO CALL

Thomas Ricketts	Mr. Ricketts will testify regarding his involvement in the Cubs transaction, including its negotiation, structure, and agreements, and prior testimony.
Marlene Ricketts	Mrs. Ricketts will testify regarding her participation in the Cubs transaction, including the negotiation, structure and agreements for the CBH subordinated debt.
Nils Larsen, Former Executive Vice President Tribune	Mr. Larsen will testify regarding his involvement in the Cubs transaction, including its negotiation, structure, and agreements, and prior testimony.
Chandler Bigelow, Chief Financial Officer, Tribune	Mr. Bigelow will testify regarding his involvement in the Cubs transaction, including its negotiation, structure, and agreements, his prior testimony and bankruptcy declaration, and Tribune's debtor-in-possession financing.
Nicholas Chakiris, Former Assistant Controller, Tribune	Mr. Chakiris will testify regarding his involvement in the Cubs transaction, including Tribune's financial accounting with respect to its guarantees and the memorandum he prepared.
David Eldersveld, Former General Counsel, Tribune	Mr. Eldersveld will testify regarding his involvement in the Cubs transaction, including its negotiation, structure, and agreements, and the guarantees and financing provided by Barclays to Tribune.
Patrick Shanahan, VP Tax, Tribune	Mr. Shanahan may testify regarding his involvement in the Cubs transaction, including Tribune's tax and accounting treatment.
Randy Michaels, Former Chief Executive Officer, Tribune	Mr. Michael may testify regarding his involvement in the Cubs transaction, including communications with the Tribune Board.
Sam Zell	Mr. Zell may testify regarding his involvement in the Cubs transaction and the impact of the leveraged buyout of Tribune in 2007.
Crane Kenney, President, Chicago Cubs	Mr. Kenney may testify regarding his involvement in the Cubs transaction, including the bidding and negotiations process, Major League Baseball's approval, and Cubs operations.
Craig Parmalee, Managing Director, Standard & Poors	Mr. Parmalee will testify regarding credit rating analysis performed by S&P in connection with the Cubs transaction.
Jeanne Shoesmith, Director, Standard & Poors	Ms. Shoesmith may testify regarding credit ratings prepared by S&P in 2012 through 2016 (testimony is dependent upon the outcome of respondent's pending motions in limine to exclude the reports).
Christopher Brumm, Senior VP and Assistant General Counsel, Major League Baseball	Mr. Brumm will testify regarding his involvement in the Cubs transaction, including Major League Baseball's involvement and approval in the negotiation, structure, and agreements, and prior testimony.
Bob DuPuy, Former General Counsel, Major League Baseball	Mr. DuPuy may testify regarding his involvement in Major League Baseball's approval of the Cubs transaction.
Christopher Martell, Former Senior VP, JPMorgan Chase Securities, Inc.	Mr. Martell will testify regarding his involvement in the Cubs transaction, including the negotiation, structure, and agreements, and prior testimony.
Scott Milleisen, JPMorgan Chase Bank	Mr. Milleisen will testify regarding his involvement in the Cubs transaction, including the CBH senior debt negotiation, structure and agreements, the OSA, and the guarantees.
Marc Utay	Mr. Utay will testify regarding negotiations with Tribune to acquire the Chicago Cubs business, payments made to him by Tribune in connection with the Cubs transaction, and documents produced pursuant to trial subpoena.
Mark Cuban	Mr. Cuban may testify regarding negotiations with Tribune to acquire the Chicago Cubs business, and documents produced pursuant to trial subpoena.
Sal Galiatoto, Galiatoto Sports Partners	Mr. Galiatoto may testify regarding his involvement in the Cubs transaction, including negotiation, structure, and marketing, the CBH debt, financial projections, and documents produced pursuant to trial subpoena.
Alfred Leavitt	Mr. Leavitt may testify regarding his involvement in negotiations of the Cubs transaction on behalf of the Ricketts family with MLB and Tribune.
David K. Larson, Trustee, Joe and Marlene Ricketts Grandchildren's Trust	Mr. Larson may testify regarding his involvement in the Cubs transaction on behalf of Ricketts Acquisition LLC and the Grandchildren's Trust, as its sole member, including the negotiation, structure and agreements.
Mary Kay Braza, Foley & Lardner	Ms. Braza may testify regarding her involvement in negotiations of the Cubs transaction on behalf of the Ricketts family with MLB and Tribune, including the OSA.
Blake Rubin, McDermott, Will & Emery	Mr. Rubin will testify regarding her participation in discussions with Barclays representatives concerning the guarantees and financing provided by Barclays to Tribune.
Mary Fontaine, Mayer Brown LLP	Ms. Fontaine will testify regarding her participation in discussions with Tribune representatives concerning the guarantees and financing provided by Barclays to Tribune.
Bryan Krakauer, Sidley Austin	Mr. Krakauer will testify regarding his participation in discussions with Barclays representatives concerning the guarantees, financing provided by Barclays to Tribune, and Tribune's bankruptcy.
Navid Mahmoodzadegan, Moelis Company	Mr. Mahmoodzadegan may testify regarding analysis conducted in the Tribune bankruptcy on behalf of the creditors' committee, including analysis of the guarantees.
IRS Insolvency Specialist Tracey Solomon	Ms. Solomon will testify concerning the applicable IRS procedures involving bankruptcy matters, including administrative priority claims.
Custodian of records, Barclays Bank	A records custodian may testify regarding documents produced pursuant to trial subpoena relating to Tribune's debtor-in-possession financing and the impact of the guarantees.
Custodian of records, Moelis Company	A records custodian may testify regarding documents produced pursuant to trial subpoena relating to analysis conducted in the Tribune bankruptcy on behalf of the creditors' committee, including the guarantees.
Dr. Douglas Skinner, Ph.D. Professor of Accounting, The University of Chicago Booth School of Business	Dr. Skinner will testify as respondent's finance expert regarding the extent to which Tribune faced financial risk from its guarantees of the CBH debt, the economic impact of the Ricketts family's interest in the CBH subordinated debt, and other matters set forth in his opening and rebuttal reports.
Dr. Oliver Hart, Ph.D., Professor of Economics, Harvard University	Dr. Hart will testify as respondent's economics expert regarding the benefits and burdens of ownership of the Cubs after the transaction, whether the transaction is economically distinguishable from a sale of the Cubs by Tribune, and other matters set forth in his opening report.
Howard Gellis, former Senior Managing Director, The Blackstone Group, L.P.	Mr. Gellis will testify as respondent's lending industry expert regarding the commercial reasonableness of the Tribune guarantees and the CBH subordinated debt, and other matters set forth in his opening and rebuttal reports.
IRS Revenue Agent James Batory	Revenue Agent Batory may testify regarding respondent's calculation of gain on the disguised sale of the Cubs.

Respondent reserves the right to call a records custodian with respect to any documents stipulated or exchanged with petitioners for which an objection has been reserved, including Major League Baseball, JPMorgan Securities, Inc., JPMorgan Chase Bank, Standard & Poor's, and Fitch Ratings Service.

Respondent reserves the right to call witnesses in rebuttal, solely for purposes of impeachment, and to cross-examine any witness offered by petitioners. Respondent also reserves the right to examine any witness regarding all documents stipulated or identified by the parties to be offered as evidence.

SUMMARY OF FACTS

In 1981, Tribune Company ("Tribune") acquired the Chicago Cubs major league baseball team, the Wrigley Field stadium, and other Cubs-related assets (the "Chicago Cubs Assets") for $20.5 million. At the time, Tribune was a publicly traded C corporation. In 2007, investor Samuel Zell led a leveraged buyout of Tribune stock. Zell structured the new company as an S corporation wholly-owned by an ESOP. On the effective date of the S election, January 1, 2008, Tribune converted from a C to an S corporation with an unrealized built-in gain of $612 million attributable to the Chicago Cubs Assets. Disposing of any of its built-in gain assets, including the Chicago Cubs Assets within a ten year period beginning January 1, 2008, would subject Tribune to an entity level tax under section 1374(a) on any net realized built-in gain.

In connection with the leveraged buy-out, Tribune took on $8.4 billion in new debt, increasing its total outstanding liabilities to $14.4 billion. Saddled with debt, Zell looked to turn Tribune's assets into cash. The Chicago Cubs Assets were the crown jewel of Tribune's portfolio. Zell had planned on selling the Chicago Cubs Assets even before the leveraged restructuring of Tribune was completed in December 2007.

To sell the Chicago Cubs Assets, Tribune engaged JP Morgan to facilitate the bidding process. In advance of the bidding, Tribune's advisors prepared a descriptive memorandum outlining Tribune's preferred transaction; the key aspects of the structure included (1) a debt-financed purchase of the Chicago Cubs Assets by a partnership, (2) guarantee of the debt by Tribune, (3) a special cash distribution to Tribune equal to 95% of the value of the Chicago Cubs Assets, and (4) an agreement by the parties not to sell the Chicago Cubs Assets prior to January 1, 2018. Bidding began in the second half of 2007. After several phases of bidding, Tribune walked away from an offer made by a group led by Marc Utay that valued the Chicago Cubs Assets at $1 billion, offered a 27.5 percent retained interest in the partnership, and yielded projected after-tax proceeds of $657.4 million. Instead, Tribune accepted the offer tendered by the Ricketts family, which included a significantly smaller retained interest in the partnership and lower value for the assets, but had higher projected after-tax proceeds.

During the bidding process, Tribune, on December 8, 2008, filed a petition for Chapter 11 bankruptcy relief and reported $14.4 in debt. Just over a month later, in January 2008, Tribune announced its plans to sell the Chicago Cubs Assets to the Ricketts family and the deal closed in October 2009. The Ricketts family structured their winning bid in accordance with the descriptive memorandum, a transaction that allowed Tribune to dispose of 95 percent of its interest in the Chicago Cubs Assets in exchange for $713.5 million in cash. If allowed, Tribune achieved the economic equivalent of a tax-free sale of the Chicago Cubs Assets through a purported debt financed distribution to Tribune equivalent to the fair market value of Tribune's 95 percent interest in the Chicago Cubs Assets. The Ricketts family, through affiliated entities, contributed $150 million in cash to CBH for a 95 percent interest and beneficial use and control of the Chicago Cubs Assets. CBH took on $674 million in senior and purported subordinated debt. Tribune collected $713.5 million in cash and attempted to avoid payment of $181 million in built-in gain tax under section 1374.

A. Summary of Transaction

Prior to the sale, Chicago National League Baseball Club, LLC ("CNLBC"), a Qualified Subchapter S Subsidiary ("QSub") and wholly-owned subsidiary of Tribune, held a portion of the Chicago Cubs Assets, including the Chicago Cubs baseball team and Wrigley Field. Because CNLBC was a QSub, all of its assets and liabilities were treated for tax purposes as assets and liabilities of Tribune under section 1361(b)(3). Tribune also held other assets related to the Chicago Cubs business through other wholly owned subsidiaries.

Tribune contributed the assets and liabilities of its Chicago Cubs business, with a fair market value of approximately $845 million, to newly formed CBH, which is treated as a partnership for U.S. tax purposes. The Ricketts family provided the funds: Ricketts Acquisition LLC ("RA LLC") contributed $150 million in cash to CBH, CBH obtained the senior debt financing ("Senior Debt"), arranged subordinated debt through a Ricketts affiliate ("Subordinated Debt"), as was a $35 million revolving operational support fund (the "OSA"). Tribune then received a $713.5 million special distribution.

To obtain the necessary cash to achieve Tribune's transaction goal of receiving a debt-financed cash distribution, CBH borrowed the Senior Debt of $425 million with a $25 million revolving credit facility from a consortium of banks led by JPMorgan Chase Bank (the "Senior Lenders"). To ensure sufficient funds to service the Senior Debt, CBH agreed to establish a cash collateral account into which CBH agreed to deposit all amounts received at any time (less certain excluded revenues such as loans received under the OSA). Payments from the cash collateral account were paid first to service the Senior Debt, with any excess distributed in accordance with a waterfall provision in the Cash Collateral Agreement. Payment on the Subordinated Debt was fourth (and last) in priority under this waterfall provision.

CBH borrowed the Subordinated Debt of $248.8 million from Marlene Ricketts through her indirect interest in RAC Education Trust Finance LLC ("RAC Finance"), an entity owned by MMR Investors, LLC. Marlene Ricketts, the matriarch of the Ricketts family and mother of Thomas Ricketts, was the sole member of MMR Investors, LLC. The sole manager of RAC Finance was RA LLC. Under the terms of the Subordinated Promissory Note, CBH must pay the accrued interest on the Subordinated Debt at the end of each year, but only if CBH determines that there is cash available under the payment waterfall and the payment is allowable under the Cash Collateral Agreement and a Subordination Agreement. Accrued but unpaid interest is added to the principal balance of the Subordinated Debt as paid in kind interest. CBH may not prepay any amount of principal on the Subordinated Debt for the first five years unless the sum of the outstanding principal on the Senior Debt and the Subordinated Debt (including any interest that has been added to principal) exceeds $700 million.²

It was contemplated that CBH would issue Subordinated Promissory Notes to outside investors in addition to or as a substitute for a portion of the $248.8 million funded by Marlene Ricketts and a Confidential Private Placement Memorandum was drafted for this purpose. Under the terms of the Subscription Agreement, which was required to be executed by any potential note holder, the form of any Subordinated Promissory Note would be exactly the same as that agreed to by the subordinated lender. Thus, any outside note holders would be subject to the same limitations on receipt of payments, paid in kind interest, and loan acceleration. Subordinated promissory notes were never issued to outside investors and Marlene Ricketts remained the sole subordinated lender.

B. Operating Support Agreement

In transactions involving the transfer of a controlling interest in one of its clubs, Major League Baseball ("MLB") must certify that the level of debt undertaken in connection with the transfer will not create a persistent inability of the club to comply with MLB's debt service rule. The MLB debt service rule restricts the amount of debt a team can carry based on how much debt can reasonably be supported by the team's earnings. In a letter dated October 7, 2009 to Mr. Ricketts, MLB expressed concern about the level of debt to be taken on by the new partnership. The Operating Support Agreement ("OSA") was established as a separate evergreen reserve fund in connection with the MLB approval. In a letter dated October 27, 2009, Mr. Ricketts, on behalf of the Ricketts entities, agreed to form an OSA Entity to provide CBH an available funding source of no less than $35 million for operational support. The agreement anticipated the OSA Entity would fund CBH through unsecured, subordinated loans, if needed, to meet ongoing operational expenses and satisfy MLB's debt service rule. Should the total net worth of the OSA entity fall below $35 million, the agreement obligates the Ricketts family to make an additional capital contribution or escrow deposit equal to the short-fall. The OSA does not cap the total amount the Ricketts family may be required to contribute.

The Senior Lenders relied on the OSA. The fifth whereas clause of the OSA provides, in part, that the Senior Lenders' obligation to make loans is conditioned upon the execution and delivery of the OSA. Furthermore, paragraph 7.01(aa) of the Credit Agreement dated October 9, 2009, makes it a specific event of default if "the OSA Entity shall fail to make any payment due to the Borrower [CBH] under the OSA Commitment [Subordinated Loan Commitment Agreement] as and when due, or any other default shall occur under the OSA Commitment or the OSA Agreement, or the failure of the OSA Entity to fund an OSA loan as required under the OSA." Several documents state that the OSA Entity's obligations are not intended to be, directly or indirectly, a guarantee of the Senior Debt; however, the parties, including MLB, intended the OSA Entity to help ensure that CBH operations maintain liquidity and that the Cubs organization remains properly funded.

C. Tribune's Guarantees of Collection

Tribune needed to sell the Chicago Cubs Assets to pay its bankruptcy creditors; Tribune was still a debtor-in possession at the time the transaction closed. To maximize the cash from the sale and obtain a tax-free debt-financed distribution, Tribune required that it provide guarantees for the debt incurred by CBH; guarantees that neither the Ricketts family nor the Senior Lenders required. Tribune contends that, by providing the guarantees, it received basis under section 752 and, thus, the special distribution of $713.5 million is tax-free under the debt-financed distribution exception to the disguised sale rules under Treas. Reg. § 1.707-5 as "borrowing through the partnership."

Both guarantees, in section one, cap Tribune's potential liability to the original principal amount plus any unpaid interest and premium. Further, in section two, the guarantees explicitly state that these are collection guarantees and not guarantees of payment, and that the lenders must first exhaust all their remedies against CBH, the collateral and other guarantors before collecting on the guarantees. In a Tribune memorandum, dated October 27, 2009, Nick Chakiris, Tribune's Assistant Controller, explains that in order to trigger the Tribune guarantees, the "lines of credit supplied by the $25 million revolver and the $35 million OSA would need to be exhausted and the [Ricketts family] would need to refuse to contribute additional funds." Chakiris further states that the $25 million revolver and the $35 million OSA "ensure that the repayment of the Senior Debt Financing facilities and the Subordinated Debt Financing facilities are not solely dependent on successful operations of the Cubs Business. Finally, although the Company [Tribune] is the guarantor on the debt, . . . , the guaranties are insignificant to the overall transaction and are not a continued necessity for the successful operations of [CBH]. "

In rating the risk of the transaction Fitch, Standard & Poor's and JPMorgan did not decrease the risk of the transaction as a result of Tribune's collection guarantees. Any mention of the guarantees was brief and not included in the overall analysis of the transaction. The three rating statements did, however, address the importance of the OSA. The lack of consideration of the guarantees by the rating agencies is not surprising. Chakiris concluded that Tribune would not record a liability related to its collection guarantees for accounting purposes and his analysis for this conclusion states, in part,

The Company [Tribune] has no credit rating as it is currently operating as a debtor in possession under the Chapter 11 proceedings. Without an approved plan of reorganization in place when the guaranties were signed, the lending parties had no insight into the Company's [Tribune's] future financial position. We further note that Bidder [Ricketts] family has net worth of $1 billion as listed in a 2008 Forbes Magazine report. The Bidder [Ricketts] has ample resources absent the Company's [Tribune's] guaranty. We conclude that it is unlikely that the amount or the terms of the Senior Debt Financing facility were enhanced as a result of the guaranty.

Chakiris concludes that Tribune's sensitivity analysis determined that "there is no value to the contingent liability associated with the guaranties as the likelihood of performance is remote." Based on this conclusion, Tribune did not record the guarantees as liabilities and determined it was instead required to make off-balance sheet disclosures related to these guarantees because "it is not currently likely that the guaranties will have a material impact on the Company's operations, cash flows or liquidity."

Further, prior to its bankruptcy filing, Tribune entered into a financing arrangement with Barclays Capital in which Tribune granted Barclays a security interest in Tribune's accounts receivables. When Tribune filed for bankruptcy, this borrowing was converted into an interim debtor-in-possession ("DIP") financing. A side letter was signed at closing of the interim DIP that allowed "tax advantaged debt" defined as Permitted Disposition Transaction (PDT) debt to be incurred by Tribune, but only if the interim DIP was repaid in full. This debt was defined as PDT debt. Tribune sought to amend the side letter to allow for the PDT debt to be incurred without accelerating the interim DIP facility. The negotiations with respect to the PDT debt in connection with the proposed Cubs transaction indicate that the risk of the guarantees being called upon was remote.

D. Tribune's Book Treatment

In his memo, Chakiris stated "the purpose of this [transaction] was to transfer operational control of the Cubs Businesses to [CBH] thereby monetizing the assets for [Tribune]." For book purposes, Tribune reported the transaction as a sale. An independent auditor's report from Deloitte, also considers the transaction a sale. Deloitte states "[i]n exchange for its sale of the Chicago Cubs baseball team and related assets, Tribune and Tribune affiliated companies received cash consideration and a 5% equity interest in [CBH]." On Tribune's balance sheet, the Chicago Cubs Assets are "held for disposition." After the transaction, Tribune's "residual 5% equity stake in [CBH] is so minor that [Tribune] has virtually no influence over [CBH's] operating and financial policies."

SYNOPSIS OF LEGAL AUTHORITIES

Issue 1. The Subordinated Debt is Equity for Federal Income Tax Purposes.

CBH issued $248.8 million of Subordinated Promissory Notes to RAC Finance, an entity owned by MMR Investors, LLC, which is in turn wholly owned by Marlene Ricketts. Marlene Ricketts funded the $248.8 million of purported Subordinated Debt of CBH, which was financed through her disregarded entities. Any reasonable analysis of the debt-equity factors must conclude that the Subordinated Debt is equity for federal income tax purposes. Consequently, the Subordinated Debt cannot be allocated under Treas. Reg. § 1.752-2. Thus, Tribune is not entitled to claim basis with respect to the Subordinated Debt in the amount of $248.8 million.

The debt versus equity inquiry generally focuses on whether there was intent to create a debt with a reasonable expectation of repayment and, if so, whether the intent comports with the economic reality of creating a debtor-creditor relationship. Fin Hay Realty Co. v. U.S., 398 F.2d 694, 697 (3d Cir. 1968); Litton Bus. Sys., Inc. v. Commissioner, 61 T.C. 367, 377 (1973). The key is discerning the taxpayer's actual intent, evidenced by the particular circumstances of the transfer. A.R. Lantz Co. v. U.S., 424 F.2d 1330, 1333 (9^th Cir. 1970); U.S. v. Uneco, Inc., 532 F.2d 1209. The Tax Court has articulated a list of 13 factors for consideration in the debt versus equity analysis. Dixie Dairies Corp. v. Commissioner, 74 T.C. 476, 493 (1980); see also Notice 94-47, 1994-1 C.B. 357. The same debt-equity factors that apply in the corporate context are equally applicable to partners and partnerships. Hambeuchen v. Commissioner, 43 T.C. 90 (1964).

Factors include (i) the names given to the certificates evidencing purported indebtedness; (ii) the presence or absence of a fixed maturity date; (iii) the present or absence of a fixed or determinable rate of interest or dividends to be paid to the holder; (iv) the source of payments; (v) the right to enforce payment of principal and interest; (vi) participation in management flowing from the instrument; (vii) the status of the contribution in relation to regular corporate creditors; (viii) the intent of the parties; (ix) the adequacy of the capital structure of the issuer; (x) the identity of the interest between creditors and shareholders; (xi) the ability of the corporation to obtain loans from outside lending institutions; and (xiii) the extent to which the advance was used to acquire capital assets. Dixie Dairies, 74 T.C. at 493.

The tax opinion received by Tribune in connection with the transaction acknowledges the weaknesses in Tribune's argument that the Subordinated Debt should be treated as true debt, stating that "the two factors favoring equity in this case [participation in management and identity of interest between creditors and shareholders] are the factors that most often subject advances between related parties to greater scrutiny than advances between unrelated parties." An analysis of the transaction as a whole and of the factors independently clearly demonstrates that the Subordinated Debt is equity, albeit equity carefully structured to resemble debt.

I. The Parties Intended to Create the Appearance of a' Creditor-Debtor Relationship.

"The form of the transaction and the labels that the parties place on the transaction may have little significance when the purported debtor and creditor are related parties." Nestle Holdings v. Commissioner, T.C. Memo. 1995-441. The court in Fin Hay Realty recognized that following formalities is often of little probative value in a debt/equity determination:

In the present case all the formal indicia of an obligation were meticulously made to appear. The corporation, however, was the complete creature of the two shareholders who had the power to create whatever appearance would be of tax benefit to them despite the economic reality of the transaction.

Fin Hay Realty v. US, 398 F.2d 694, 697 (3^rd Cir 1968). The transaction structure was dictated in advance by Tribune and required that a newly created partnership have a sufficient amount of debt to enable the special distribution to flow to Tribune tax free. The transaction structure and the level of debt were dictated by Tribune. The MLB Commissioner stated in an October 7, 2008 letter that the structure of the transaction and the level of debt in particular were driven by Tribune. In addition, as indicated by Standard & Poors in its report to RA LLC, the Ricketts family preferred not to use subordinated debt instead of equity, stating:

Our understanding is that subordinated debt was chosen as a source of capital in favor of equity, in large part to meet the tax strategies of the seller. We view the terms of the subordinated notes as having many favorable characteristics, such as deferral rights, and a relatively long tenor. In addition, the expected restrictive payments test under the senior notes indenture will likely limit cash payment of interest under the subordinated notes to some degree. Our rating conclusions assume that the Ricketts related parties that will hold the subordinated notes will act, with regard to these investments, very much like equity holders. (emphasis added).

Not only is Standard & Poors an independent third party with respect to the transaction, its report was prepared exclusively (and contemporaneously) for RA LLC, which highlights its probative value with respect to the Ricketts family's view of the Subordinated Debt. Equally, Tribune dictated in advance its guarantee of the debt, to achieve its tax purposes.

II. Application of the Debt-Equity Factors Demonstrates the Subordinated Debt is Equity.

In form, the Subordinated Debt reflects the classic features of debt: an apparently enforceable right to a sum certain on maturity, including fixed interest, regardless of the income of CBH. This does not reflect the economic reality of the arrangement. As stated in Fin Hay Realty:

Under an objective test of economic reality it is useful to compare the form which a similar transaction would have taken had it been between the corporation and an outside lender, and if the shareholder's advance is far more speculative than what an outsider would make, it is obviously a loan in name only. Fin Hay Realty v. US, 398 F.2d 694, 697 (3rd Cir 1968).

The speculative nature of the Subordinated Debt is evident upon a review of its terms, all of which had to be accepted by any buyer of any Subordinated Debt. The interest rate on the Subordinated Debt is 6.5%, which is actually lower than the 6.79% - 7.17% interest rate range on the three private placement notes constituting $250 million of the Senior Debt, which is secured by CBH's assets. The Subordinated Debt interest rate is lower despite the fact that no principal will be due until 2024, which is more than 15 years after the inception of the loan and after the maturity date on the Senior Debt. In addition, annual accrued interest on the Subordinated Debt may not be paid unless CBH determines that there was cash available under the payment waterfalls. Under the Subscription Agreement, however, CBH cannot make this determination if it owes Tribune any money under the Tax Matters Agreement (the "TMA"). If the lender receives a cash interest payment despite CBH having an obligation to Tribune under the TMA, the lender must hold the cash in trust for Tribune and pay it over upon written request. Accrued interest that is not paid each year is added to the principal balance of the loan as paid in kind interest, which is not due until 2024.

To avoid any potential default of the Subordinated Debt due to nonpayment of interest, the interest is added to principal on the annual payment date. However, the Subordinated Debt is not due for 15 years, essentially deferring payment by CBH of any interest for the life of the purported debt. Nevertheless, the Subordinated Debt permits Marlene Ricketts the right to receive a tax distribution for the accrued and unpaid interest. The right to a tax distribution is a hallmark of equity, and is never available on a debt instrument. Interestingly, Thomas Ricketts, the member of the Ricketts family that controls RA LLC, the 95% owner of CBH, made the election to defer payment of interest on the Subordinated Debt until maturity and to only take a tax distribution. In short, the individual controlling 95% of the borrowing is making decisions on behalf of the lender.

The "events of default" under the Subordinated Debt are very weak. Essentially, a default cannot occur as a result of nonpayment of principal or interest when due until the maturity date in 15 years. The other two events of default are tied to conditions of the Senior Debt.

Lastly, as evidenced by the fact that no investor purchased any of the Subordinated Debt, the subordinated loan documentation was wholly inadequate to protect the interests of any lender. Any potential investor in the Subordinated Debt was obligated to accept the exact same terms as the Ricketts family without any negotiation. Consequently, a potential investor of a portion of $248.8 million of Subordinated Debt would have been legally protected by an eight page Subordinated Promissory Note, a nine page Subscription Agreement, and a three page Subordinated Debt Commitment Letter signed by Marlene Ricketts. Of the nine pages comprising the Subscription Agreement, approximately half consist of lender representations, covenants and agreements which protect the interests of CBH as the borrower.

III. Participation in Management and Identity of Interest.

The Subordinated Debt is held by Marlene Ricketts, the matriarch of the Ricketts family. The Ricketts family controls RA LLC, which as the majority owner of CBH possesses nearly exclusive management rights in CBH. RA LLC is the sole manager of RAC Finance, the lender of the Subordinated Debt. Those rights should be treated as held by Ms. Ricketts based upon her relationship as holder of the Subordinated Debt and RA LLC. In Gooding Amusement Co. v. Commissioner, 23 T.C., 408, 419 (1954), aff'd 236 F. 159 (6th Cir. 1956) the Court found that "where identity of interest exists, the creditors will not enforce payment under the terms of the purported debt." It is highly unlikely that Ms. Ricketts would sue her son to enforce payment of the Subordinated Debt. The identity of interest between Ms. Ricketts and RA LLC supports treatment of the Subordinated Debt as equity for tax purposes.

Further, many of the special benefits provided to Ms. Ricketts under the agreement — premium seating, clubhouse access, annual road trips — are of the type provided to owners and non-owners alike (such as retired athletes and contest winners). There is no support for treating such special benefits as equivalent to the rights of a creditor.

IV. MLB Debt Service Rule.

MLB did not consider the Subordinated Debt to be true debt under its Debt Service Rule. Under the Debt Service Rule, "(NJo Club may maintain more 'Total Club Debt' than can reasonably be supported by its EBITDA." The Debt Service Rule is designed to make sure that a team does not leverage itself so much that it cannot service its debt with its EBITDA. The "Total Club Debt" definition is broad and far reaching. In addition to specifically enumerated items, the definition includes "without limitation all long-term and short-term obligations and all indebtedness" and "any other debt that is properly classified as an indebtedness of the Club under generally accepted accounting principles". Despite this far reaching definition, MLB does not consider related party debt to be true debt of a team (i.e. part of a "Club's total outstanding debt") unless such debt is secured by team assets. Since it was not secured by team assets, the Subordinated Debt was excluded from the definition of "Total Club Debt" in the MLB Basic Agreement.

V. The Subordinated Debt Could Not Be Sold to Investors.

The Ricketts family considered selling a portion of the Subordinated Debt in a private placement. However, the Subordinated Debt was never sold in the debt market. No one appeared to be interested. "(E)vidence that a taxpayer could not obtain loans from independent sources indicates that the related-party advance was in substance a capital contribution." Calumet Indus., Inc. v. Commissioner, 95 T.C. 257, 287 (1990). The inability of the Ricketts to sell the Subordinated Debt is definitive, objective proof that the terms of the Subordinated Debt were far more speculative than any outside investor was willing to accept. The Subordinated Debt is Ricketts' equity and cannot result in a share of liabilities under section 752.

Issue 2. The Special Distribution received by Tribune should be treated as Consideration for a Disguised Sale under Treas. Reg. § 1.707-5(b)(1).

Tribune realized built-in gains of approximately $739 million on the disguised sale of the Chicago Cubs Assets in 2009. The Internal Revenue Code provides generally for the tax-free contribution of capital to partnerships (section 721) as well as the tax-free return of money to a partner not exceeding a partner's adjusted basis in the partnership (section 731). However, Congress recognized that taxpayers could devise "disguised sale" schemes to avoid reporting gains on sales and dispositions of property by disguising transactions as combinations of otherwise non-taxable contributions and distributions through partnership structures. See I.R.C. § 707(a)(2)(B). In order to effectuate a purportedly tax-free return on the sale of Chicago Cubs Assets, Tribune exchanged the Chicago Cubs Assets and liabilities for a special distribution of cash through CBH.

Under section 707(a)(2)(B), if a partner transfers property to a partnership and receives a related transfer of money, the transfer may be treated as a sale. Treas. Reg. § 1.707-3(a)(1). Such transfers constitute a sale only if based on all the facts and circumstances, (i) the transfer of money would not have been made but for the transfer of property; and (ii) in cases in which the transfers are not made simultaneously, the subsequent transfer is not dependent on the entrepreneurial risks of partnership operations. Treas. Reg. § 1.707-3(b)(1). Transfers that occur within a two-year period are presumed to be a sale of the property to the partnership unless the facts and circumstances clearly establish that the transfers do not constitute a sale. Treas. Reg. § 1.707-3(c)(1). However, Treas. Reg. § 1.707-5(b)(1) provides a "debt-financed distribution" exception that if a partner transfers property to a partnership, and the partnership incurs a liability and all or a portion of the proceeds of that liability are allocable to a transfer of money to the partner made within 90 days of incurring the liability. The transfer of money is taken into account only to the extent that the amount of money transferred exceeds that partner's allocable share of the partnership liability. For the debt-financed distribution exception to apply, Tribune's guarantees must be respected and treated as an obligation such that Tribune is allocated the Senior and, to the extent respected as bona fide debt, the Subordinated Debt under section 752.

I. Tribune's Guarantees should be Disregarded because the Ricketts Family Bears the Economic Risk of Loss on the Debt.

Treas. Reg. § 1.707-5(a)(2) provides that section 752 and the regulations thereunder apply in determining a partner's share of a partnership liability for purposes of the debt-financed distribution exception. A partner's share of recourse liability equals the portion of that liability, if any, for which the partner bears the economic risk of loss. Treas. Reg. § 1.752-2(a). A partner bears the economic risk of loss for a partnership liability to the extent that, if the partnership constructively liquidated, the partner would be obligated to make a payment to any person (or a contribution to the partnership) because that liability becomes due and payable and the partner would not be entitled to reimbursement from another partner. Treas. Reg. § 1.752-2(b)(1).

For purposes of determining whether a partner is obligated to make a payment, contractual obligations such as guarantees are taken into account. Treas. Reg. § 1.752-2(b)(3)(i). Furthermore, for purposes of determining the extent to which a partner has a payment obligation and economic risk of loss, it is assumed that all partners who have obligations to make payments actually perform those obligations, irrespective of their actual net worth, unless the facts and circumstances indicate a plan to circumvent or avoid the obligation. Treas. Reg. § 1.752-2(b)(6).

Tribune's guarantees of collection do not provide Tribune with an economic risk of loss on the CBH debt and should be disregarded. It is appropriate to disregard a guarantee if the guarantee is nothing more than a ". . . guise to cloak" a partner "with an obligation for which it bore no actual economic risk of loss." Canal Corp. v. Conun'r, 135 T.C. at 213. Rather, the Ricketts family bears the economic risk of loss for the liabilities under the section 752 anti-abuse rule. See Treas. Reg. § 1.752-2(j). Where the facts and circumstances indicate a plan to circumvent or avoid the obligation attributed to the partner under the constructive liquidation test (Treas. Reg. § 1.752-2(b)(6)), the anti-abuse provision under Treas. Reg. § 1.752-2(j)(1) applies.

Under Treas. Reg. § 1.752-2(j)(1), an obligation of a partner to make a payment may be disregarded or treated as an obligation of another person if the facts and circumstances indicate that a principal purpose of the arrangement between the parties is to eliminate the partner's economic risk of loss with respect to that obligation or create the appearance of the partner bearing the economic risk of loss when, in fact, the substance of the arrangement is otherwise. Treas. Reg. § 1.752-2(j)(3) further provides that an obligation of a partner to make a payment is not recognized if the facts and circumstances indicate a plan to circumvent or avoid the obligation.

In Canal Corp., the Tax Court considered the application of Treas. Reg. § 1.752-2(j) to an indemnity agreement. WISCO, a wholly-owned subsidiary of Chesapeake (the predecessor of Canal Corporation) transferred assets worth $775 million to a new partnership (PRS) in exchange for a 5 percent partnership interest. Chesapeake wanted to sell a portion of its business but had a low basis in the assets. Georgia Pacific (GP) transferred property worth $376.4 million to PRS in exchange for a 95 percent partnership interest. GP had no interest in Chesapeake's tax deferral but was willing to "buy" at a lower "price" because of the deferral benefit. Subsequently, PRS borrowed $755.2 million from a third party lender, all of which was immediately distributed to WISCO in a special distribution. GP served as the guarantor on the principal amount of the loan and WISCO agreed to indemnify GP for any principal payments GP was required to make under its guarantee. Neither GP nor the third party lender required the indemnity.

The indemnity agreement was significant in several respects:(1) the indemnification only covered the principal of the debt; (2) it required GP to proceed against the assets of PRS before demanding indemnification; and (3) it provided that WISCO's interest in PRS would increase should WISCO make an indemnification payment. In addition, WISCO was not required to maintain a certain net worth (WISCO's net worth of $157 million represented approximately 21 percent of the indemnification exposure) and the economic risk of loss of Chesapeake was limited to WISCO's assets, the most valuable of which was an intercompany note that Chesapeake could cancel at any time. Importantly, GP knew that WISCO's assets were limited at the time of the transfers. Like Tribune in this case, WISCO claimed that no disguised sale had occurred because it satisfied the literal requirements for the debt-financed distribution exception in Treas. Reg. § 1.707-5(b)(1).

In its analysis, the Court considered the purpose of the indemnity agreement and whether WISCO had sufficient assets to cover the indemnity agreement. The Court found that the purpose of the agreement was to limit any potential liability of WISCO's assets. In so finding, the Court took into account the following facts, none of which were dispositive: (1) GP did not require the indemnification; (2) the indemnification did not require WISCO to maintain a certain net worth; (3) WISCO provided the indemnification purposely to achieve tax deferral; (4) the indemnification only covered the principal of the loan; and (5) WISCO stood to receive an increased interest in PRS if required to make indemnification payments. The Court found that WISCO's agreement to indemnify GP lacked economic substance and provided GP no real protection because WISCO's primary asset was an intercompany note that could be cancelled at any time and the indemnity did not require WISCO to retain this note or any other asset (i.e., WISCO was severely undercapitalized vis-à-vis the indemnification exposure).

Tribune's guarantees share several similarities with the WISCO indemnity disregarded by the Court. In both cases, neither the lender nor the guarantors required the guarantees. Both Tribune and Chesapeake insisted on the debt as a prerequisite to the transaction. Further, as in Canal Corp., the lenders imposed no net worth maintenance requirement on Tribune.

The cash distribution Tribune received is taxable as sale proceeds under the disguised sale rules of section 707(a)(2) if its guarantees are disregarded for purposes of determining its share of recourse liabilities. The anti-abuse regulation was included to prevent exactly the type of transaction that Tribune engaged in: one where the form seems to obligate the taxpayer but where the obligation was cleverly structured to avoid true economic risk. Tribune intended to sell the Chicago Cubs Assets and obtain "true sale" treatment for financial reporting purposes, and the public believed that the Ricketts family purchased the Chicago Cubs Assets. The tax results are no different.

Tribune used several techniques to hollow out its collection guarantees. First, Tribune was in the middle of a bankruptcy restructuring under Chapter 11 when the guarantees were executed. No lender would give any credence or rely in any way upon a guarantee of a bankrupt obligor. Lenders generally avoid dealing with bankrupt companies, with the notable exception of Debtor in Possession ("DIP") financing. Knowing this, Tribune fashioned the guarantee with an administrative priority. However, there is no evidence that the lenders relied on Tribune's guarantee. The guarantees were structured and entered into solely for Tribune's benefit.

Further, it is extremely unlikely that the guarantees would have ever become payable to the lenders because they are guarantees of collection, not payment, and there are many conditions precedent in the guarantees that must occur before the guarantees become payable. Administrative priority of payment is of no practical consequence to a lender until the guarantees become payable. If the guarantees are not payable to the lenders, the guarantees will not be able to compete for payment from the bankruptcy estate vis-à-vis other claims against the bankruptcy estate. In the meantime, other administrative claims, whether superior or in pari passu in the order of payment to the guarantees, and even unsecured priority claims (by definition a lower than administrative claim priority), that have become payable, may be paid out by the bankruptcy estate.

Second, the guarantees were not commercially common guarantees. They were highly unusual, arcane guarantees of collection, and not of payment. The guarantees also had monetary carve-outs for expenses and costs. The guarantees cannot be enforced until the borrower (a) shall have failed to make a payment due to the lenders in respect of the guaranteed obligation and the loan shall have been accelerated, (b) the lenders shall have exhausted all "Lender Remedies" and (c) the lenders shall have failed to collect the full amount of the guaranteed obligations. Section 2 of the guarantee agreement provides that the term "Lender Remedy" shall mean "all rights and remedies at law and in equity that the [lenders] may have against any Borrower Party, the Collateral. . . . or any other Person that has provided credit support in respect of the applicable Guaranteed obligations, to collect, or obtain payment of, the Guaranteed obligation, including, without limitation, foreclosure or similar proceedings, litigation and collection of all applicable insurance policies, and termination of all commitments to advance additional funds to [Borrower] under the Loan Documents. For the avoidance of doubt, Lender Remedies shall not have been exhausted with respect to any Collateral which has been foreclosed on by the [lenders], the value thereof has been included. . . ." Effectively, the lenders are required to foreclose on the Chicago Cubs Assets, but the guarantee of collection still does not trigger until the lenders actually sell the collateral, which requires the consent of MLB. Further, the definition of "Lender Remedy" also requires a lender to exhaust their rights under the OSA, as well as the loan agreements, as rights regarding the collateral. The guarantee of collection presents no real economic risk to Tribune, as the guarantor.

Third, the structure of the transaction ensured that the Ricketts family would be responsible for the CBH debt. MLB did not look to the guarantees of the bankrupt Tribune. Instead, the Ricketts family was required to maintain an OSA with an evergreen cash escrow of $35 million to be used to fund any shortfalls in the operations of the business, such as baseball salaries, rent and franchise expenses. While debt service is excluded from the OSA, cash is fungible and OSA proceeds used for CBH operations would free up cash to service the debt. Further, if the Tribune guarantees of collection had provided any assurance, MLB would not have required the Ricketts family to maintain $35 million in the OSA. Additionally, under the letter agreement, dated October 27, 2009, between MLB, CBH and certain Ricketts family affiliates, MLB may require the Ricketts to make either equity contributions or "subordinated loans" under the Subordinated Loan Commitment Agreement.³ The Letter agreement states that MLB may "at any time and from time to time" direct that the Ricketts transfer funds to the team. In an October 7, 2009 letter from the MLB commissioner to Thomas Ricketts, the MLB commissioner indicates that he will require contributions to an escrow account if the OSA Entity's liquid assets fall below $35 million and "then current Club EBITDA, financial performance and financial projections indicate additional funding is needed as a remedial measure. . . ." If the Cubs fall out of compliance with the Debt Service Rule, "[the MLB commissioner] will require that such amounts from the OSA Entity or the OSA Escrow Account as [the MLB commissioner] deem[s] necessary to achieve compliance be used in the DCR calculations to further supplement the Club's EBITDA in support of the Club's Debt Service Rule obligations." Moreover, per the Basic Agreement, the MLB commissioner has 16 specifically enumerated remedial measures that he can take against a team, team owners, and team executives if the team violates the Debt Service Rule, which are intended to force teams to get back into compliance with the Debt Service Rule. If the Ricketts do not perform under the letter agreement or the OSA, MLB has remedies against the Ricketts family, but not Tribune. The principle purpose of the transaction, and specifically the collection guarantees, was to create the appearance of Tribune bearing the economic risk of loss for the CBH debt when, in fact, the substance of the arrangement was otherwise.

II. Tribune Failed to Comply with the Technical Rules Used to Determine Its Share of Recourse Debt under Section 752.

Even if the Subordinated Debt is respected and the guarantees of collection by Tribune are also respected, Tribune does not have a "payment obligation" on its collection guarantees. Tribune does not bear the economic risk of loss under its collection guarantees of the CBH debt in a constructive liquidation of the partnership under Treas. Reg. § 1.752-2(b)(1). Under the regulation, the following steps are considered to occur in a hypothetical sale transaction:

Tribune structured its guarantees so that numerous additional steps must be considered as occurring before Tribune, as the guarantor of collection, would have such a payment obligation. These additional steps would not be required if Tribune had provided a standard guarantee of payment, since under a payment guarantee a creditor could proceed directly against the guarantor when the obligation becomes due and payable. Instead, under Tribune's guarantee of collection, once the debt becomes due and payable, the borrower first must fail to satisfy the obligation, then the lender must exhaust its legal remedies under both law and equity against the borrower, including suing the borrower for repayment, receiving a judgment against the borrower, then seeking to enforce the judgment, selling the collateral, and suing under the OSA, only to have the execution of these various judgments returned unsatisfied. These additional steps were not contemplated by the regulations in determining if a partner has a payment obligation.

As a technical matter, after applying all of the steps in the hypothetical sale and liquidation of the partnership under Treas. Reg. § 1.752-2(b), the guarantee of collection fails to trigger a payment obligation. Tribune intentionally placed many difficult hurdles in front of its guarantees, and those hurdles apply equally in the hypothetical sale such that no payment obligation arises on the default and acceleration of the loans. Therefore, Tribune is not treated as having any share of recourse liability.

Even if a payment obligation is considered to arise under the terms of the collection guarantee, it would not arise until after such additional steps were taken by the lenders to enforce their claims. A payment obligation is not considered to arise until after the occurrence of certain future events in a situation in which the obligation is considered to be contingent on the occurrence of such future events, and the likelihood that those events will occur is not reasonably certain. Treas. Reg. § 1.752-2(b)(4). The many vague conditions that must occur in order to collect on Tribune's collection guarantees are extremely unlikely to occur. Tribune knew they would not occur when it structured the guarantees, a fact that is demonstrated by Tribune establishing no reserve for the liability on the books. Tribune intentionally structured the collection guarantees to effectively negate any chance that it would ever have a payment obligation under the guarantees, but then claimed to possess a real economic risk of loss under the same guarantees in a constructive liquidation of the partnership under Treas. Reg. § 1.752-2(b)(1). Tribune cannot have it both ways. Unless and until the lenders take the series of steps necessary to create a payment obligation, Tribune bears no economic risk of loss under its collection guarantees of the CBH debt in a constructive liquidation of the partnership under Treas. Reg. § 1.752-2(b)(1). Accordingly, the entire special distribution is treated as consideration for a disguised sale under Treas. Reg. § 1.707-5(b)(1).

III. The Substance over Form Doctrine Applies to Recast the Transaction as a Sale of 95% of the Chicago Cubs Assets.

Judicial doctrines provide an independent avenue for recasting the transaction in accord with its substance: a sale of 95 percent of the Chicago Cubs Assets. It is well established that the substance of the transaction and not its form, governs for tax purposes. In Gregory v. Helvering, 293 U.S. 465, 468 (1935), the transaction on its face satisfied "every element required by" the relevant statutory language. The Court, in disregarding the form of the transaction, found the "the whole undertaking, though conducted according to the [statutory] terms . . . was in fact an elaborate and devious form of conveyance masquerading as a corporate reorganization." Id. at 469. The Supreme Court has explained that "[i]n applying the doctrine of substance over form, the Court has looked to the objective economic realities of a transaction rather than to the particular form the parties employed." Frank Lyon Co. v. U.S., 435 U.S 561, 573 (1978). See also Comm'r v. Court Holding Co., 324 U.S. 331, 333 (1945); BB&T Corp. v. U.S., 523 F 3d 461 (4th Cir. 2008); West Virginia N.R. Co. v. Comm'r, 282 F. 2d 63, 65 (4th Cir. 1960) ("[i]t is well settled that in matters of taxation substance rather than form prevails and that the taxability of a transaction is determined by its true nature rather than by the name which the parties may use in describing it").

A transaction can be disregarded for tax purposes where no legitimate business activity accompanies the goal of tax avoidance. See Pritired 1, LLC v. U.S., 816 F. Supp. 2d 693 (S.D. Iowa 2011) (quoting Frank Lyon Co. at 583-84: "a transaction will be accorded tax recognition only if it has 'economic substance which is compelled or encouraged by business or regulatory realities, is imbued with tax-independent considerations, and is not shaped solely by tax-avoidance features that have meaningless labels attached."). When a transaction is found to be a sham, the form of the transaction is disregarded and the proper tax treatment of the transaction must be determined. The court in IES Industries, Inc., v. U.S., 253 F. 3d 350 353 (8th Cir. 2001), quoting Rice's Toyota World, Inc. v. Comm'r, 752 F.2d 89, 91-92 (4th Cir. 1985) said as follows:

A transaction will be characterized as a sham if it is not motivated by any economic purpose outside of tax consideration (the business purpose test), and if it is without economic substance because no real potential for profits exists (the economic substance test).

A transaction has economic substance if it is rationally related to a useful non-tax purpose that is plausible in light of the taxpayer's conduct and economic situation and the transaction has a reasonable possibility of profit. See Rice's Toyota World, 752 F. 2d 89 (4th Cir. 1993) ; Pasternak v. Comm'r, 990 F.2d 893 (6th Cir. 1993); ACM Partnership v. Comm'r, 157 F.3d 231 (3d Cir. 1998).

In Chemtech Royalty Associates, L.P. v. U.S., the Fifth Circuit, observing Supreme Court precedent in Culbertson v. Comm'r, 337 U.S. 733, 741 (1949), stated, that a partnership will be respected for tax purposes where the parties in good faith and acting with a business purpose genuinely intended to join together for the purpose of carrying on the business and sharing in the profits and losses. 766 F.3d 453, 460-61 (5^th Cir. 2014); see also TIFD III-E, Inc. v. U.S., 459 F. 3d 220, 231-32 (2d Cir. 2006).

The objective reality of the Cubs transaction is a sale of a 95% interest in the Chicago Cubs Assets by Tribune to the Ricketts family. Tribune effectively parted with 95 percent of the benefits and burdens of the Chicago Cubs Assets while receiving cash equal to the value of 95 percent of the Chicago Cubs Assets, funded largely with the proceeds of the CBH debt for which Tribune faced no realistic possibility of ever having to repay even if CBH defaulted. Tribune's guarantees of collection were structured to ensure that there was no realistic possibility of Tribune ever being called upon to honor them. The restriction on CBH from transferring its assets prior to the end of the recognition period and the put and call options are all consistent with a true sale of the 95% interest in the Chicago Cubs Assets.

Tribune retained a 5 percent interest in CBH, which in substance was a contingent payment. A contingent payment is a type of installment sale in which either the price or payment period for the asset has not been fixed. Tribune's 5 percent interest in CBH was required by its own transaction structure. For ten years the Ricketts family was subject to numerous ' contractual restrictions that prevented them from paying down debt and selling assets to prevent Tribune from paying tax on the transaction. After the 10 year period, the Ricketts family could buy out Tribune's interest at fair market value and have a right of first refusal on any offer. In total, the Ricketts family bought 100 percent of the Cubs for a cash payment and a 5% contingent payment, the value of which would be determined after the 10 year gain recognition period and associated contractual restrictions lapsed.

To counter the contingent payment, Tribune points to its participation in Cubs management. While the initial Board may have consisted of one member appointed by Tribune and four members appointed by RA LLC, the CBH LLC Agreement provides that the board could consist of up to 20 members, 19 of which are chosen by the Ricketts family. Further, any change to the single Tribune board member must be approved in advance by the Ricketts family. Thomas Ricketts is designated as the MLB Control Person under the MLB Rules and Regulations. This means that Tom Ricketts is the "single individual with ultimate authority and responsibility for making all Club decisions . . ."

Capital calls are governed by section 2.2 of the Amended and Restated CBH LLC Agreement, which provides that apart from the initial contribution of assets by the partners, "no Member shall be obligated to make Capital Contributions to [CBH]." Under section 2.2 if the Board makes a request for a capital contribution for Required Funding and one member elects not to make the contribution, the non-contributing member will have its Percentage Share (i.e. equity) in the partnership diluted to the extent the unfunded contribution is funded by the other member. As the value of the Cubs skyrocketed since the sale, Tribune made the additional capital contributions to prevent its membership interest from being diluted. The substance of the transaction was a sale, and retaining the five percent partnership interest in the Chicago Cubs Assets was merely window dressing" to achieve non-recognition treatment for federal income tax purposes.

IV. The Transaction Should Be Recast as a Taxable Sale of 95 Percent of the Chicago Cubs Assets under Section 701 Anti-Abuse Rules.

Subchapter K is intended to permit taxpayers to conduct joint business activity through a flexible economic arrangement without incurring an entity level tax. Implicit in this intent are three requirements: (1) the partnership must be bona fide and used for a substantial business purpose; (2) the transaction must be respected under a substance over form analysis; and (3) the resulting tax consequences must clearly reflect income (or else the distortion must be clearly contemplated by the applicable provision). Treas. Reg. § 1.701-2(a). Treas. Reg. § 1.701-2 further provides in part as follows:

If a partnership is formed or availed of in connection with a transaction a principal purpose of which is to reduce substantially the present value of a partners' aggregate federal tax liability in a manner that is inconsistent with the intent of subchapter K, the Commissioner can recast the transaction for federal tax purposes, as appropriate to achieve tax results that are consistent with the intent of subchapter K.

Whether there is a principal purpose of reducing the partners' federal tax liability is determined under all facts and circumstances. Treas. Reg. § 1.701-2(c).

As described above, several aspects of the transaction are unusual and were designed for tax rather than business purposes. The absence of common features of a guarantee, and the potential unwinding of the transaction after the end of the built-in gain recognition period indicate that this transaction was entered into with the principal purpose of reducing Tribune's federal tax liability. The partnership was merely an avenue to tax-free treatment for a 95 percent sale of the Chicago Cubs Assets, only to be unwound after the expiration of the built-in gain recognition period.

Tribune's treatment of this transaction for tax purposes as a contribution and distribution do not clearly reflect income and the distortion is not clearly contemplated by the applicable provisions. The section 707 and section 752 regulations (particularly the debt-financed distribution exception) do not clearly contemplate non-recognition treatment for a distribution from a partnership to a partner with a payment obligation that lacks substance.

The transaction was the economic equivalent of a sale of 95 percent of the Chicago Cubs Assets in exchange for $713.5 million. The Ricketts family (the effective purchaser) managed and controlled the business, though under the formal structure of an entity treated as a partnership for federal income tax purposes. Tribune used the partnership structure in an attempt to avoid a taxable sale or exchange.

Issue 3. The $2.5 Million Payment by Tribune to Marc Utay Should be Capitalized.

Tribune paid expenses, primarily legal and accounting fees, incurred by bidder Marc Utay in connection with the bidding process. Tribune made the payments in June 2009 to entice Mr. Utay to continue negotiations in order to influence the Ricketts family to close the acquisition of the Chicago Cubs Assets when negotiations with the Ricketts family had stalled.

Treas. Reg. § 1.263(a)-5 provides the rules for capitalizing costs incurred to facilitate an acquisition of a trade or business, a change in capital structure of a business entity, and certain other transactions. In relevant part, Treas. Reg. § 1.263(a)-5(a)(1) provides that:

a taxpayer must capitalize an amount paid to facilitate (within the meaning of paragraph (b) of this section) an acquisition of assets that constitute a trade or business (whether the taxpayer is the acquirer in the acquisition or the target of the acquisition), without regard to whether the transaction is comprised of a single step or a series of steps carried out as part of a single plan and without regard to whether gain or loss is recognized on the transaction.

Treas. Reg. § 1.263(a)-5(b) provides that an amount is paid to facilitate a transaction if the amount is paid in the process of investigating or otherwise pursuing a transaction based on all of the facts and circumstances. The fact that the amount would or would not have been paid but for the transaction is relevant but not determinative.

First, Tribune sold the Chicago Cubs Assets which comprised a trade or business and, therefore, clearly falls within Treas. Reg. § 1.263(a)-5. Second, the $2.5 million that Tribune paid to Mr. Utay constitutes an "amount paid to facilitate" the transaction with Ricketts because the payment was made to pursue the transaction with the Ricketts family, encouraging the closing of the sale. Mr. Utay appeared to have been intent on abandoning the bid process. As incentive to keep Mr. Utay involved, Tribune agreed to reimburse Mr. Utay for professional fees associated with his bid. Tribune made the reimbursement to keep Mr. Utay in the bid process, which was the means by which the transaction closed with the Ricketts family. Accordingly the reimbursement was an amount paid to facilitate the transaction and should be capitalized by Tribune.

Issue 4. The adjustments determined by respondent should be sustained.

If issues 1 and 2, above, are determined in favor of respondent, and for independent reasons based upon the foregoing facts and legal analysis, the adjustments determined by respondent, including to capital contributions, recourse liabilities, non-recourse liabilities, basis, and other affected items, in the Notice of Final Partnership Administrative Adjustment issued with respect to CBH and in the Notice of Deficiency issued to Tribune for the taxable year 2009 should be sustained.

EVIDENTIARY PROBLEMS

None anticipated other than those evidentiary issues set forth in respondent's motions in limine described above, the objections reserved by the parties in the Stipulations of Fact, and anticipated challenges to claims by petitioner under the trial protective order that evidence offered at trial constitutes "Confidential Information."

Respectfully submitted,

MICHAEL J. DESMOND
Chief Counsel
Internal Revenue Service

Date: 9/27/2019

G. ROGER MARKLEY
Special Trial Attorney
(Large Business & International)
Tax Court Bar No. MG0434

ROGELIO A. VILLAGELIU
Senior Counsel
(Large Business & International)
Tax Court Bar No. VR0078

THOMAS F. HARRIMAN
Senior Attorney
(Large Business & International)
Tax Court Bar No. HT0367

W. BENJAMIN McCLENDON
Special Trial Attorney
(Small Business & Self-Employed)
Tax Court Bar No. MW0860

BRANDON S. CLINE
Senior Attorney
(Small Business & Self-Employed)
Tax Court Bar No. CB0316