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NFL IN LA: MARK DAVIS, OAKLAND RAIDERS, AND ESTATE TAX PLANNING SCENARIOS

By Jaboner Jackson 8 a.m. |  Yesterday, footballphds.com investigated the role the Oakland Raiders play in the race between AEG and Majestic Realty to return the NFL to Los Angeles.  A large part of our analysis hinged on the estate tax implications for the Oakland Raiders that began to materialize in earnest upon the death of Al Davis.  Today we delve deeper into the estate tax issue for the Raiders as only we can to detail how estate taxes figure prominently into a possible relocation of the Raiders to LA Stadium in City of Industry.

Principles Behind Estate Taxes

In order to illustrate the importance that estate taxes will have on the Raiders, we will first discuss estate taxes in general.  Estate taxes refer to taxes due to the government upon an individual's death.  For illustrative purposes, let us refer to a fictional Dr. PhD as our case study.

Dr. PhD owns a business selling footballs.  Over his 82 years of life, he has experienced great success with his business.  At the start of 2011, his business is worth $100 million.  Unfortunately Dr. PhD passes away early in 2011.  He leaves behind an intelligent, lovely wife and an adult son.  Upon his death, he bequeaths his business to his intelligent, lovely wife, Mrs. PhD.  Dr. PhD is now the decedent.

Mrs. PhD's attorney and accountant file the necessary tax forms to the federal government.  The IRS does not send a tax bill to Mrs. PhD since no taxes are currently due.  The reason why no taxes are currently due is because under current estate tax law, the spouse of the decedent gets an "unlimited marital deduction."  Accordingly, Mrs. PhD does not have to pay estate taxes on the $100 million. 

Unfortunately Mrs. PhD also dies shortly thereafter in 2011 from a broken heart.  Mrs. PhD's football business, which had been bequeathed to her by Dr. PhD, is now passed on to her son, whose name is Sonny.  Sonny's lawyer and accountant file tax forms to the IRS.  Sonny gets a $5 million exemption per current laws, which means that he owes estate taxes on $95 million.  Accordingly, Sonny owes $32 million in estate taxes, which is the 35% federal estate tax rate for 2011. 

Sonny never has been involved in the business.  He is more an artistic type than a business type.  Unfortunately, his artwork does not bring in much money.  He does not have $32 million to pay the estate tax bill.  Accordingly, he hires an investment bank to look into selling the business so that he can pay his estate tax.  The investment bank helps him sell 35% of the business for $35 million.  After settling a capital gains tax, Sonny pays the $32 million estate tax to the IRS.  He holds onto the remaining 65% of the company and hires a CEO to run it. 

Accordingly, we can summarize current estate tax as follows:

1. Estate taxes are due when estates are worth more than $5 million;

2. No estate taxes are due on estates worth less than $5 million;

3. Estates in 2011 received a $5 million exemption;

4. An unlimited amount of an estate can be transferred to a spouse;

5. When an estate in excess of $5 million is passed on to children, the children must pay taxes on the amount in excess of $5 million.  This tax oftentimes leads to "distressed" sales by the children to pay estate tax bills. 

Current And Future Estate Tax Rates

Estate tax rates are established by Congress at the federal level.  States can also pass their own estate taxes at the state level.  California does not currently have an estate tax.   Accordingly, residents of California pay only the federal estate tax. 

Since estate tax rates are determined by Congress, rates have varied based on legislation.  Current federal estate tax rates for 2011 are 35%.  The estate tax rate for 2012 will also be 35%.  Estate tax rates for 2011 and 2012 have been determined by the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. 

Of note, the estate tax rate for 2010 was 0%.   This was due to lapsing of estate tax laws in 2009 and Congress' subsequent inability to agree on new estate tax laws for 2010.  Accordingly, when George Steinbrenner, the deceased owner of the New York Yankees, passed away in 2010, his estate of $500 million was not subject to estate taxes and his heirs did not have to pay estate taxes.  Put simply, 2010 was financially a good year to die. 

Current estate tax rates will expire at the end of 2012.  Upon expiration, estate tax rates are scheduled to be 55% for 2013.  But there remains likelihood that Congress will pass legislation before 2013, thereby changing the estate tax rate before the scheduled 55% rate kicks in.  Estate tax rates have historically been a source of discord between Democrats and Republicans.  For this reason, prediction of estate tax rates beyond 2012 remains a difficult proposition. 

Table 1 illustrates historical and scheduled estate tax rates.  Estate tax rates decreased in 2002 due to Congressional passage of the Economic Growth and Tax Relief Reconciliation Act of 2001, which is commonly referred to as the Bush-era tax cuts.  The previously mentioned Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended these tax cuts until the end of 2012. 

Table 1: Historical and Scheduled Federal Estate Tax Rates

Estate Tax Scenarios For the Raiders

Prior to his death, Al Davis owned 47% of the Raiders.  Upon his death in 2011, his wife, Carole Davis (Carol Davis), inherited Al Davis' 47% of the team.  Due to the "unlimited marital deduction," no estate taxes were due at this time.  But as illustrated by our example with Dr. PhD, Mrs. PhD, and Sonny, estate taxes will be due upon Carole Davis' death, when the team is passed on to Mark Davis, the son of Al and Carole Davis. 

The following are estate tax scenarios, based on our previous franchise valuation of the Raiders at $740 million.  Our scenarios are also based on current estate tax rates and do not take into account possible changes due to Congressional action.  Our scenarios also do not take into account life insurance policies which would offset some of the tax burden.  (The FOOTBALLPHDS are using the following scenarios for educational purposes and we hope that Carole Davis lives a continued long and healthy life.  In other words, we hope that she healthily outlasts our educational scenarios.)

Table 2: Estate Tax Scenarios based on $740 million Raiders Valuation

In Scenario B in which Carole Davis dies in 2013, Mark Davis would owe $71 million more than if Carole Davis died in 2012 (Scenario A).  If Mark Davis needed to sell a portion of the team to pay the estate taxes in Scenario B, he would fall beneath the 30% minimum ownership required by the NFL to maintain operating control.  Accordingly, we believe that it would be more likely that Mark Davis would sell the entire 47% equity stake in Scenario B rather than just a portion since holding onto a 21% ownership stake would not allow Mark Davis to maintain control of the team. 

Estate Planning Prior to Al Davis' Death

The Raiders have publically stated that Al Davis and the Raiders engaged in detailed estate tax planning prior to Al Davis' death to maintain the team in the Davis family.  Most likely, this estate planning involved the purchase of life insurance policies by Al Davis for both himself and Carole Davis.  Al Davis likely funded these expensive life insurance policies through a 20% sale of the Raiders to three financiers in 2007.  This 20% equity sale was for $150 million. 

Even so, it is unclear how much of the $150 million was used for estate planning purchases, especially since the Raiders went on an unprecedented free agent spending spree in 2008 and thereafter involving big money contracts for Tommy Kelly, DeAngelo Hall, Nnamdi Asomugha, and Shane Lechler, to name a few. 

Summary

Pending estate taxes for Mark Davis will figure prominently into the future of the Oakland Raiders, particularly as it relates to a possible relocation back to Los Angeles.  On October 6, 2011, we wrote that only an "Act of God will derail the AEG project" when we compared Farmers Field and LA Stadium.  The Act of God came two days after our article in the form of Al Davis' death.  And with AEG squarely focused on securing the San Diego Chargers as their anchor tenant for Farmers Field, Majestic Realty has a legitimate shot at bringing the Raiders to LA Stadium instead.  Although AEG still has the lead in the race to return the NFL to Los Angeles, Majestic Realty is once again part of the discussions.

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Next week, I detail how to build an NFL stadium with no upfront cash expenditure after taking a few days off for New Year's Eve.  Thank you for a great year, Wonderful Readers.  I hope you enjoyed our unparalleled coverage of all things related to the NFL in LA as much as I enjoyed presenting it. 

References from Footballphds.com

Oakland Raiders and LA Stadium (12/2011)

AEG’s Missteps with Farmers Field (12/2011)

Relocation Fees for Los Angeles (12/2011)

G4 Financing (12/2011)

Our Interview With TouchdownLA.com (12/2011)

Financing Santa Clara Stadium, Part 1 (12/2011)

Financing Santa Clara Stadium, Part 2 (12/2011)

Jaguars Not Coming to LA (11/2011)

Financing a New San Diego Chargers Stadium, Part 1 (11/2011)

Financing a New San Diego Chargers Stadium, Part 2 (11/2011)

Financing a New San Diego Chargers Stadium, Part 3 (11/2011)

Financing a Football Stadium in Los Angeles, Part 1 (10/2011)

Financing a Football Stadium in Los Angeles, Part 2 (10/2011)

Financing a Football Stadium in Los Angeles, Part 3 (10/2011)

Financing a Football Stadium in Los Angeles, Odds and Ends (10/2011)

Nuts and Bolts of LA Stadium (10/2011)

Majestic Realty and LA Stadium Primer (10/2011)

AEG versus Majestic Realty (06/2011)

The Definitive NFL Stadium Guide Version 1.5 (08/2011)

Final Stack Ranking of Teams Headed to Farmers Field (08/2011)

Outside References:

Sports Business Journal: Al Davis Sells Minority Interest (10/2007)

Photo: AP

jaboner@footballphds.com

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