How I Think the ESPN and NFL Deal is Structured

In episode 32 of How Tax Works, Matt Foreman discusses the tax structure of the recently announced deal where the NFL is exchanging NFL Network and Redzone for a 10% equity stake in ESPN.

How Tax Works, hosted by Falcon Rappaport & Berkman LLP Partner Matthew E. Foreman, Esq., LL.M., delves into the intricacies of taxation, breaking down complex concepts for a clearer understanding of how tax laws impact your financial decisions.

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Transcript

Matthew Foreman [00:00:00]:
Welcome to the 32nd Episode of How Tax Works. I'm Matt Foreman. In this episode, I will discuss the structure of the NFL ESPN deal, or at least the options, like what it could be. I have no insider information. I have nothing that's not publicly available. But it's a really interesting deal. Not just, you know, for me as a sports fan, but for me as a tax attorney.

Matthew Foreman [00:00:32]:
So it really heck of a, heck of a confluence of interests right there, I'll tell you that much. How Tax Works is meant for informational and entertainment purposes only. This may be attorney advertising and it is not legal advice. Please hire your own attorney. How Tax Works is intended to help listeners navigate the intricacies and complexities of tax law, regulations, case law, and guidance to demystify how taxes shape the financial and business and business decisions we all make. Before we get started, a few administrative things. I, I know that this one, if you listen to the last one, you thought you're going to get an AI one, which you're not right now, that is going to be in two weeks. There's new episodes in two weeks and the next episode, actually the next two episodes which will be released at the same time, so slightly different release pattern, are going to talk about whether AI can replace competent tax advisors.

Matthew Foreman [00:01:21]:
We already know that I can replace incompetent tax advisors and idiots. What I want to know is whether it can replace competent tax advisors. So, and I know it's coming out next because I'm literally going to record it after I record this one. I just want to hit this one first a little more timely, try to get it in. All right, so if you have any questions, comments or constructive criticism, any criticism that's not constructive, and I'm the sole arbiter of that, can be arbitrary and capricious. I'm just going to delete. But if you have any, any of those questions, comments or constructive criticism, you can email me at my FRB email address, which you can find via your favorite search engine. Upcoming webinars and speaking engagements are on the How Tax Works landing page on the FRB website.

Matthew Foreman [00:02:07]:
I do actually have a series of four webinars. I know a number of the listeners also attended the ones I did last year on four different topics off the top of my head, 704C. I'm doing one on profits, interest and estate planning. I'm doing one on 1202 common mistakes in 1202 QSBs and the fourth one, I'm. I don't remember. I, I probably should remember because I was just talking about it like maybe an hour ago with our marketing folks who are wonderful. But it's coming up. If you're interested in them and you've never attended one before, send me an email.

Matthew Foreman [00:02:40]:
Very easy to get my email address again if you've attended them before, you can send me an email to make sure I send you the link, or you can just rely on the idea that I'm going to send you an email when I send a mass email saying, hey, please sign up again. They're going to have continuing cpe, right? Cpa, CE for EAS attorneys, going to have cle. So that's exciting. And this time we're adding a new category. We are also going to be adding some CFP credit. The, the marketing folks were polite enough and willing enough to indulge me and add that. So I really appreciate that. All right, so, so that's, that's the big one.

Matthew Foreman [00:03:20]:
I do have some other, you know, speaking engagements, have some articles coming out. Always a whole lot of marketing in the hopper. But, you know, we'll get that going. All right, so let's, let's talk about, right? What's going on. So if you read business deals generally, right. You follow, you know, sports business stuff like that, their sports business journal, espn, the Athletic, all talk about it. You'll find stuff in the Wall Street Journal and the New York Times, the business parts, really. Any, any large scale reporting.

Matthew Foreman [00:03:51]:
The NFL has been trying to sell NFL Network for the better part of five years now. Some point before the pandemic, who knows, it's six weeks, 40 years. I've lost track of time before then they've been trying to sell it. Can't tell you why. You know, I think a lot of stuff they have on NFL Network is great. As someone who watches basically only sports, the only TV I really watch is sports. So everyone's like, hey, what TV shows you're watching? And I'm like, man, Major League Baseball is crazy right now. And I hear the new NFL season starting up.

Matthew Foreman [00:04:21]:
So excited about that. So really going to, going to sort of dovetails my interest, right? And so I see it, you know, you see that the news in the paper, the first article I think that broke it was actually in the Athletic and talked about kind of like what's going on, right? So NFL Network and a couple other assets, the biggest one, other than the network itself is probably Red Zone, which if you don't know what Red Zone is and you are a sports fan, first off, how if you're a sports fan, you don't know what it is, don't know. But it's pretty much one of the coolest concepts I've ever seen, which is basically every Sunday there's a TV channel that's just what, you know, my father in law tries to do, which is flip, flop, flipping between games, trying to find, you know, the team in the red zone, right, or the team that's kicking a field goal or to see that cool 60 yard pass or whatever. And in doing that, they created a really interesting concept, kind of hard to monetize other than what's called carriage fees, which is if you have a, you know, if you have a cable, what happens is the way that cable is basically priced out is that what happens is the provider, you know, Comcast, right, or Time Warner or Verizon Files, whatever, basically pays a per month fee to the provider, you know, ESPN to the NFL, whatever, to cbs, you know, maybe not cbs, cbs, so free over the air, but that sort of thing. And in exchange they basically then charge me, you know, or you, whoever the subscriber is for it and called carriage fees. I have no idea where that name came from and I don't really care. I don't care enough to look it up. And basically, because the red zone, because it's just constant from 1 o' clock through about 7 o', clock, when the 4 o' clock game, at 4 o' clock Games end, there really isn't advertising.

Matthew Foreman [00:06:09]:
You know, you could put, you know, presented by, you know, presented by How Tax Works, the Best Tax podcast, of course, but you really don't. There really isn't a way to put commercials in it because the whole idea of it is there's no commercials. So the way that it monetizes itself and a lot of cable TV is like this in a lot of ways is carriage fees, right? You pay a monthly fee to have it paid for you to watch it. So people are interested in this. And what happens is basically NFL Network sold a lot of its properties, not all didn't sell NFL films and sell a whole bunch of other stuff. And in exchange, you know, the word sold is kind of loose. Sold or exchanged might be the right word, right? The NFL got a 10% stake in ESPN. There's some sort of comments I've read that are sort of offhand that it might, after a number of years go away.

Matthew Foreman [00:06:59]:
I'm not really sure how that works. You can say, you know, you get 10% of the profit for four years, that's perfectly fine. That's something you can do. But that's the idea. But what sort of piqued my interest is that ESPN is owned by Disney, which is a public company, which is either a corporation, taxes a C corporation or it is something else that is taxed as a C corp because it's a public company, you know, publicly traded partnership. I don't, I'm sure I indirectly own some Disney through funds, you know, retirement account, but I don't directly own any Disney to my knowledge. Obviously NFL is private, so don't own any of that. Although I probably own stock in companies that the owners of the NFL teams own.

Matthew Foreman [00:07:38]:
So I guess in some ways, I don't know, sort of confused by it. There's no team like Major League Baseball has the Braves, Atlanta Braves, which are owned by Liberty Media, which is a public company. You can buy tracking stock. NFL doesn't have that. I know people think that they own stock in the Packers. I don't know what you own. You don't get to vote and you don't get any money from it. So congratulations, you have a nice piece of decor.

Matthew Foreman [00:07:59]:
That's, you know, enjoy. And that's the idea, right? And so you know, I thought about well, how do you structure that? People are like what do you mean? They just exchange it. And, and I'm like no, but like I'm a tax lawyer, you can't do that. And I remember I was talking about this with a friend and he's like what do you mean you can't do that? Like, well, look like the NFL assets are appreciated assets, right? They're either stuff they created themselves, they've, they've deducted the expense, it depreciated whatever, or they've just grown in value above whatever it cost to create them. Right? Whichever it may be. And, and so there's built in gain. So if you were to contribute it, you contribute in exchange for 10% of the ownership. The implication is that the value is 10% of the total value within ESPN.

Matthew Foreman [00:08:40]:
And the result of that? The answer, the sort of long answer of what you get in this slightly long winded discussion is the idea of what you actually get. It would trigger gain. And the reason for that is because under section 351 which is the code section that's operative in order to contribute assets into a C corporation or S Corporation, which ESPN and Disney are definitely not, you, you have to have control under 368 C and people are like all right, well do you have control? What does control mean? What control means is that the contributing partner must, must control or Contributing shareholder or shareholders, plural, right. Must control 80% of the total voting power of all classes eligible to vote and 80% of the total number of shares. I already said they're getting 10%, so they're not doing it. People like, oh, what if, you know, what if Disney contributes a dollar? And I'm like, I don't, I don't think that works. I think that's nominal. I think they need to contribute something fairly significant, and I just don't think it's there.

Matthew Foreman [00:09:45]:
So I thought to myself, what are the options, right? How can we do this? And being a tax lawyer, I thought about this, right? And if they were both C corporations, it'd be less problematic. You'd have some drag from dividends, received deductions, not getting a full thing for dividends. But the NFL is a partnership, likely an llc. I would assume it used to be a nonprofit, didn't you know, years ago? Not going to discuss why, but they're not one anymore. It has 32 partners, right? LLC members. So 32 partners. And those 32 partners are split up amongst. Know there's, there's general partners and there's limited partners.

Matthew Foreman [00:10:23]:
There's a lot of estate planning that goes in. I already talked about why you should buy a professional sport, professional football team. So that's pretty neat. In a prior podcast, if ESPN were a partnership, right, this wouldn't be an issue because 721 doesn't have what I call the 8080 control requirement. Right? But, you know, there still could be an issue if there's a lot of debt being contributed. Not really relevant to this episode, but it's important in general. So I thought to myself, well, how would they do this? How is this something that can be done? So I went ahead and I thought through how to do it, and one of them, actually, there's a public company that dealt with this issue before and dealt with it a couple other ideas that I think are likely and plausible. But before I get into that, you're going to hear some music.

Matthew Foreman [00:11:09]:
I'll be back in two minutes. All right, so. So we're back. Hope you enjoyed that. A little, little thing. Also, if I sound a little different right now, I had to move the microphone because the, the microphone stand that the microphone sits on. This is way too much information. But it's, it's, it makes me laugh.

Matthew Foreman [00:11:40]:
So we're rolling with it. The microphone stand fell while I was taking a momentary break, and so I had to find the Allen wrench to tighten it. So very exciting news. I'm basically Bob Villa around the, around the apartment here. So really exciting. So anyway, so the options, right, I came up with with four what I'm going to call viable options. And I think both work. I think both of pros or both work, all of them work.

Matthew Foreman [00:12:10]:
I think there's one that's more the most likely. And I'll discuss that all work from a tax perspective. But what I have learned over the years, and I mean what I'm about to say is that while, you know, tax is extremely important, you know, when, when you know, anyone talks about taxes, the rational people when they're talking about taxes are not actually talking about taxes. They're talking about net proceeds after tax because there are ways to structure things that will have more taxes but end up with higher net numbers. And if you are only focusing on taxes, I mean first off, I agree with this right, you should focus on net proceeds and other factors. But anyway, so here are the four options again, conjecture. I have no information other than public filings and documents and my own general sort of curiosity. So here we go.

Matthew Foreman [00:13:05]:
Option one, Disney just contributes the assets into ESPN along with the NFL. So essentially what they do is, is they create a new like 10, a new basically like parent above ESPN. Right. So I thought that was an interesting one. I'm sorry, that's not even. I'm sorry. No, Disney just puts more assets into ESPN along with it to trigger it. So you get 8080 control because you have Disney and the NFL contributing it.

Matthew Foreman [00:13:39]:
And I think that one is plausible, extremely unlikely. I don't really get what other assets Disney would have to put in unless it's putting in like a lot more cash. But espn, you know, from public filing seems like a fairly profitable company. So I don't really think ESPN or Disney's in the business of throwing money into it. And I suspect if they would have done that, that'd be in public filings because I think it'd be relevant, you know, so I, I just don't, I don't see that the second one, and you'll notice I'm going through these first two pretty quickly. I think the last two are much more likely. The NFL drops NFL Network into a C Corp. Which then undergoes a statutory merger with espn.

Matthew Foreman [00:14:17]:
Right. You know, Delaware C Corp. Merge with the Delaware, Delaware C Corp. And ESPN Basics type a statutory merger using the subsidiary. You use a merger sub 2 underneath it, whatever. I think that one's unlikely. And along with the first one, you know, similarly is because the NFL likely wants Pass through treatment. Right.

Matthew Foreman [00:14:36]:
The. The NFL is a fairly, fairly profitable business enterprise. Fairly is an understatement, I suspect. And so, you know, I think you really need to understand that they're not going to want to stick a huge asset from a pass through into it, especially when their proceeds from it are the profits from that asset and the other assets they're going to want pass through. Right. And I think that's the key. The next one is Disney forms. This is the one I misspoke about earlier, but Disney forms a new C Corp.

Matthew Foreman [00:15:11]:
Contributes ESPN to the C Corp. NFL puts the NFL assets, NFL Network assets into the. Into C Corp. Right. So they both contribute into the new C Corp. This is actually the transaction if you follow public companies doing mergers and stuff like that. BlackRock did this in early 2024 when it acquire acquired global infrastructure partners GIP. In doing that, you know, basically what they did was there's $3 billion of cash and 12 million shares new.

Matthew Foreman [00:15:40]:
What's what we're going to call new BlackRock in that situation. The 12 million shares are worth about $9.5 billion. That's a B. So 12 and a half billion dollar deal. Most mostly stock, some cash. Obviously the cash is taxable, the double contribution tax free. Fine, sure, whatever. BlackRock also in that one they formed a new parent and a new merger sub and then they had blackrock merged with the merger sub and the partners contributed into the new parent for cash and stock.

Matthew Foreman [00:16:09]:
So the type A merger actually was tax free under 351, you know, standard merger sub. I think that's a forward. I figure it's a type A forward or reverse. As I said on the podcast, I always mix them up. So I look at it and I didn't look at them again to prepare, but that's really the idea of it. Pretty straightforward, definitely plausible. I don't think that's what happened and I also don't think that's what happened because that would also require them to give notice that that's what's happening now. I suspect there's going to be a fairly long lead time for Hart Scott Rodino, which is the antitrust stuff, because this is definitely a curious one, right, because you have a situation where The NFL owns 10% of one of its customers and I suspect the other customers.

Matthew Foreman [00:16:57]:
Right. Other networks are not thrilled. So it's interesting, you know, it's consolidating and stuff like that. So you know, they must have some level of comfort. They'll get it through, but we'll see And I think that's it. I don't know. I don't think this is it. Again, you know, you, you have a situation where you end up with a C corp again for NFL Network.

Matthew Foreman [00:17:23]:
So I don't think that's what they really want. You know, maybe that's what they're going to do. And that's the deal. It still consolidates, right? And I think that it still consolidates. So for ESPN Disney perspective, you still get the full DRD dividends, receive deductions, so there's no tax. But you're going to get, you know, a, a C corp paying a dividend to a partnership, right? So you're going to get taxed at the C Corp level and then get taxed on the dividend, right? So instead of 37% tax rate plus whatever, whatever state, you end up with a situation where you have the 21 corporate tax and then 23.8% tax. I'm just sort of lazily going to assume that every person who owns the NFL is solidly into the max rate bracket. Probably true.

Matthew Foreman [00:18:11]:
But you know, I don't see it. And I think that's one really important thing to note is that, you know, NFL is a tax partnership, most likely owned by 32 billionaires, or there are two groups of billionaires, right? Whatever it is, and they likely are quite sensitive to tax rates. And so the question becomes, you know, what would I do, right? And I think that what I would want to do, and this one is plausible, this one's absolutely plausible. And we will find out how they did it. Most likely at some point it'll leak out. It'll be in a 10k or a 8k or a 10q or whatever it is. What it likely is, what at least what I would do is ESPN drops its assets into a single member LLC taxed as a disregarded entity. And the NFL Network NFL drops all the NFL Network assets and any assets it's contributing into their own single member LLC that the NFL Network single member LLC is dropped into the ESPN llc, which then causes it to regard as a partnership section 721.

Matthew Foreman [00:19:16]:
This is revenue ruling 99.5 situation two. Then you know, that's it, right? You have a partnership. And so the ESPN folks get a partnership that passes up so they don't see a tax rate bump. In fact, it's tax release exactly the same. It's no longer consolidated. I mean, you still have the consolidated entity because you still have the old ESPN historic C Corp sitting there below Disney. So you have that, that doesn't really change anything. It just has a partnership below it that feeds up income and then that's it.

Matthew Foreman [00:19:49]:
Right. So you need a few things. If I were on really either side, I'd want a tax, a required tax distribution section on the allocations to make sure there's enough cash. Again, these are, you know, income producing assets. So I'm not terribly concerned about that. But you know, anytime there's a fight, you know, one thing that they do and, and you see this with business owners when they're fighting with their partners is they turn off the cash. The one who has control and has cash will turn it off for the other as a, I'll just say a negotiating tactic. It's a little nastier than that.

Matthew Foreman [00:20:22]:
But you know, we'll just call it a negotiating tactic. For right now. I, I'd really want to define when to distribute cash. Right. The deals all say, oh, you know, The NFL gets 10 of the profit. What does that mean? What is profit? How is that defined? Is it book? Is it tax? Are we depreciation? You know, there's no extra depreciation here, but what's going on? How's that done? Are there parts of ESPN that are kind of loss leaders who want to exclude those? What business exactly are they getting the 10% of? You know, that's, that's really well defined. And I'm going to go on a limb and say whatever lawyers we're negotiating that have thought of these things, right. I'm, I'm not, I like to think I'm smart and I'm good at what I do, but I know I'm not the only one, right? So this is pretty standard stuff to do.

Matthew Foreman [00:21:06]:
I'm not digging in overly deep. And, and this is, you know, this whole structure is what's called an upsea umbrella partnership C Corp. You know, it's like how Goldman is, is structured. So Goldman's a partnership that's owned partially by partners, you know, and, and then the other side is owned by the public co. Right. Goldman Sachs corporate company or whatever it is that we can all invest through. Right. And again, I'm quite certain I own Goldman through some funds or whatever.

Matthew Foreman [00:21:34]:
So, so I'm, you know, talking here, but that, that's the structure, right, that ESPN's, you know, again still consolidates with Disney, but now it owns 90 of an LLC tax to partnership. And that's how you do it. So that's, that's kind of what I'm thinking is the most. That's how I would want to do it. It might be the one where you get a C Corp. And the NFL has just sort of said, well, look, you know, this increases our taxes, but really not by that much. NFL can't get 199 cap A. You know, there's still PTETs available on it and things like that.

Matthew Foreman [00:22:08]:
So, you know, there's some leakage, but not, not a perfect world. But you know, at the end of the day, and I, I say this to clients all the time, like, you know, I should get this and I should get that. And I always tell people is focus. And I started the episode with this right? Focus on maximizing the overall cash, not on minimizing tax taxes, just an expense. If you focus on the overall number and getting the right business deal with the right partners, that, that, my friends, that's the way to do it. And I think that's really important. All right, so. So that was a 32nd episode.

Matthew Foreman [00:22:44]:
I hope you learned something. I'll be back in two weeks with the 33rd and 34th episodes. I'm going to be talking about whether AI can understand tax law. And now for the best song of all time.