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The IRS has launched a campaign to examine whether wealthy taxpayers are violating the law when using their ownership of sports teams to save large amounts in taxes.

The effort will focus on sports industry entities that are reporting “significant tax losses” to “determine if the income and deductions driving the losses” are lawful, according to the IRS announcement earlier this year. That announcement, which consisted of one sentence on a webpage devoted to compliance campaigns by the IRS division that focuses on large businesses, did not specify what kinds of abuses the agency will be looking for.

The initiative comes after ProPublica, drawing on leaked IRS data, revealed how billionaire team owners frequently report incomes for their teams that are vastly lower than their real-world earnings.

When someone buys a business, they’re often able to deduct almost the entire sale price against their income during the ensuing years. That allows them to pay less in taxes. The underlying logic is that the purchase price was composed of assets — buildings, equipment, patents and more — that degrade over time and should be counted as expenses. Owners of sports franchises routinely avail themselves of such deductions, which can be worth hundreds of millions of dollars.

But in few industries is that tax treatment more detached from economic reality than in professional sports. Teams’ most valuable assets, such as TV deals and player contracts, are virtually guaranteed to regenerate because sports franchises are essentially monopolies. There’s little risk that players will stop playing for their teams or that TV stations will stop airing their games. But the team owners still get to deduct the value of those assets over time, sometimes billions of dollars’ worth, from their taxable income.

It helps billionaire sports team owners pay far lower income tax rates than the athletes they employ or even the low-wage workers who sell food or clean their stadiums.

ProPublica’s 2021 article traced how owners, starting with the late baseball showman Bill Veeck decades ago, persuaded the IRS to accept a “gimmick” that allows owners to take massive depreciation write-offs.

Among those benefiting was Steve Ballmer, the billionaire owner of the Los Angeles Clippers and former CEO of Microsoft. His tax records showed that in recent years his basketball team had reported $700 million in losses for tax purposes, despite indications that the Clippers’ real-world financial results were often profitable.

That allowed Ballmer to legally not pay tax on any real-world Clippers profits, and to offset his other income and cut his tax bill. His spokesperson said at the time that Ballmer “has always paid the taxes he owes.”

The practice helps create a counterintuitive overall tax picture that upends conventional wisdom about how taxation works in America. ProPublica found that billionaire owners like Ballmer are consistently paying lower income tax rates than their millionaire players — and often lower even than the rates paid by the concessions workers who staff their stadiums.

The IRS did not immediately respond to questions from ProPublica about what prompted the initiative and what abuses it’s investigating.

In an analysis for clients, the law firm Morgan Lewis credited the IRS campaign to several factors: an increased enforcement budget, criticism that wealthy taxpayers are not audited frequently enough and ProPublica’s reporting.

“The IRS may be acting on its promise to restore ‘fairness’ in tax compliance by taking more shots at partnerships and high-wealth individuals, including sports team owners,” the firm wrote. “With the Sports Industry Losses campaign, the sports industry looks to be the next opponent in the IRS arena.”

Clay Hodges, a tax planning specialist at the firm Moss Adams, said in an interview that the IRS usually selects areas to focus enforcement efforts based on evidence that it will find unpaid taxes. While it’s impossible to judge the IRS’ motivation based on its public announcement, he said, he noted the regular headlines of sports team owners selling teams for huge profits.

“When they announce these campaigns, the IRS is very strategic,” he said. “It’s more than just a fishing expedition. They think it will bear fruit.”

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