On June 2, 2017, the Internal Revenue Service (IRS) held in a private letter ruling that proceeds used to a fund portion of the new stadium for the Los Angeles Rams franchise of the National Football League (NFL) and received by a taxable non-profit, non-stock corporation (the CORP), formed as membership organization for fans of professional sports teams, are not gross income to the Rams for federal income tax purposes as the proceeds received are subject to a legally enforceable, binding obligation to repay such proceeds. More specifically, the CORP plans to enter into a contract with the Rams whereby the CORP will receive and have the opportunity for certain benefits, including the right for CORP members to enter into a limited number of personal seat license (PSL) agreements with CORP. The CORP PSL agreements will then be assigned to the Rams, and the Rams will assume all obligations under the PSL agreements. The Rams are entering into this contract with the CORP as an inducement to a separate, but assumingly related entity (Stadium Owner) to build and own the new Rams stadium in Los Angeles, California that is scheduled to open in 2020.
The contract between the CORP and the Rams provides that certain CORP proceeds (i.e., CORP member funds received in exchange for PSLs) will be segregated from other assets through the use of a trust established for the benefit of the CORP (the Trust). In turn, the Trust, will loan the total amount of the PSL proceeds to the Stadium Owner to be unequivocally dedicated and used exclusively for construction of the new stadium. The loan will be made at an interest rate sufficient to permit the continued operation of the CORP, and is expected to remain outstanding for the same repayment term as the PSLs.
The IRS ruling is undeniably favorable to the Rams and other future professional and amateur sports teams utilizing PSLs under a similar corporate structure considering the current tax charged to corporations on their gross income reaches a maximum of thirty-five percent (35%). However, the ruling was silent on whether the PSL proceeds are a loan for tax purposes and therefore subject to original issue discount (i.e., deemed interest rules). It is anticipated that CORP members will be able to elect to transfer their PSL proceeds all at once or over a period of time. If a CORP member elects the multiple-installment option, the amount of the total proceeds transferred will increase. That said, the underlying PSL agreements plan to provide for fixed repayment term (excluding interest) of all contributing CORP members.
The Rams represented in the private letter ruling that the PSL proceeds were subject to “a legally enforceable and binding obligation” of the CORP to repay the proceeds. The IRS did not opine on whether this arrangement constituted a loan, but it would appear to qualify as “evidence of indebtedness” and thus, a debt instrument for tax purposes. Interest is deemed received by the holder of a debt instrument that does not have adequate stated interest, does not have a fixed maturity date of less than a year, and does not meet other exceptions, such as being a tax-exempt obligation or being an obligation between natural persons. Thus the holders of the PSLs may have additional income imputed to them under these agreements, which would be taxed as interest income as it is deemed accrued. If applicable, this would place them in the unenviable position of being taxed on interest without cash in hand.