The 2014 National Football League season is upon us, and Johnny Manziel is not the starting quarterback of the Cleveland Browns.  Johnny Football has no meaningful NFL regular season playing time to discuss, and his off-field exploits (and on-field bird flipping) are well-chronicled in other corners of the Web, so we can turn our attention to matters involving the financing of Cleveland Browns Stadium, er, FirstEnergy Stadium, Home of the Cleveland Browns (hereinafter, “Browns Stadium” or “Stadium” – oh yes, we use defined terms in this blog).

The City of Cleveland owns Browns Stadium and leases it to the Cleveland Browns.  The City financed the construction of the Stadium with tax-exempt bonds, with over $100,000,000 of principal amount still outstanding.  Because the lease between the City and the Browns imbues the Stadium, and thus the bonds that financed the Stadium, with private business use aplenty, the lease is structured so that far less than 10% of the debt service on the proceeds of the Stadium bonds is directly or indirectly derived from payments in respect of, or secured by, private business use property.  The City pays the debt service on the vast majority of the Stadium bonds with amounts it receives from Cuyahoga County (the county of which Cleveland is the seat) from the County’s imposition of excise taxes on the sale of tobacco products and alcohol.  The County’s sin tax constitutes a generally applicable tax that is not treated as a private payment or private security with respect to the Stadium bonds.  This is a fairly typical structure that state and local governments use to finance on a tax-exempt basis stadiums that will be used by private parties.

So why am I writing about this?  The Cuyahoga County sin tax was scheduled to expire in 2015, so a 20-year extension of this tax was put to the County’s electorate at the May 2014 primary election.  A group opposed to the extension of the sin tax, which called itself the Coalition Against the Sin Tax (“CAST”), urged the voters to reject the sin tax extension.  CAST also prepared a petition that would have put on the November 2014 general election ballot an initiative for the City’s adoption of a $3.25 “facility fee” on each ticket sold to events at Browns Stadium, Progressive Field (the home of the Cleveland Indians), and Quicken Loans Arena (the home of the Cleveland Cavaliers).  CAST argued that this facility fee would raise the same revenue as the sin tax but that it would be more just than the sin tax, because it would place the burden for paying debt service charges and other costs of improving and maintaining these three stadiums on the people that choose to attend games.

CAST was greatly outspent by Keep Cleveland Strong, the group financed by the Greater Cleveland business community and the Browns, Cavaliers, and Indians to support the extension of the County’s sin tax.  This David-versus-Goliath story ended as they all do – with Goliath winning (with the one famous exception, of course).  The sin tax extension passed easily.

But what if CAST, whose argument had some facial appeal, had prevailed and the City imposed the facility fee to replace the funding no longer available from the defeated and expired sin tax?  Leaving aside the issues raised by the use of the politically expedient label of “facility fee,” rather than “facility tax,” the facility fee would have applied only to Browns Stadium, Progressive Field, and Quicken Loans Arena and not any other large entertainment venues in Cleveland (of which there are several).  Unlike the County’s broadly applicable sin tax, the limited scope of the facility fee would have precluded its treatment as a generally applicable tax, as illustrated by Treas. Reg. § 1.141-4(g), example 11.  This example in the Treasury regulations provides that a ticket tax is not a generally applicable tax where it applies only to events held at a bond-financed stadium owned by a governmental unit and does not extend to events held at a number of other large entertainment facilities, some of which are not bond-financed, within the governmental unit’s jurisdiction.

The replacement of the County’s sin tax with the City’s facility fee would have resulted in the City’s receipt of private payments that would have paid debt service on or secured more than 10% of the proceeds of the Stadium bonds.  In other words, the more than $100,000,000 of outstanding tax-exempt Stadium bonds would have become taxable, and debt to finance future improvements of the Stadium could not have been issued on a tax-exempt basis.  Ironically, rather than isolating the cost of Browns Stadium to those who attend games there, the facility fee would have cost all those who live and work in Cleveland millions.  Not even Johnny Manziel himself, in the glory days of his Heisman Trophy season, could have salvaged such a busted play.