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Volume 21 No. 1
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IRS to Rams: Designing PSLs as loans avoids tax

The Los Angeles Rams received Internal Revenue Service approval to structure personal seat license fees as loans from fans, meaning the team would not have to pay taxes on the money but also that the seat buyers would be paid back.

The Rams, who are expected to go to market with PSLs later this year, have not decided yet to use the structure, which would be a first in U.S. professional sports. PSL fees have always been accounted for as income to teams.

The disclosure is included in an Internal Revenue Service ruling from earlier this month that the team requested to determine whether it could structure the seat licenses as loans. A source provided a copy of the ruling to SportsBusiness Journal.

“Here, the fans are lending the PSL monies to the team and the team is obligated, after a long period of time has elapsed, to repay the funds” without interest, said Robert Willens, founder of his own eponymous tax and consulting firm. “In the loan case, the funds received by the team are not taxable, since one is not taxed on the proceeds of a loan.”

The Rams declined to comment.

The Rams plan to open their new Inglewood stadium in 2020, and PSLs are a critical funding ingredient, expected to supply well into the hundreds of millions of dollars. As a result, the tax savings would be significant.

To avoid tax on PSL fees at the new stadium, the Rams would have to return the money to buyers.

“The Rams did not want the PSL proceeds taxable to them as income. Section 61 is a very broad [tax law] provision and is supposed to require the Rams to include in income any assets that increase the net worth of the Rams,” said Richard Greene, a tax attorney and partner with Greene Radovsky Maloney Share & Hennigh. “The IRS ruled the PSL funds in the newly formed entity did not have this result for the Rams.”

The IRS decision, known as a private letter ruling, details other elements of the PSLs planned by the team: PSL holders are entitled to special events, including cruises and fantasy camps; exclusive access to the team website for content; special merchandise for PSL holders; and involvement in determining team player of the year.

It’s not hard to see why the Rams might take the PSL-as-loan approach. Say the club expected to raise $500 million in PSL proceeds. At a federal corporate rate of 35 percent, plus the steep rates in California, taxes would consume nearly half the amount.

As for repaying the $500 million, PSL terms often stretch 20 to 30 years, so the money due is paid back over decades. (The Rams have not announced the terms for the PSLs that they will sell.)

And that $500 million is worth considerably less in the future than today, because the funds appreciate in value over time.

No matter the IRS ruling, there is little doubt that the PSL money will add to the value of the franchise as one of the biggest cash flows in the team’s early years in Los Angeles.

The Rams relocated to L.A. from St. Louis last year after 20 years in the Gateway City, where they also sold PSLs. The team, in fact, is fighting litigation from previous PSL holders there over the team’s move. Those PSLs, like those of other teams, were structured as payments to the team and not reimbursable.

The Los Angeles Chargers plan to share the new Inglewood stadium and are expected to issue PSLs separate from the Rams.

The IRS private letter ruling also discloses that the Rams do not plan to sell every seat as a PSL.

“Tickets at the stadium for each Team game will remain available for purchase by public, nonmembers of Corp (the entity of PSL holders) at the same face amount ticket price that a member purchased the ticket,” the IRS ruling said. The stadium capacity will be 70,240.