Was Steve Ballmer 'Hunting Goodwill' In Clippers Deal?

Former Microsoft Corporation MSFT CEO, Steve Ballmer paid $2 billion to buy the Los Angeles Clippers basketball team. The amount represented a 400 percent premium on the next highest price ever paid for an NBA franchise.

On the other hand, according to the Financial Times, Ballmer could receive a $1 billion tax break over the next 15 years, thereby substantially reducing the cost of the acquisition.

Whether Ballmer’s decision to pay such a premium was influenced by the potential tax break remained an open question.

Related: 3 Things Steve Ballmer Did Right

Goodwill

The key to Ballmer’s windfall, the Financial Times said, was a little-known tax incentive known as “Goodwill.”

Goodwill came into being about a decade ago as a way to account for media rights. It was designed to represent the difference between the purchase price and the actual cash (and fixed assets) owned by the team.

The Role Of Media Rights

The NBA just finalized a $24 billion deal with ESPN owner The Walt Disney Company DIS and Time Warner Inc.’s TWX Turner Broadcasting.

The deal reflected the fact that the value of media rights have been rising in both collegiate and professional sports, including the NBA.

The media deal also served to make Ballmer’s high-octane purchase price of the Clippers seem much less questionable.

Not A Deal Maker

Bloomberg pointed out that despite the attractiveness of a potential $1 billion tax deduction, Ballmer’s purchase likely would have gone ahead with or without the incentive.

Tax lawyer, Eric M. Nemeth told Bloomberg, "Pro sports teams defy conventional valuation."

Saying, "Folks that don't have money don't buy sports teams to make money,” Nemeth added, “The people that buy sports teams already have made their money.”

According to Nemeth, reversing owners' goodwill benefits would not likely deter potential buyers.

Related: Microsoft And Salesforce Unveil New Joint Solutions At Dreamforce 2014

The Fairness Factor

Arguments aside, some including Matt Gardner, Executive director of the Institute on Taxation and Economic Policy (ITEP), said the law including sports franchises in the Goodwill tax write-off was a bad one.

In a blog post Gardner said, “It’s bad enough that the goodwill tax rule allows companies to deduct costs they may never incur—but it’s even worse that wealthy team owners can bid up the asking price of their teams as a tax shelter.”

Gardner’s solution called for Congress at least to reverse the 2004 change that invited sports team owners to use “Goodwill.”

A better response, he said, would be to get rid of the 1993 law that allowed corporations to write off the value of intangible assets in the first place.

At the time of this writing, Jim Probasco  had no position in any mentioned securities.