On Monday, the Tampa Bay Times reported that a group of minority owners of the Tampa Bay Rays were suing majority owner Stuart Sternberg, saying he’d engaged in a “relentless scheme” to force them out and seize full control of the team. Among the charges:
- Sternberg deprived minority owners of their share of profits while still sticking them with taxes on those profits — no details provided by the Times on how he pulled this off — forcing some of them, including Lenda Naimoli, the widow of original Rays owner Vince Naimoli, to sell their shares to him at cut-rate prices.
- Sternberg then transferred “the entire baseball club and franchise” to a new company he controlled without telling his minority partners.
- Starting in 2014, Sternberg was “secretly negotiating” to sell shares to Stephen Bronfman, the Canadian private equity goon who has been working to bring baseball back to Montreal.
That’s a bunch of stuff, certainly, and what you make of it depends on your perspective, and your agenda. St. Petersburg Mayor Rick Kriseman responded by calling on Sternberg to “consider relinquishing control” of the Rays, while also wondering aloud whether the Montreal talks could represent a default on the team’s use agreement with St. Pete, which prohibits discussions about moving the team before 2028. Most headline writers, meanwhile, focused on the “secret Montreal talks” angle, though the only thing secret seems to have been that they started earlier than Sternberg had previously admitted.
Kriseman’s default charge first: Depending on what evidence the minority owners have, this could well be much ado about nothing, as the Rays use agreement only prohibits Sternberg from talking to other cities about playing games there before 2028, it doesn’t prohibit Sternberg from talking to other cities before 2028 about playing games there. So talking to Bronfman in 2014 about moving the Rays to Montreal 14 years hence was perfectly within the terms of the use agreement — and that’s assuming that the Tampontreal Ex-Rays thing was even a glimmer in anyone’s eye then.
As for Sternberg keeping his Bronfman talks secret, that’s not necessarily nefarious either: You have to start negotiations before you announce them, pretty much by definition. Yes, Sternberg keeping his cards hidden for several years seems skeezy, but pretty much everything Sternberg has done in his campaign to get somebody else to build him a stadium in Tampa Bay has been pretty skeezy, so more gamesmanship isn’t especially out of character.
More interesting is whether this suit will result in any consequences for Sternberg, and here we enter I Am Not A Lawyer territory. The minority owners are asking that the club be placed in receivership to determine who exactly should own how much of it, which clearly would but a dent in Sternberg’s plans to, well, do much of anything, really. But in America, anyone can sue anyone for anything, so it’ll take more analysis of the suit itself — which the Tampa Bay Times still hasn’t deigned to link to — to figure out what’s actually likely to happen going forward. Likewise, Times columnist John Romano’s speculation that the suit could force Sternberg to open his books: Yes, that would be interesting if it happens, but we’re a ways off from that point just yet.
For now, then, we just have a bunch of minority owners upset that they were being muscled out by their majority partner, which could be anywhere from a violation of the law to just cold business practice. And Montreal is ending up in the headline about it mostly because “Rays secretly plotting to move to Montreal” is always an attention-grabbing headline — look, I used it myself up above! — whether or not it’s actually new news. We’ll all find out more once this starts moving through the courts, but unless the plaintiffs start talking to the media, which they haven’t so far, it’ll probably be a while before we get any more revelations, or even find out what the hell that “deny profits while forcing to pay taxes” business is about, which sounds pretty sneaky.
UPDATE: I now have a copy of the complaint — thanks, Noah, and thanks as well for all your fine work following this story over the years — and it appears that the “deny profits while forcing to pay taxes” business is that the plaintiffs are charging that Sternberg paid himself and his cronies large, unaccountable salaries while refusing to distribute profits to the team owners at large, leaving the minority owners on the hook for taxes for owning a share of a profitable franchise without seeing any of the profits, which is a more familiar if still enraging scam. Whether it’s litigable is, again, outside my area of expertise — corporate lawyers, feel free to chime in!
Did you mistakenly strike the “k” and not the “l,” being they’re right next to each other on the keyboard? Sleazy.
Okay, okay. The “a” and “e” aren’t next to each other on the keyboard. Either way, I still feel the need to take a shower to wash out the stench after this read.
“You can dress up greed, but you can’t take the stench out” – Craig D. Lounsbrough
There are subtle differences of connotation between “sleazy,” “skeezy,” and “skeevy,” but I will leave that discussion for another time.
I think you meant to write: “… it doesn’t prohibit Sternberg from talking to other cities before 2028 ABOUT playing games there”, rather then a second “from”.
Yes, thank you, now fixed!
Is the complaint you got from Noah public and if so do you know how to get a copy?
It is public, and I just added a link above:
https://www.fieldofschemes.com/wp-content/uploads/2021/05/RaysSuit.pdf
According to the Tampa Bay Times, Kriseman says he won’t be doing any more negotiating with the Rays while Sternberg is in charge:
“…“I think, given the allegations in this lawsuit … they are of such a nature that with him being the majority owner, the managing partner and the operator of the team and the one who we would be negotiating with, it makes it difficult, it really makes it untenable for me to be able to sit down and negotiate with him,” Kriseman said. “As long as he’s in that role, I can’t negotiate with him, because part of the complaint calls for him to be removed.”
The mayor said if he hammered out a deal with Sternberg, and then the owner was subsequently outted by a court, “Then I’ve got no deal.”
Kriseman echoed his Monday call for Sternberg to step down, if only temporarily, until the suit is resolved.
The Rays declined to comment….”
Kriseman’s term as mayor is up in January 2022.
It would depend on what Kriseman means by “deal”. If he means a verbal agreement with the manager of the general partnership, it is probably not binding, no. If he signs an MOU or an actual agreement with the business that has the authority to enter into contractual arrangements on behalf of the ball club, then the deal remains in force to any successors (including new mayors or successor ownership groups).
A contract is a contract. And a handshake is just a handshake.
Neil, what is going on here!?!? You should be on Sternberg’s side.
The Plaintiffs are complaining about Sternberg paying high wages instead of handing out dividends to shareholders. Dividends, I might add, which are taxed at a lower rate than wages.
To top it off, the Plaintiffs are fussy because they wanted dividends in order to cover the taxes they owed on unrealized capital gains. I can’t imagine you are advocating for a tax code with lowered or zeroed out taxes on unrealized capital gains, are you??
p.s. My lady, who works for Amazon, gets ticked about this every year around tax time. She never sells her AMZN stock, but Amazon does their accounting in apparently the same way the Rays do it, so she has to pay unrealized capital gains tax every year. The end result is her “cash flow” (aka take home pay) keeps trickling downward because cost-of-living increases are less than the increasing amounts of tax on unrealized capital gains. I am sure Amazon views this as a feature, not a bug, because it incentivizes employees to move up (at which time they’ll get more stock) or get out. Point is, THIS IS THE REAL AMAZON WORKERS SCANDAL. Enough of the peeing in bottles myth. You, Neil, can lead the charge on reforming the Federal tax code to disallow companies from doing annual unrealized capital gains assessments!
I don’t think Stuart Sternberg counts as a Rays “employee.”
Time out here. Former Corporate Auditor here.
Tampa Bay Rays is a Limited Liability Corporation (LLC) aka partnership. As opposed to Amazon, which is a corporation. The LLC does not pay taxes. Nor does it issue dividends. The parters report their share of LLC’s gain or loss on their individual income tax returns. Whereas shareholders of a corporation must include the corporate dividend distributions on their personal income tax returns.
Note: A corporation does pay taxes on its income (hence, ruling a corporation is held to be an individual).
The lawsuit alleges the following, “Purposely devaluing Plaintiffs’ limited partnership interests by strategically withholding distributions and leveraging enormous tax liability to discourage limited partners from increasing their limited partner interests and encourage them to “fire sell” their limited partner interests to 501SG at far below fair value (after declining to purchase those same interests for the benefit of the Partnership).”
This is clearly goes to an LLC. That the partners were required to report their share of LLC’s income, “the resultant of the LLC’s enormous tax liability,” on their personal income tax returns. This reduced the partner’s ability to increase their share in LLC (higher personal income taxes. Less disposable income). If the partners were required year in and year out to report LLC’s income on their personal income tax returns, this might be the basis for partners to dispose of their interests in LLC. Goes to the intent of the controlling majority partner, which is up to the courts to decide.
As to distributions, I would need to see LLC’s tax returns to make a determination as to what this references. The purpose of LLC is to manage its income to the extent the partners reportable share is the least amount possible. More specifically, an LLC allows it to take advantage of deductions not allowable on an individual income tax return, thus allowing LLC to operate at a loss.
False statement: Dividends, I might add, which are taxed at a lower rate tan wages.
Wages, interest, dividends, etc. are included on personal income tax return in determination of Adjusted Gross Income (AGI), upon which tax is based.
Amazon issues Restricted Stock Units (RSU’s) to employees provided certain conditions are met. The employee pays income tax on the RSU once its vested (however, under IRC Section 83(b), employee may opt out and pay income taxes on fair market value of RSU at its granting, as opposed to its vesting. However, this is risky. If RSU fails to vest, income tax paid upon it are non-refundable).
As to tax unrealized capital gains and losses: One doesn’t have unrealized capital gains anymore than one has unrealized capital losses. Capital gain or loss only occurs, or is realized, at time of sale of the asset. Difference between asset’s sales price and basis in the asset results in capital gain or loss.
f you are one of the two attorneys I worked with with same name for many years, you know all of this.
Than not tan. If not f. Problematic to copy and paste comments, esp. if you click back into box to review comment that was pasted.
Thanks Tim. I was shaking my head a bit at the notion of “unrealized” gains or losses and associated tax implications. The gains/losses would have to be realized – at least for the company itself – for there to be any tax implication. Is it your position that the partnership/LLC could have earned an operating profit, thus incurring tax liability for each member/partner, yet withheld distributions of that profit?
I am thinking of something like artificially inflated “management fees” paid out of taxable income to the manager of the general partner etc. Or perhaps simply a resolution made by the majority shareholder that no distributions will be made this year, next year, or possibly ever, despite tens of millions in actual operating profit annually for the Rays.
I seem to recall Al Davis did more or less the same thing to his (non managing) partners for decades… the Raiders made money and the value of their holding increased, but many/all of the minority partners (and non-managing high percentage partners) received no actual cash…. and occasionally even experienced cash calls.
Is that your recollection of it also?
John:
Not sure what lawsuit is alleging as to “distributions.” LLC functions much like a corporation, accounting wise. Tax wise, LLC differs in that it’s a pass-through entity. Everything flows through to LLC partners. If LLC is profitable, it cannot and doesn’t make dividend distributions to LLC partners (as a corporation does to shareholders) or anyone else for that matter. LLC partners simply report their share of LLC income on their personal income tax returns. Hope that makes sense.
Given the rapid escalation in prices of homes across the nation this last year, hoping you reported the “unrealized gain” on your home on your personal income tax return. I know I did. SMDH
John: You got it.
Sternberg as Tampa Bay Rays LLC managing partner didn’t pay minority partners their share of LLC income.
Doesn’t have to. He’s managing partner. Can do whatever he wants with LLC income.
Meanwhile, minority partners had to pay their share of LLC income on their personal income tax returns.
That’s how the tax code works.
Sternberg knows this.
That’d be the basis for fire sale of minority partners share of LLC (after years of paying personal income taxes on their share of LLC income, they constructively received, but was never distributed).
That’s how LLC’s work (better know what you’ve gotten yourself into if you’ve a minority share in an LLC). Predatory?
If you’re going to swim with sharks, or formerly manta rays, you’re going to get eaten.
Not pay, “distribute.”
In order to pay personal income taxes using those funds and not their own.
https://youtu.be/KdDDrB57bXk?t=56
Rays owner sued by partners | Nothing Personal with David Samson.
First 19min worth watching about how MLB Partnership Agreements really work…
Minutes 16 – 19. Correct. Having been a Corporation Tax Auditor for 8 years, that’s how the tax system works. Phantom income? You’re a partner in LLC. LLC has taxable income. On your personal income tax return, you’re required to report your share of LLC “pass-through entity” income, whether or not that income was distributed to you. If that’s problematic, you dispose of your share in LLC. That’s how LLC’s work.
You maybe thinking to yourself, but that’s not fair. You want to play with the big boys, you’d better be prepared to play the game. The game is called “American capitalism.” And when the big boys play, they don’t play fair.
David Samson. Don’t be fooled. He’s no saint. Dave was a master game player. So his hands are dirty as well. Dave’s essentially correct in what he’s relaying here, from LLC majority partner perspective (Um Dave, you failed to mention loans to shareholders. Actually, LLC doesn’t want to be profitable, in order to avoid paying personal income taxes. To get around it, majority partner issues loans to shareholders. No note. No repayment schedule. No due date. No interest on loan. In effect what majority partner’s doing is distributing income, so as not to pay personal income tax on LLC income, now greatly reduced under guise of loans to shareholders).
https://www.fieldofschemes.com/2018/12/18/14431/former-marlins-exec-gives-fans-the-finger-literally-not-figuratively-as-he-brags-of-profits-from-stadium-ripoff/
https://www.fieldofschemes.com/2014/01/24/6662/david-samsons-claim-to-fame-is-extorting-public-money-for-marlins-stadium/
https://www.fieldofschemes.com/2003/11/24/163/marlins-finances-probed-sort-of/
Well, as George W (that’s Dubya, not Washington…) once said: “These are the most productive members of society”.
Sarcasm off.
Thanks for the explanation(s), Tim. I seem to recall hearing Buffett (Warren, not Jimmy) talking about this option for high wealth investors, simply create an entity (foreign or domestic) that pays no tax and then loan yourself money out of it’s earnings. Didn’t know you could leave the repayment schedule out… but not surprised in the grander scheme of things. I assumed it would be a “repay on death of loan recipient” type of arrangement.