Joan Kroc Need Be in No Hurry to Sell Padres : Team’s Tax Status Means Owner Won’t Be Hurt by Waiting Until Next Year

Most people would do anything to avoid paying $1.6 million more in taxes. They’d even sell their baseball team before year’s end, if that’s what it took.

But those who know Joan Kroc--whose net worth exceeds $600 million--say that paying a little more in taxes isn’t all that’s important to her.

Especially if it means taking her time and finding an acceptable buyer for her San Diego Padres, which went on the market Friday for a reported $50 million.

And, according to a San Diego tax accountant who specializes in mergers and acquisitions, Kroc knows that she is in no hurry--tax-wise--to sell her National League baseball franchise.

Because of the Padres’ tax classification with the Internal Revenue Service, Kroc will not be substantially hurt, financially, by completing a sale next year, according to Joe Haney, tax partner with the local office of Deloitte, Haskins & Sells.

Potential buyers will also benefit from the Padres’ classification as an “S Corporation” and won’t be forced to rush into a deal, Haney said Friday.

The tax difference between selling the team this year and next may only cost Kroc $1 million to $2 million, depending on how much the team sells for and how Kroc determines her “cost basis” for the team.

The S Corporation (once known as a Subchapter S Corporation) designation means that the owner of a company assumes the tax consequences for its losses and profits.

The Padres have made money only twice in their 18-year history--in 1984 and 1985--so for the most part the team has been a tax write-off for Kroc and, before his death in January, 1984, her husband, Ray.

Because it was an S Corporation, the Krocs could use the Padres’ losses to offset earnings from other investments and businesses.

Using Haney’s expertise--and admittedly making some financial assumptions--here’s a rough calculation of how a Padre sale could be taxed:

First, assume that Kroc indeed gets the $50 million that she reportedly is asking.

Then, figure how much profit she’d have to report. Ray Kroc bought the team in 1974 for about $12.5 million. But, because the team has depreciated its players’ contracts, the actual book value of the team may be much lower.

On the surface, it would seem that most of the sale price would represent profit.

But it won’t.

When Ray Kroc died, Joan inherited his fortune, including the Padres. The “cost basis” for the Padres then increased to the fair market value of the team at that point.

It’s difficult to know exactly what the fair market value was in January, 1984, before the Padres’ pennant-winning season and World Series appearance. But, for the sake of argument, estimate the team’s value at about $30 million, a figure that sources close to the team said is not unreasonable.

Using that $30-million cost figure, Kroc would yield a paper profit of $20 million.

Under current tax law, a 20% capital-gains tax would be applied, meaning that Kroc would owe about $4 million in taxes on the transaction. She would actually receive $46 million--$50 million minus $4 million in taxes.

Under the new tax law, capital gains will increase to 28%, which, under the example, means that Kroc would owe about $5.6 million. She’d actually receive $44.4 million.

That’s a difference in taxes of only $1.6 million if the club is sold in 1986 rather than next year.

And the difference gets smaller if the cost basis of the sale is greater than the example.

Clearly, “that’s a lot of money, and there are a lot of my clients who are trying to close transactions for less before the end of the year,” Haney said.

But to Kroc, who can afford to say that she never makes decisions based on tax ramifications, the money seems less important than keeping her word to find a buyer who won’t relocate the Padres, several of her associates said Friday.

Kroc’s position may have been different, however, had the Padres been a typical corporation, without the “S Corporation” status.

In that case, Kroc may have had significantly stronger financial incentives to sell the team before Jan. 1, 1987, because she would have been double-taxed, according to Haney.

Under the new law, and assuming that the Padres were a typical corporation, Kroc, under the example, would owe nearly $12 million in additional taxes if the team were sold in 1987 rather than 1986.

Potential buyers benefit from the Padres’ special tax status because, one way or the other, Kroc’s tax liability would likely have been passed on through an increased purchase price.