Frank McCourt

L.A. Dodgers Owners Use Loss Carryforwards; So Now They’re Tax Cheats?

Stipulated: the L.A. Dodgers are evil. Not seventh-circle evil like the Mets or the White Sox, but evil enough. And we’ll assume, for sake of argument, that their owner, Frank McCourt, bathes in Kruggerands while sipping puppies blended with 50-year old single-malt scotch.

That still doesn’t make him a tax cheat.

So why this lame L.A. Times column from Frank Hiltzik?

To everyone who claims that our wealthiest citizens pay more than their fair share of income taxes and we should cuse they’re the ones who, you know, create jobs in our economy, I have four words for you:

Frank and Jamie McCourt.



They made $108 million and paid no federal income tax? Why might that be?


So let’s get this straight: they made $108 million by losing $109 million? It must be magic! No?

“…Jamie’s accountant states in a court document that some is due to depreciation, which is a way of accounting for wear and tear on a property.”

So real estate losses are non-cash funny money? The tax law stretches commercial real estate deductions out over 39 years now, so real estate isn’t a great tax shelter. Sure, you can deduct commercial mortgage interest, but you can’t deduct principal on mortgage payments. So even in real estate, the McCourts’ $130 million tax loss carryforward isn’t a symptom of prosperity.

Let’s consider another exotic possibility: maybe they really lost money. Mr. McCourt’s day job is in commercial real estate. How has that been doing lately?

But Hiltzik seems to think tax loss carryforwards are some kind of cheaters game, or maybe even a status symbol, like a Mercedes or a private jet:

“Jamie’s documents say that in 2008 the net loss carry-forward from previous years was $109 million — in other words, the McCourts could have earned that much without paying a penny of income tax.”

Imagine of a world without loss carryforwards (I think you can!). You start a business and you lose $2 million in Year 1. In Year 2 things turn around and you make back $1 million. Without loss carryforwards, as a 35%-rate taxpayer you would pay $350,000 in Year two, even though the business is still $1 million in the hole. That’s an effective rate of >infinity%.

Perhaps Mr. McCourt is prosperous in spite of his loss carryforwards. Maybe his real estate has held its value, unlike everybody else’s. Maybe he’s even running personal expenses through his business (though Leona Helmsley learned that the IRS looks for that). But even a Los Angeles real estate empire can suddenly come crashing down.

Remember that maybe, just maybe, Mr. McCourt’s soon-to-be-ex-wife has a vested interest in making him look prosperous, and in making losses look like a mark of wealth. She might like some of that.

[H/t: TaxProf Blog]