Going into overtime In addition to these tax considerations, PE firms may need to rethink their exit strategies. A private equity firm may hold an investment for three to five years, but investments in sports teams may send these investments into overtime. Providing long-term growth and reliable, diversified revenue, a PE firm may rethink its traditional investment strategy and look at sports investing as a capital vehicle with a focus on long-term growth and adjust its exit strategy accordingly. It’s possible that we may see more continuation funds or GP led secondaries for some PE investors that want to remain invested in a team for a longer time horizon. Whether tax losses or revenue are generated, PE firms should make investors aware of the limited cash flows that are typical to sports investments that may be significantly different from their other investments. The play is under review Owners and potential investors alike should be aware that the IRS in January 2024 announced its Sports Industry Losses compliance campaign. As explained by the IRS, the campaign “is designed to identify partnerships within the sports industry that report significant tax losses and determine if the income and deductions driving the losses are reported in compliance with the applicable sections of the Internal Revenue Code.” What started in January 2017 with the identification of 13 initial campaigns to address significant compliance and resource challenges has grown into more than 45 separate campaigns, several of which target high-income individuals such as high-income non-filers, business aircraft and the sale of partnership interests. IRS shifting compliance focus onto high-earners, partnerships and large corporations Audits by the IRS are not new, but these campaigns provide a reminder to team owners and investors that sometimes the best offense may be a great defense. Common areas for review may include the timing of deductions related to complex player contracts, minority sales and the appropriate character of gain, and the character of league level items as ordinary or capital, among others. Here are some key steps to handling future scrutiny or audits: Prepare “audit ready” files. Proper documentation and organized system, leveraging technology for detailed data and analysis, is the benchmark. Ensure proper substantiation of data. Whether it’s a transfer pricing study or tax opinion letters, providing the basis for tax positions should be obtained in the regular course of business for complex tax considerations. Review industry and emerging trends. Whether this is done in-house or by leveraging conversations with tax and business advisors, a well-positioned business facing an audit has their ear to the ground to anticipate possible areas of focus. Establish the protocols for communication. The introduction of PE into the owner’s box brings a broader group of stakeholders whose interest should be considered when dealing with federal and state audit procedures (i.e., whether a partnership elects to “push-out” any adjustments to the partners or to pay any resulting tax liability at the entity level). It will be important to consult a tax professional. Private equity has officially entered the owner’s suite of professional sports, bringing significant changes to sports franchise ownership. This shift goes beyond prestige and emotional ties as firms focus on creating long-term value through diversified revenue streams, tax benefits and profitability. While offering opportunities for succession planning and capital growth, this trend also comes with increased IRS scrutiny, making it crucial for owners and investors to stay audit-ready and proactive in managing compliance challenges.