Coach's IRS Tax Court Win

Alabama football coach Nick Saban was involved in a tax battle with the IRS over a bad debt deduction he took in 2011. Coach Saban made a real estate investment by loaning $2 million dollars for an office building in Louisiana. Two LLCs entered into a promissory note to repay Coach Saban with interest at 16%. A few years later, as problems with the investment grew serious, Saban contributed the promissory note to an entity named 2590 Associates in exchange for a 15% interest in the companies’ profit, gain and/or loss.

The company 2590 Associates knew that it could not collect on the promissory note that Saban had contributed, so it claimed a worthless debt deduction in 2011. As a 15% owner in 2590 Associates, Saban would stand to benefit from the worthless debt deduction. The IRS disallowed the worthless debt deduction. The matter ended up in the U.S. Tax Court.

The IRS conceded that Saban’s $2 million loan was initially a bona fide debt. However, the IRS argued that the contribution by Saban of the loan to 2590 Associates did not create a bona fide debt between 2590 Associates and the original debtor. The IRS apparently thought that the Saban had received consideration for the debt by receiving a 15% ownership stake in 2590 Associates. Therefore, the IRS argued that the debt to Saban was satisfied and no longer existed,

The Tax Court disagreed with the IRS. In the end, Saban probably won a case to uphold a deduction of about $450,000.

Gene M. Bowman, Attorney & CPA (retired) in Huntsville, Alabama