Sports Law Blog
All things legal relating
to the sports world...
Thursday, March 25, 2004

Tax Law and Sports: This is an area of the law I do not cover much, despite the fact I am currently learning a great deal on the subject. But a good friend sends this along from her tax textbook:

    Allocation issues have been particularly contentious when a professional sports franchise is purchased. For example, in Laird v. United States, 556 F.2d 1224 (5th Cir. 1977), cert. denied, 434 U.S. 1014 (1978), the Atlanta Falcons professional football team was acquired for about $7,750,000. The purchaser allocated $50,000 of the cost to the National Football League franchise and $7,700,000 to the players' contracts. Under IRS rulings, the franchise was treated as a nonwasting asset, but the players' contracts were wasting assets with an estimated useful life of 5.25 years. The court held that $3,500,000 should be allocated to the players' contracts and $4,250,000 to the franchise. See also Section 1056(d), which now establishes a presumption that no more than 50% of the price of a sports franchise is allocable to players' contracts.

Why is this important? Well, it is pretty complicated and has to do with Section 197 of the Tax Code. Eric A. Thornton of Williamette Management Associates explains it best:

    Section 197 provides that the franchise agreement intangible asset acquired in the purchase of a professional sports team is not amortizable for income tax purposes.

    However, other intangible assets acquired with the purchase of a sports team (but not components of the national franchise agreement) may be amortizable for income tax purposes. These acquired intangible assets may be amortized if the intangibles (1) have an identifiable value separate from any acquired goodwill, going-concern value, and the franchise agreement intangible asset and (2) have a determinable remaining useful life ("RUL").

Thus, the value of the franchise itself is not amortizable (meaning it cannot be depreciated over time for the tax benefit), but other intangible assets, such as player salaries, television rights and sponsorship agreements, can be amortized. Of these, the most valuable by far are the player salaries. As a result of this rule, purchasers of sports franchises have an incentive to allocate as much of the cost as possible to other intangible assets and not to the value of the franchise itself. The IRS knows this as well and closely scrutinizes acquisitionsions of professional sports teams.

Perhaps the most fascinating part of the textbook excerpt is that the Falcons were sold in 1975 for $7.5 million. Adjusting for inflation, this is $26 million in 2002 currency. Coincidentally, that is the year Arthur Blank bought the team for $545 million.

See, even tax law can be interesting when it deals with sports.




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