Academic journal article Contemporary Economic Policy

Tax Revisions of 2004 and Pro Sports Team Ownership

Academic journal article Contemporary Economic Policy

Tax Revisions of 2004 and Pro Sports Team Ownership

Article excerpt

I. INTRODUCTION

In 1946, Major League Baseball (MLB) entrepreneur Bill Veeck convinced the IRS that the roster of players on his newly acquired Cleveland Indians was a depreciable asset (Veeck, 1962). Okner's (1974) assessment of this "roster depreciation allowance" (RDA) first appeared nearly 30 yr later. The point of his work, and subsequent work after nearly another 20 yr by Quirk and Fort (1992), was to elucidate the illogical foundations and ongoing consequences of the RDA. Despite these flaws, the RDA has endured and its recent treatment under the tax revisions of 2004, effective 2005, is the subject of this paper.

Under previous tax laws established in 1976, from 1977 to 2004, sports team owners were allowed to treat 50% of the team purchase price as an asset depreciable over no more than 5 yr, what we refer to as the "50/5 Rule." The 2004 revision set the RDA at 100% of the purchase price depreciable over no more than 15 yr, what we will refer to as the "100/15 Rule." All interested parties agreed that administrative enforcement costs would be driven to zero because, under the lavish percentage and depreciation period of the 100/15 Rule, no real legal challenges would be raised. Controversy over this revision did arise over the impacts on both team owner tax payments and team values.

Congressional supporters argued that owners would pay more taxes. A report by the Congressional Joint Committee on Taxation said the revisions would increase owner tax bills $381 million over 10 years. Industry experts disagreed, stating flatly that the revisions would generally lower tax payments by owners (Wilson, 2004, p. 2). To round out the controversy completely, a lobbyist-spokesman for MLB stated that tax payments would remain unchanged (Wilson, 2004, p. 3).

Turning to franchise values, members of Congress were silent but the same industry experts claimed the RDA revisions would raise the capital values of sports franchises. Lehman Brothers publicly stated that the revisions would add about 5% to sports team values across all leagues. Raymond James & Associates more vaguely agreed that team values would "increase" (Wilson, 2004, p. 3).

League officials, their lobbyists, and team owners were much less committal. They agreed there would be some advantages but chose instead to downplay the tax advantages and focus on the issue of owners suffering true net operating losses (Rovell, 2004, p. 1). Both Jeff Smulyan, previous owner of MLB's Seattle Mariners, and David Samson, President of MLB's Florida Marlins, voiced that the benefits of depreciation are small consolation for owners facing true operating losses. Ted Leonsis, owner of the NHL's Washington Capitals, said, "I look forward to the day where (write-offs are) an issue for me."

While its public statements downplayed the value of the RDA, MLB actively lobbied for the revisions and the National Football League (NFL) also publicly supported them. The National Basketball Association (NBA) and National Hockey League (NHL) remained neutral. Ostensibly, the reason for this lobbying was more about saving on legal fees than on raising franchise values, William H. Schweitzer, a managing partner of the Washington law firm that promoted the revisions for MLB, saying they would have a slightly positive impact, varying from club to club. The revisions would eliminate IRS disputes without significantly changing taxes. Indeed, he offered that MLB had not specifically evaluated how the revisions would affect franchise values (Wilson, 2004, p. 3).

We present a model of the RDA capable of sorting out these conflicting opinions. The model shows the impact of the RDA on team value and the impact of changes in the RDA on team values and taxes paid by owners. We hold all other values of team ownership constant and allow owners to either hold the team or sell it after the RDA depreciation period expires. Thus, we are able to (1) show the value of the RDA in terms of team operating profits, (2) provide comparative statics results for parameters of the RDA, (3) explore the role of the "other values" held constant, and (4) apply our findings to the controversy just detailed. …

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