Bill Would Raise Franchise Value of Sports Teams

Bill Would Raise Franchise Value of Sports Teams
The New York Times
Published: August 2, 2004

Owners of professional sports teams stand to gain tens of millions of dollars in the values of their franchises because of a single sentence buried deep in a sprawling piece of export-tax legislation now before Congress.

The benefit to sports franchises is contained in a small part of an enormous bill introduced originally to settle a trade dispute with the European Union. But the legislation has since become laden with add-ons for interests ranging from tobacco farmers to Oldsmobile dealers.

The bill, which has been approved by both houses, is expected to go before a conference committee to resolve the differences. The final version is expected to be put before both houses in September, when Congress returns from vacation.

The proposed change affecting sports team owners, which has been passed without hearings or debate, would allow the owners to write off the full value of their franchises over 15 years. Existing law generally limits teams to writing off only the value of player contracts over three to five years. The biggest items subject to the expanded write-offs would be television and radio contracts.

The benefits would apply to newly acquired assets, so current owners would not actually pocket more money, but they could command higher prices when they sell.

Two directors at Lehman Brothers, the investment bank, who specialize in sports banking and tax policy said the change could add 5 percent to sports franchise values. If so, it would represent a $2 billion windfall to franchise values, which totaled $41 billion in 2002, according to Forbes magazine.

“They’re doing very well in this,” said Robert Willens, a managing director at Lehman Brothers.

The Jets, who were sold for $635 million in 2000, might be worth an additional $55 million under the proposal, Willens estimated. Robert Caparole, chairman of Game Plan, a Boston investment bank, which has been an adviser on the sale of many professional sports teams, agreed that the change could boost purchase prices.

The proposed change appeared in separate export-tax measures in the Senate in October and in the House of Representatives in March. The two bodies recently passed markedly different versions of the bill, which grew to 960 pages, but each version has the identical language that is of special interest to owners of professional teams.

The prime sponsors, Senator Charles E. Grassley, Republican of Iowa, and Representative William M. Thomas, Republican of California, did not return telephone and e-mail requests for comment last week.

Willens predicted the bill would become law in October.

Benefits for Larger Teams

Write-offs like those proposed for franchise owners sometimes reduce taxes not only on sports teams but also, in some cases, on owner’s other earnings. For example, if Donald Trump bought the Yankees for $1.5 billion, he could deduct about $100 million per year for 15 years on profits not only from the Yankees but from his other companies that made a profit.

The precise effects of the measure cannot be calculated without knowing each team’s financial details and each owner’s tax situation. But in general, according to nine professional sport bankers, accountants and lawyers interviewed last week, the new law would be of greatest benefit to sports teams with higher values, longer-term ownership plans, and larger broadcast contracts.

“The benefits are going to vary depending on how long you’re going to hold the team and the size of the deal,” said Michael E. Rapkoch, president of Sports Value Consulting in Dallas.

Shawn McCarthy, director of the League of Fans, a program of the Center for Study of Responsive Law, which was founded by Ralph Nader, said, “Naturally I’m skeptical when professional sports leagues are lobbying Congress for changes that benefit them financially, especially considering all of the taxpayer handouts these leagues have received over the past 15 or so years.”

A report by the Congressional Joint Committee on Taxation says the measure would actually increase taxes for sports owners by $381 million over 10 years. Mark Prater, chief tax counsel for the Senate Finance Committee, said in an e-mail message that the change would also end disputes over allowable write-offs between the teams and the Internal Revenue Service.

“There’s nothing nefarious about it,” Prater wrote.

Rob Vandenheuvel, a spokesman for the House Ways and Means Committee, said the proposal had popped up twice before in other bills “as a revenue raiser.”

Lower Taxes for Owners

But most of the sports bankers and accountants interviewed said they did not believe sports owners in the long run would pay more taxes under the proposal.

Major League Baseball actively lobbied for the change and the National Football League supported it. The National Basketball Association and the National Hockey League were neutral. Willens said he was mystified by the Congressional claim that the measure would raise taxes on sports owners. Robert E. Leib, former lead tax partner in the professional sports industry group at Arthur Andersen, said that claim was misleading. Leib said the proposal would generally lower taxes and raise the capital values of sports franchises, especially in the N.F.L.

“The effect will differ franchise to franchise and league to league,” added Leib, a lawyer and accountant who founded The Leib Group in Wisconsin. He also represented the Boston developer Frank McCourt in his $430 million purchase of the Los Angeles Dodgers this year.

Leib warned, however, that minor leagues of professional sports may find the new tax rule “very disadvantageous.” He said that the minors had virtually no media contracts to figure into the proposed new accounting and that they probably would pay more taxes.

Owners of professional sports team have been trying for years to persuade the I.R.S. to allow them to amortize their increasingly lucrative media deals, but the I.R.S. has ruled that those are continuing assets, and nondeductible under special tax rules established in 1993 for professional sports.

The Canadian Press, a news service, has estimated that the average N.F.L. team received $77 million a year from national broadcast rights in 2002. The average in the N.B.A. was $26 million, according to the agency, Major League Baseball teams averaged $12 million and N.H.L. teams averaged $5 million. The bill under consideration would allow them to write off the value of those broadcast rights from their income, while stretching out the write-off on player contracts.

Values Up by 5 Percent

“At the end of the day, this should add to the current value of franchises,” said Aaron Barman, a sports investment banker with the public finance department at Raymond James & Associates.

Allen R. Sanderson, associate chairman of the economics department at the University of Chicago, who teaches and writes about sports economics, agreed.

“This is clearly something that would benefit them,” Sanderson said.

Willens said the change would add about 5 percent to major league franchise values “across the board.”

Sal Galatioto, the managing director in charge of Lehman Brothers’ sports advisory and finance group, said that the change would lower taxes for most franchises, depending on their size and other factors, and that it would add up to 5 percent in value.

“But personally, I don’t think it’s going to be enough to change someone’s determination on whether or not they want to buy one of these things,” Galatioto added. He is an adviser on the pending sale of the Nets this month and said that the deal should not wait for a possible tax law change in October.

“Deals that are done are going to have to close now,” Galatioto said.

An Expensive Disagreement

The change also means that owners are certain to save millions of dollars on the teams of lawyers and accountants they have had to hire to battle the I.R.S. in the continuing argument over franchise write-offs.

When Bud Selig, now commissioner of Major League Baseball, bought a bankrupt Seattle team and moved it to Milwaukee in 1970, he assigned $10.2 million of the $10.8 million price to player contracts and wrote off the salaries. The I.R.S. challenged the move. Selig won the dispute in court, but in 1976 Congress limited player contracts to 50 percent of franchise values.

In 1993, Congress set a simple 15-year rule for most businesses to write off intangible assets, but it carved out a special exclusion for sports franchises that allows them to more quickly write off player contracts.

In 1997, the I.R.S. set up a team of specialists based in Florida to scrutinize a wide range of professional sports’ tax claims, especially the write-offs. Audits, appeals and litigation followed.

An I.R.S. spokesman, Anthony Burke, declined to comment last week on the proposal before Congress.

“If it’s pending legislation, we don’t discuss it,” he said.

Congress’s stated reason for changing the sports tax law now, in addition to raising taxes, is to end argument between owners and the I.R.S. “The committee believes expending taxpayer and government resources disputing these items is an unproductive use of economic resources,” the House report on the legislation says.

The Senate version of the bill passed by a vote of 92-5 on May 11. The House version, called the American Jobs Creation Act of 2004, passed by a vote of 251-178 on June 17, but not before a raucous debate on other special-interest items in the bill.

Representative Pete Stark, Democrat of California, called the bill “a Christmas tree of special interest giveaways.”

Some Call It Pork

Representative Tammy Baldwin, Democrat of Wisconsin, complained, “Instead of creating jobs, it creates tax cuts for cruise-ship operators, foreign dog-race gamblers, Nascar track owners, whaling tribes, bow-and-arrow makers, Chinese ceiling-fan manufacturers, Oldsmobile dealers, and beer and liquor wholesalers.”

Republicans disagreed. Representative Thomas, chairman of the Ways and Means Committee, said the measure would primarily create jobs and incidentally fix some unfair or out-of-date tax laws.

“People deserve a day at least once every 20 years,” Thomas said in floor debate, “to try to correct the horrible, horrible condition of many areas of our economy under our current tax code.”

Nowhere in the hours of debate in the House or the Senate was a word uttered about professional sports franchises.

Greg Aiello, N.F.L. vice president for public relations, said the sports write-off proposal was not controversial because the government said it would collect more taxes and the I.R.S. and owners would spend less money fighting each other.

“It was agreed it makes sense to simplify the code and eliminate all the hassles,” Aiello said.

The N.B.A. remained neutral on the bill, said league spokesman Mike Bass, because some N.B.A. owners would benefit from the change, but others would not, because they had larger ratios of player contracts already being written off.

William H. Schweitzer, a managing partner of the Washington law firm of Baker & Hostetler, promoted the tax change on Capitol Hill for Major League Baseball. Schweitzer said the change would have a slightly positive impact, varying from club to club, by eliminating I.R.S. disputes, without significantly changing taxes. He said baseball had not specifically evaluated how the new tax law would affect franchise values.

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