Bill May Not Help Minor Leagues

September 3, 2004
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GRAND RAPIDS — Congress is hashing out a tax bill that could add millions of dollars to the value of major professional sports franchises. At the same time, though, the bill could also put owners of minor league pro teams into the position of having to pay more taxes.

The bill, over 900 pages long, would let owners of major pro sports franchises define such things as broadcast-rights contracts as intangible assets and then amortize the value of those agreements over 15 years. The legislation would also reportedly let teams write off the full value of their businesses over that same timeframe.

The end result for owners, like Detroit Red Wings and Tigers owner Mike Illitch, is that they could command higher selling prices for their franchises if the bill becomes law.

Forbes magazine has estimated the value of the Red Wings at $266 million and Lehman Brothers, an investment banker, said the bill could add another 5 percent to a franchise’s value. If so, that would make the Detroit NHL team worth another $13.3 million.

For sports teams, the key portion of the lengthy bill suggests changes be made to Section 197 of the tax code.

“That section, when it was first enacted, excluded sports franchise teams from this whole calculation. Sports franchises weren’t considered so-called 197 intangibles, which could then be depreciated over 15 years,” said David DiMuzio, a tax attorney with Rhoades McKee.

“These assets had to be another kind of intangible or couldn’t be deducted at all.”

DiMuzio said the change would repeal the exclusion for sports franchises and the assets would then fit the definition of 197 intangible and be amortizable over 15 years. With the law in place, a sales transaction could include a premium for things like broadcast deals that weren’t previously assignable or deductible.

“What it would mean is that a significant portion of the purchase price could be reclaimed in depreciation deductions against either the earnings of that team, or presumably the earnings of a partnership that owned it, or the earnings of individuals — presumably wealthy individuals — that needed the deduction against their other income,” he said.

The change would mean especially good financial news for a rich franchise such as the New York Yankees, a team with a broadcast agreement reportedly worth more than $100 million a season.

“When the Yankees are sold, that asset might in fact attract a value even greater than whatever the income stream is, just because of the overall premium they paid. In other words, that could be one of the intangible assets that make the Yankees what they are worth,” DiMuzio said.

“Those things are going to be renewed. Somebody is going to pay a lot of money to broadcast these games. So in effect, that is an asset that is kind of discounted out into perpetuity, almost. And that is what is going to attract a large amount of the purchase price.”

But the law doesn’t seem to work as well for the West Michigan Whitecaps and Grand Rapids Griffins and Rampage. If one of those teams has an asset that qualifies as intangible under Section 197, that would mean the depreciation may have to be taken over 15 years instead of, say, the five years the team may be doing now.

“As 197 intangibles, that means they will all be 15 years now. So (depreciation) will go from, perhaps, what is shorter to a longer period of time. And presumably these would not be the types of things that have the huge premiums such as the broadcast rights,” said DiMuzio.

Of course, stretching an asset’s depreciation from five to 15 years would give a minor league owner a smaller deduction to offset earnings each year, which could raise the tax bill for a team. And it may not. Only time will tell.

“I hesitate to draw any absolute conclusions until you know exactly what the specifics are,” said DiMuzio. “But seeing the language in the bill kind of confirmed this is the area they are talking about in intangibles, and this (scenario) is at least a plausible explanation.”

DiMuzio isn’t alone in reaching that possible conclusion. Sports tax attorney Robert Lieb of the Lieb Group in Wisconsin told the New York Times that minor league owners may find the bill “very disadvantageous” and would probably pay more taxes because of it.

The proposed change to Section 197 is part of the export-tax legislation. A vote on the bill’s final version is expected this month.    

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