Baseball for the Thinking Fan

Login | Register | Feedback

btf_logo
You are here > Home > Baseball Newsstand > Discussion
Baseball Primer Newsblog
— The Best News Links from the Baseball Newsstand

Thursday, July 08, 2021

The Billionaire Playbook: How Sports Owners Use Their Teams to Avoid Millions in Taxes

The history of team ownership as a way to avoid taxes goes back almost a century. Bill Veeck, owner of the Cleveland Indians in the 1940s and later the Chicago White Sox, stated it plainly in his memoir: “Look, we play the Star Spangled Banner before every game. You want us to pay income taxes too?”

Veeck is credited with convincing the IRS to accept a tax maneuver even he described as a “gimmick.” Player salaries were already treated as a deductible business expense for a team. That was not controversial in the slightest.

But Veeck dreamed up an innovation, a way to get a second tax deduction for the same players: depreciation. The way he accomplished this was by separately buying the contracts before the old company was liquidated, instead of transferring them to the new company as had been done before. That meant that the contracts were treated as a separate asset. The value a new owner assigned to that asset when he bought the team could be used to offset taxes on team profits, as well as any other income he might have. (Defenders of the practice contend that it’s not double-dipping since the deductions are taken against two separate pools of money: the money used to purchase the team and the day-to-day operating budget.)

Team owners, Veeck wrote in his memoir, had won “a tax write-off that could have been figured out by a Texas oilman. It wasn’t figured out by a Texas oilman. It was figured out by a Chicago hustler. Me.”

Once the IRS accepted this premise, the natural next step — owners assigning as large a portion of the total team purchase price as possible to player contracts — was elevated into a sport of its own. Decades ago, Paul Beeston, who was president of the Toronto Blue Jays and president of Major League Baseball at various times, famously described the result: “Under generally accepted accounting principles, I could turn a $4 million profit into a $2 million loss and I could get every national accounting firm to agree with me.”

 

RoyalsRetro (AG#1F) Posted: July 08, 2021 at 09:49 AM | 18 comment(s) Login to Bookmark
  Tags: taxes

Reader Comments and Retorts

Go to end of page

Statements posted here are those of our readers and do not represent the BaseballThinkFactory. Names are provided by the poster and are not verified. We ask that posters follow our submission policy. Please report any inappropriate comments.

   1. Lowry Seasoning Salt Posted: July 09, 2021 at 01:42 AM (#6028353)
As if all the recent remembrances of Rumsfeld weren't enough to remind me how awful the Bush tenure was, I'd forgotten about this:

In an effort to stop the endless litigation, Congress inaugurated the modern era of amortization by simplifying the rules in 1993: Under the new regime, the purchaser of a business would be allowed, over the span of 15 years, to write off more types of intangible assets. This might have been welcome news for the sports business. But Congress explicitly excluded the industry from the law.

Following lobbying by Major League Baseball, in 2004, sports teams were granted the right to use this deduction as part of a tax bill signed by President George W. Bush, himself a former part owner of the Texas Rangers. Now, team owners could write off the price they paid not just for player contracts, but also a range of other items such as TV and radio contracts and even goodwill, an amorphous accounting concept that represents the value of a business’ reputation. Altogether, those assets typically amount to 90% or more of the price paid for a team.

That means when billionaires buy teams, the law allows them to treat almost all of what they bought, including assets that don’t lose value, as deteriorating over time. A team’s franchise rights, which never expire, automatically get treated like a pharmaceutical company’s patent on a blockbuster drug, which has a finite life span. In reality, the right to operate a franchise in one of the major leagues has in the last few decades been a license to print money: In the past two decades, the average value of basketball, football, baseball and hockey teams has grown by more than 500%.
   2. Starring Bradley Scotchman as RMc Posted: July 09, 2021 at 08:11 AM (#6028362)
how awful the Bush tenure was

You want awful? Strap in for the next four years, buddy.

In other news, rich guys know how to avoid paying taxes. Film at 11.
   3. DL from MN Posted: July 09, 2021 at 08:28 AM (#6028363)
Anyone still think MLB won't be able to find a partner for expansion? They're running one of the best tax shelters on US soil. Of course they'll be able to find two more billionaires interested in buying in.
   4. snapper (history's 42nd greatest monster) Posted: July 09, 2021 at 09:05 AM (#6028366)
They're running one of the best tax shelters on US soil. Of course they'll be able to find two more billionaires interested in buying in.

I don't know if an MLB team is particularly good as a tax shelter. My gut is that multi-national operations are far superior. You can simply transfer price most of your profits into the lowest tax regime you operate in. A billionaire should never want to generate income in the U.S. if he could do so in Ireland or Luxembourg. Every big US company has access to the same tax breaks MLB gets, including getting localities to give them subsidies and tax breaks.

I think the reason they have no trouble finding owners is that the business is incredibly profitable. If you practiced honest accounting, and market rate deals, I think you'd find an MLB team throws off tons of free cash flow, that the owners deliberately hide from the players.
   5. winnipegwhip Posted: July 09, 2021 at 09:28 AM (#6028368)
So even if there is a labor dispute and there is no 2022 season, it may be possible for teams to make a profit due to heavy amortization and declaring taxable losses?
   6. snapper (history's 42nd greatest monster) Posted: July 09, 2021 at 09:35 AM (#6028370)
So even if there is a labor dispute and there is no 2022 season, it may be possible for teams to make a profit due to heavy amortization and declaring taxable losses?

Corporations don't want accounting profits, they want losses. Profits lead to taxes. Cash flow is the real gauge of success. If you can generate positive cash flow with book losses, you're where you want to be.
   7. The Yankee Clapper Posted: July 09, 2021 at 12:05 PM (#6028396)
Just for the record, the vote on final passage of the Tax Bill mentioned in #1 was 280-141 in the House of Representatives, and 69-17 in the Senate.
   8. Never Give an Inge (Dave) Posted: July 09, 2021 at 03:20 PM (#6028426)
Corporations don't want accounting profits, they want losses.

Well, ideally they want GAAP accounting profits (to help support the stock price), but tax accounting losses. For private companies that have no intention of going public, like baseball teams, they don't care much about the former.
   9. A triple short of the cycle Posted: July 09, 2021 at 06:12 PM (#6028448)
Bill Clinton was History's Greatest Monster for having an affair with a subordinate - but the real worst was all of the pro-corporation legislation that went through during his era. Like NAFTA and the telecommunications act. And this 1993 change.
   10. smileyy Posted: July 09, 2021 at 08:26 PM (#6028457)
#### a neoliberal. (dnfanl)
   11. snapper (history's 42nd greatest monster) Posted: July 09, 2021 at 10:25 PM (#6028464)
Bill Clinton was History's Greatest Monster for having an affair with a subordinate - but the real worst was all of the pro-corporation legislation that went through during his era. Like NAFTA and the telecommunications act. And this 1993 change.

Don't forget admitting China to most favored nation status for trade, and repealing the Glass-Steagall act.
   12. Hombre Brotani Posted: July 10, 2021 at 03:08 PM (#6028484)
It's always fun to see conservatives bemoan the death of Glass-Steagall after they worked for decades to kill it.
   13. snapper (history's 42nd greatest monster) Posted: July 10, 2021 at 04:19 PM (#6028490)
It's always fun to see conservatives bemoan the death of Glass-Steagall after they worked for decades to kill it.

Gee, it's almost as if there were different factions within each of the major parties. Are we not allowed to say something turned out to be a bad idea if our party supported it? Free trade with low wage countries was another disaster Republicans and Democrats jointly brought us, which I've opposed for 30 years.
   14. Hombre Brotani Posted: July 10, 2021 at 04:44 PM (#6028494)
Are we not allowed to say something turned out to be a bad idea if our party supported it?
You're encouraged to say that. What you actually did was not do that.
   15. Lowry Seasoning Salt Posted: July 10, 2021 at 06:31 PM (#6028511)
...but the real worst was all of the pro-corporation legislation that went through during his era. Like NAFTA and the telecommunications act.


YC must be tied up.

Just for the record, the vote on final passage of NAFTA was 234-200 in the House of Representatives and 61-38 in the Senate.

The Telecommunications Act? The one originally introduced by Larry Presslar, South Dakota Senator (R) who chaired the Senate Commerce Committee? Just for the record, the vote on the final passage was 414-16 in the House of Representatives and 91-5 in the Senate.
   16. Never Give an Inge (Dave) Posted: July 10, 2021 at 06:38 PM (#6028512)

Back to the topic of TFA, this is an area of tax law I'm not very familiar with. But I assume that if owners depreciate nearly the full purchase price of the team over time, then when they sell it the entire purchase price is a gain. So even though Ballmer can basically reduce his taxable income by $2 billion over time, Donald Sterling theoretically had a $2 billion gain when he sold the team to Ballmer. If that's true, and if Ballmer will have a similar gain when he ultimately sells the team, I'm not sure that this is as big of a deal as the article makes it out to be. (There is, I guess, conversion of taxable income to a capital gain, which is taxed at a lower rate, under this system...so that is a hit to the Treasury.)
   17. Stevey Posted: July 11, 2021 at 08:02 PM (#6028660)
#16, from the article:

Advocates for team owners point out that when owners sell their teams, they have to pay back the taxes they avoided by using amortization. But even if owners ultimately repay the taxes they skipped, deferring payment of those taxes for years, sometimes decades, essentially amounts to an interest-free loan from taxpayers. An owner could reap huge gains by investing that money.
   18. BDC Posted: July 11, 2021 at 09:20 PM (#6028670)
An owner could reap huge gains by investing that money

Or they could sign Chris Davis for $161,000,000.

You must be Registered and Logged In to post comments.

 

 

<< Back to main

BBTF Partner

Dynasty League Baseball

Support BBTF

donate

Thanks to
BFFB
for his generous support.

You must be logged in to view your Bookmarks.

Hot Topics

NewsblogFINAL REGULAR SEASON OMNICHATTER! for September 27 thru Game 162!
(40 - 9:37pm, Sep 28)
Last: The Yankee Clapper

NewsblogNew York Mets Embark on Branding Effort to Build Cred and Win Young Fans
(25 - 9:29pm, Sep 28)
Last: reech

NewsblogNBA 2021 Playoffs+ thread
(4663 - 9:17pm, Sep 28)
Last: smileyy

NewsblogThe Cardinals’ Impressive Winning Streak Doesn’t Guarantee October Success
(18 - 8:03pm, Sep 28)
Last: The Yankee Clapper

NewsblogEmpty Stadium Sports Will Be Really Weird
(14218 - 7:29pm, Sep 28)
Last: Never Give an Inge (Dave)

NewsblogThe Giants Capitalize on the First Pitch
(4 - 7:16pm, Sep 28)
Last: Ron J

NewsblogOT Soccer Thread - Transfer! Kits! Other Stuff!
(322 - 6:08pm, Sep 28)
Last: bunyon

NewsblogShohei Ohtani, on future with Los Angeles Angels: 'I want to win'
(28 - 5:34pm, Sep 28)
Last: John Northey

NewsblogArizona Diamondbacks give manager Torey Lovullo one-year extension despite 104-loss season
(12 - 5:33pm, Sep 28)
Last: Jack Sommers

NewsblogBrother HRs off brother for first time since '75
(15 - 5:28pm, Sep 28)
Last: Walt Davis

NewsblogBaseball’s Wall Street-Style Executives Get Titles to Match
(1 - 4:37pm, Sep 28)
Last: winnipegwhip

NewsblogTB progressing with Montreal Sister City plan
(55 - 2:38pm, Sep 28)
Last: Jay Seaver

NewsblogWhy Detroit Tigers, Chicago White Sox stormed the field: 'It wasn't intentional'
(9 - 1:28pm, Sep 28)
Last: zenstudent

NewsblogYus Your Illusion: Yusmeiro Petit and the Well-Hidden Power of Pitcher Deception
(1 - 12:59pm, Sep 28)
Last: CFBF's Results are Certified

Hall of Merit2022 Hall of Merit Ballot Discussion
(184 - 12:06pm, Sep 28)
Last: Dr. Chaleeko

Page rendered in 0.3222 seconds
48 querie(s) executed