And I like to read what tax authorities say about baseball. Sometimes it doesn’t make a lot of sense, though.
Last week, the Office of Chief Counsel of the IRS released a highly redacted version of a field advice to a revenue agent who was auditing an owner of a minor league baseball team.
The standard minor league contract is for seven years. Often, someone starting his career is paid a bonus when he signs his contract. The contract can be terminated by the club for a number of reasons, the most obvious being that aspiring ballplayer can’t hit, field or pitch as well as the owner had hoped. The player can go to the major leagues and get out of the contract.
The owner did a study of all the minor league players that the club had ever had on its roster and determined that the average useful life of the contract is [redacted]. I am going to guess that the number is about four years, based on my exhaustive research on the web and my observations this summer of the Frisco RoughRiders and the Traverse City (MI) Beach Bums. So, (let’s assume that) the owner amortized the cost of the contracts over 4 years.
The field attorney at the Chief Counsel’s office disagreed. He said that the contracts were amortizable and not currently deductible when paid or incurred, citing a lot of authority, some directly applicable to baseball contracts. I’ve got no problem with that. Neither did the owner. The field attorney cited Regulation Section 1.167(a)-1(b) that says “the estimated useful life of an asset is not necessarily the useful life inherent in the asset but is the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business.” Makes sense to me.
Then, he cited a case involving the buyout by a franchisor of a franchisee’s territory rights, because the franchisee was not developing the territory fast enough. The franchisor had to amortize the cost of that buyout over the estimated time that it would take to build out the territory. Based on that authority, the field attorney said that the contracts have to be amortized over the seven year contract term – not the estimated useful life of the contract.
Huh? I think that field attorney is probably a young whippersnapper who never had to compute depreciation or amortization based on useful lives. That was how it was done in the good old days prior to ACRS, MACRS and Section 197. (ACRS was enacted in 1980.) The estimated useful life is not seven years. There aren’t many 26- to 30-year old men riding around the country on minor league buses. Check for yourself. Go to a Beach Bums game next year.