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Retrieved 4/12/2004

Revenue sharing, luxury tax cut value

Thursday, April 8, 2004
Updated: April 9, 10:38 AM ET
Associated Press

NEW YORK -- The New York Yankees are baseball's most valuable franchise, Forbes magazine's estimates, but the worth has declined because of the sport's revenue-sharing system and luxury tax.

The Yankees are estimated to be worth $832 million, the magazine said Thursday in its April 26 issue, down from an $849 million estimate last year.

Boston moved into second place at $533 million, with the New York Mets third at $442 million.

Los Angeles was valued fourth at $399 million, even though the team just sold for $430 million.

The two teams moving into new ballparks had large increases, with Philadelphia rising 18 percent to $281 million and San Diego going up 17 percent to $265 million.

Montreal, owned by the other 29 teams, is last at $145 million, just behind Tampa Bay ($152 million).

Franchise value for 2004

Franchise value for 2004 with one year change in value and revenue according to Forbes magazine (all dollar figures in millions):

Rk. Team Value Change Revenue
1. New York Yankees $832 -2 $238
2. Boston Red Sox $533 9 $190
3. New York Mets $442 -11 $158
4. Los Angeles Dodgers $399 -11 $154
5. Seattle Mariners $396 3 $169
6. Atlanta Braves $374 -12 $156
7. San Francisco Giants $368 -4 $153
8. Chicago Cubs $358 7 $156
9. Houston Astros $320 -2 $128
10. St Louis Cardinals $314 2 $131
11. Texas Rangers $306 -8 $127
12. Baltimore Orioles $296 -5 $129
13. Cleveland Indians $292 -12 $127
14. Colorado Rockies $285 -6 $124
15. Philadelphia Phillies $281 18 $115
16. Arizona Diamondbacks $276 3 $126
17. San Diego Padres $265 17 $106
18. Chicago White Sox $248 6 $124
19. Cincinnati Reds $245 10 $123
20. Anaheim Angels $241 7 $127
21. Detroit Tigers $235 -1 $117
22. Pittsburgh Pirates $217 -3 $109
23. Oakland Athletics $186 8 $110
24. Milwaukee Brewers $174 -16 $102
25. Florida Marlins $172 27 $101
26. Kansas City Royals $171 12 $98
27. Toronto Blue Jays $169 2 $99
28. Minnesota Twins $168 14 $99
29. Tampa Bay Devil Rays $152 4 $101
30. Montreal Expos $145 29 $81

retrieved 4-19-2004

New owners' tax break losing value

Thursday, April 15, 2004
By Darren Rovell

Tax day used to be a sigh of relief for new owners of professional sports teams, but for today's owners recently welcomed into the sporting world fraternity, the reception from Uncle Sam isn't as great as it was decades ago.

Boston Red Sox owner John Henry, along with a group of partners, spent $700 million to purchase the team two years ago and will spend $125 million on a team that hopes to beat the New York Yankees this year. But Henry will not benefit as much from what used to be one of the sporting world's greatest perks -- writing off large portions of player payroll. Had he bought a team 35 years ago, his tax breaks would be worth a fortune.

When a group led by Bud Selig bought the bankrupt Seattle Pilots in April of 1970 for $10.8 million and moved them to Milwaukee, the 35-year-old used car dealer and future Major League Baseball commissioner later reported only a franchise purchase price of $600,000 to the government for tax purposes, attributing $10.2 million of the cost to player payroll.

Based on his genius and ingenuity, Bill Veeck was elected into the Hall of Fame in 1991.
The accounting practice was first used by former owner and renowned promoter Bill Veeck, who discovered that a new owner could use the value of the players' contracts in a sale in order to report a lower purchase price when his group bought 54 percent of the Chicago White Sox in 1959. The deduction could then be used to show smaller profits or larger losses on paper, reducing the taxable income.

But in the three decades since Selig bought what would become the Brewers and trucking magnate Leonard Tose led a group to buy the Philadelphia Eagles for $16.4 million -- he reported a $50,000 franchise sale price to the Internal Revenue Service -- the value of writing off the costs of player contracts has been severely diminished, meaning that there's less celebration among new sports owners on April 15.

There are a number of reasons that tax breaks for new owners are less appealing, including higher franchise prices, a greater net worth of owners and government rules that have restricted amortization -- spreading the cost of a contract over time to help reduce future income taxes.

"In the old days, when men were made of steel and ships were made of wood, the teams cost a fraction of a fraction of what they do today and the tax benefits were therefore huge," said Paul McKenney, a lawyer who has advised several sports owners on tax issues. "Now the tax benefits are very minimal."

"It's definitely not a significant motivating factor in purchasing a team," said NBA commissioner David Stern, who has been at the league's helm for the past 20 seasons. "No matter what the tax treatment is, if the team isn't profitable, it can't provide a substantial benefit."

The principal behind the idea that allows a percentage of payroll to be deducted and used to report slimmer profits or inflate losses, is based on the fact that the government considers sports contracts to be an intangible asset. Much like a piece of machinery, whose cost can be written down over a period determined to be its useful life, players also have a useful life value to a sports team, under IRS rules.

Selig and his investors deducted roughly $2 million off the balance sheet from the Brewers and used it to offset the reporting of their personal income for each of the next five years. But in the year after Selig's tax benefits ran out -- write-offs equaled more than $140,000 -- the IRS began limiting the degree to which owners could discount the cost of players contracts to their advantage.

In October 1976, the government unveiled the Tax Reform Act of 1976, which established that no more than 50 percent of the purchase price could be allocated to intangible assets, such as player contracts, unless a rare exemption was granted if an owner provided a reason for exceeding that amount.

The impact was immediate.

Oil investor Robert K. Moses Jr. was reportedly interested in buying the Houston Rockets, but when the deal fell apart, he cited the inability to make the financing package work with a smaller write-off.

In 1986, the IRS added another reform for those looking to become partners in sports teams and use the depreciation value to offset the taxes on their personal business income. In order to do so under the new criteria, owners had to pass one of seven tests that would allow them to be classified as active owners.

"The whole deal shouldn't really exist because owners are not buying the players as much as they are buying the franchise, the rights to the name and the rights to play in the stadium," said Paul Weiler, the Henry J. Friendly professor of law at Harvard and author of "Leveling the Playing Field: How The Law Can Make Sports Better for Fans."

But the tax break has become less of a factor, given the modern state of the business.
"When owners are losing millions of dollars in real money, it's crazy to think that they're fine with it because they are not paying as much tax," said Jeff Smulyan, who owned the Seattle Mariners from 1988 to 1992.

Despite a World Series title, Jeffrey Loria's Florida Marlins still experienced significant cash losses.

Jeffrey Loria has had more experience with write-offs than any recent professional sports owner. Owners typically can deduct player contracts for the first four or five years of franchise ownership. Loria purchased a majority share in the Montreal Expos in 1999, but the clock started over again three years later when he sold the Expos and purchased the Florida Marlins.

"If we had a loss of $60 million on paper, but $20 million in cash, that's a big difference," said David Samson, president of the Marlins, which reportedly lost $20 million last season despite winning the World Series. "But the only number Jeffrey cares about is that actual cash loss. The benefit of depreciation is far outweighed by the reality of cash losses when you are losing money operationally."

The process of convincing the IRS to even grant the 50 percent deduction became harder when local auditors usually assigned to random projects were replaced by national auditors who specialized in the finances of sports teams, said Carl Fortner, a tax partner on Foley & Lardner's Sports Industry Team, which has counseled several professional team owners on tax issues, including Selig. In October, the IRS sent a 15-page memo to those that audit teams to be aware of the latest government standards as it applied to taxing franchises.

"The IRS has been much less receptive to greater deductions because franchises cost so much these days," said Bob DuPuy, president and chief operating officer of Major League Baseball.

Whereas it used to be automatic that a team owner could attribute a huge chunk of the franchise price to player salaries, team owners now have to hire auditors who determine a true market value for the player's contract instead of the actual dollars being paid to player.

It is that value, according to Fortner, that is shown to the IRS. Unlike decades ago, where owners would simply spread the costs over the first five years of ownership, player contracts in most cases now may be depreciated based on the length of individual contacts. This debunks the theory that new owners are more likely to sell after their fifth year of ownership because the write-off period is longer. Plus, owners are allowed to depreciate other intangible assets, including season ticket waiting lists and suite revenues.
Despite the stress put on cash losses and a more scrutinizing IRS, some say the write-offs still have value.

"The total money for the tax benefit should be increasing in terms of dollars because the salaries have been on the rise for so long," said Scott Rosner, lecturer at the University of Pennsylvania's Wharton School of Business and co-author of "The Business of Sports."

The value is just diminished due to the astronomical wealth of the owners coming into the sport. So the old-guard owner might have saved $2 million in taxes and that meant a lot. The new age owner could be saving $20 million and that's less of a deal."

Ted Leonsis bought the Washington Capitals five years ago and the chance to write-off player salaries from his $85 million purchase of the team is declining. But Leonsis has reportedly lost more than $100 million throughout his ownership reign, so creating larger paper losses won't dull the pain of having to still dole out the cash.

Said Leonsis: "I look forward to the day where (write-offs are) an issue for me."

Darren Rovell, who covers sports business for ESPN.com, can be reached at Darren.rovell@espn3.com.

MLB's yen for Asian revenue

Thursday, May 20, 2004
Updated: May 24, 9:07 AM ET

It was the middle of winter 2003 when Mark Lemmon, the Toronto Blue Jays' vice president of corporate partnerships, got the call. The person on the other end spoke in broken English, but it was clear that he was interested in advertising at SkyDome for the upcoming season.

Lemmon didn't usually let an unsolicited pitch over the phone get this far, but he soon began to understand the magnitude of the proposal. The man was a Japanese advertising executive who had seen the in-stadium advertising for Japanese companies at Safeco Field since Ichiro arrived and he was wondering if the same opportunity was available at Skydome when the Mariners came to play the Blue Jays.

Hideki Matsui
Players like Hideki Matsui have helped major-league teams to cash in on a growing Japanese fan base.
Thanks to the cold call and subsequent execution by the team, the Blue Jays became the first team to sell advertising for the games when the most popular Japanese players come to town.

"Luckily, at some point in the conversation, I realized that this guy was serious," Lemmon said.

The Japanese advertising firm, Taihei, purchased signage at Blue Jays games for its clients, including a male spa called Dandy House and Megame Super eyewear. This year, the Tampa Bay Devil Rays joined the profit party of facing the league's most popular Japanese players -- Hideki Matsui and Suzuki. Tampa Bay has inked a six-figure deal for behind-the-plate signage, selling half-inning spots to the firm soon after they returned from the season-opening series against the New York Yankees in Japan.

The selective Japanese advertising is expected to become a trend as the availability of major-league games in Japan continues to grow, according to Paul Archey, senior vice president of Major League Baseball International. This season is the first of a six-year, $275 million rights deal paid by Japanese advertising firm Dentsu to distribute the games. Approximately 300 games will be shown, 80 percent of them including either the Yankees, Mariners or Mets.

Japanese companies use the ads behind the plate to target Japanese tourists who come to see the games as well as the television audience watching the games back in Japan. "Businesses are looking to get the double whammy both here and in Japan," Archey said.

An estimated 20 percent of the fans in the stands at Blue Jays home games against the Yankees and the Mariners are Asian. This year, Lemmon said the team added temporary outfield signage for the 16 total games against the teams and interest could increase from Japanese companies should their new 27-year-old Japanese reliever Mike Nakamura make it big.

"They are not fooling around with their investment in us and we aren't fooling around with our execution," said Lemmon, who plans to fly to Japan to negotiate marketing deals with Japanese companies before next season.

Since playing the Yankees in a season-opening series in Japan, the Devil Rays have struck advertising deals with six Japanese companies, including Nikon and Fujifilm, according to David Auker, senior vice president of business operations for the team.

Selling advertising is one of the few ways teams with Japanese players can benefit from acquiring the player, which is always a bidding war with the absence of an international draft in baseball.

Teams like the Mariners, who are owned by Nintendo founder Hiroshi Yamauchi, have signs in Japanese script behind the home plate for all home games. Since the Yankees have Hideki Matsui, a Continental Airlines billboard appears behind home plate in both English and Japanese. Beyond numerous deals with Nikon, Mass Mutual of Japan and Konica/Minolta, the Mets also struck a deal with Panasonic, which places its logo on the backdrop used at postgame press conference, a prime location since Kaz Matsui's address is always broadcast in Japan.

The Mariners are paying Suzuki $11 million this year, the Yankees are giving Hideki Matsui $7 million and the Mets signed Kaz Matsui to a contract that will yield him $5 million this season. But the teams do not receive any more money than the rest of those in the league, even though the three players are largely responsible for the huge growth in licensing and television rights revenues coming from Japan. Even though all the home games of each team are broadcast back to Japan, all international revenues are split 30 ways.

"I think all the team executives understand that this stuff goes in cycles," Archey said. "Right now, the Yankees, the Mariners and the Mets have the players. In a couple years, it could be the Colorado Rockies with their Taiwanese pitcher, Chin-hui Tsao. Last year, Korea was interested in the Chicago Cubs because of Hee Seop Choi. Now they watch more Florida Marlins games because he now plays on that team."

Mets officials don't have any objections with the current system either.

"We knew what the rules were when we began pursuing Kaz Matsui," said Dave Howard, the Mets' executive vice president of business operations.

"The real benefit of signing a player like Kaz to a $20 million [deal] isn't to get a bigger portion of licensing or television dollars or even to sell a couple signs in the stadium or see a bump in ticket sales," he said. "Our bottom line is that he is an exciting, young superstar player who helps make our team better."

Darren Rovell, who covers sports business for ESPN.com, can be reached at darren.rovell@espn.com


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