Rev. Rul. 54-441

Advice is requested relative to the application of I. T. 4078, C. B. 1952-1, 39, under circumstances in which 1-year uniform professional baseball players' contracts are acquired through the purchase of an entire or substantially entire baseball club.

I. T. 4078, supra, holds that the cost of a 1-year uniform professional baseball player's contract, with the standard optional renewal clause, purchased after the end of the playing season to which the contract related, constitutes a business expense for the taxable year in which "paid or incurred" depending on the method of accounting used by the purchaser. I. T. 4078 relates to the expensing of the cost of baseball players' contracts acquired in the normal and usual operation of a going baseball club and is not applicable to a transaction or series of transactions whereby an entire or substantially entire roster of a going baseball club's players' contracts are acquired at one time for the reason that such an acquisition constitutes an extraordinary expenditure which if expensed in the year of acquisition would distort net income.

Accordingly, it is held that where an entire or substantially entire roster of a going baseball club is acquired at one time, the cost of the 1-year uniform professional baseball players' contracts thus acquired will be treated for Federal income tax purposes under the rules set forth below.

(1) Any aggregate amount assignable to the entire or substantially entire roster of a going baseball club's players' contracts upon acquisition shall be capitalized and recovered over the useful life of such asset in order to clearly reflect income.

(2) The period of time over which such contracts shall be spread is a factual matter to be determined in each peculiar situation. One acceptable method is to use a period based on a reasonable cycle of years' experience of the predecessor club owners' experience in exercising the 1-year renewal options of its baseball players' contracts provided such period contains no abnormal or unusual factors.

(3) There shall be deducted each year from the aggregate basis assigned to the baseball players' contracts described above the amounts received in that year from the sale or disposition of any such contracts and the remaining balance shall be spread over the unexpired period as determined in paragraph (2) hereof. This method shall be followed until the aggregate basis assigned to baseball players' contracts described above has been recovered, and any amounts received upon the sale or disposition of such contracts that may remain on hand after said aggregate basis has been recovered shall be reported as ordinary income.

(4) The cost of subsequent individual players' contracts (other than by acquisition of an entire or substantially entire roster of a going baseball club) purchased in the normal course of business will be fully deductible in the year of purchase in accordance with the rule enunciated in I. T. 4078, supra.