Rev. Rul. 67-379

Advice has been requested as to the proper income tax treatment of the acquisition costs of one-year professional baseball player contracts by major league baseball clubs.

In Commissioner v. Pittsburgh Athletic Co. , 72 F.2d 883 (3d Cir. 1934), affirming 27 B.T.A. 1074 (1933), acquiescence C.B. XIV-2, 17 (1935); Commissioner v. Chicago National League Ball Club , 74 F.2d 1010(7th Cir. 1935); and Helvering v. Kansas City American Assn. Baseball Co. , 75 F.2d 600 (8th Cir. 1935), it was held that the cost of a one-year baseball player contract with a standard renewal option may be deducted in full in the year paid or accrued. These decisions were based on the theory that player contracts have a useful life of one year or less in the baseball business. The courts held that the optional renewal clause (commonly called the `reserve clause') did not add to the useful life of the contracts because there was no certainty that the purchasing club would be able to utilize its renewal rights. The Pittsburgh Athletic Co., Kansas City American Assn. Baseball Co. and Chicago National League Ball Club decisions were accepted by the Revenue Service in I.T. 2932, C.B. XIV-2, 61 (1935); and I.T. 4078, C.B. 1952-1, 39.

Further consideration has been given to the court decisions and published rulings dealing with player contracts. As a result of this reconsideration, the Service has determined that it will no longer treat the purchase price or other acquisition cost of a baseball player's contract as an ordinary and necessary business expense.

The uniform player contract currently in use in the baseball industry contains a `reserve' clause giving the baseball club the right to renew the contract upon expiration of the one-year term at a salary negotiated by the player and the club. If the parties are unable to agree on the player's compensation, the club may, within certain limitations, fix his salary. Although the club cannot require the player actually to play for it if he refuses to do so, it can prevent him from playing for any other club in the event of such a refusal since, under the contract and the rules adopted by the major and minor leagues, the club which owns a player's contract has the exclusive right to his services so long as he is capable of playing baseball and wishes to do so. Although the club obligates itself only from year to year, the effect of the contract, operating in conjunction with the league rules, is the same as if the player were expressly to bind himself to play only for the club which owns his contract for the entire period of his useful life as a player in organized baseball, subject to annual salary adjustments. See the detailed discussion of the reserve clause and the changes which have been made therein since the Pittsburgh Athletic Co., Kansas City American Assn. Baseball Co. , and Chicago National League Ball Club cases in H. Rept. 2002, 82d Cong., 2d sess. (1952) at pp. 111-113 and 127-133. See, also, Hearings before the House Subcommittee on Study of Monopoly Power, Serial No. 1, Part 6, Organized Baseball, 82d Cong. 1st Sess. (1951) at pp. 29-31, 35-36, and 44-51; Hearings before the Senate Subcommittee on Antitrust and Monopoly, S. Rept. 2391, 88th Cong., 2d Sess. (1964) at pp. 35, 37, 38 and 141; and footnote 10 to the dissenting opinion in Toolson v. New York Yankees, Inc., et al. , 346 U.S. 356, 362 (1953).

By virtue of the renewal or reserve clause, which confers the exclusive right to the player's service during his baseball career, the purchaser of a player contract obtains an asset which has a useful life extending substantially beyond the taxable year in which the contract is acquired. Accordingly, the cost of a uniform baseball player contract owned or controlled by a major league club must be capitalized and depreciated over its useful life pursuant to section 167 of the Internal Revenue Code of 1954. Compare section 1.263(a)-2(a) of the Income Tax Regulations.

The cost of a player contract (which must be capitalized under the rules previously stated) includes ( a ) amounts paid or incurred upon the purchase of a player contract and ( b ) bonuses paid to players for signing player contracts, but does not include working agreement development costs.

In computing the depreciation deduction under section 167 of the Code with respect to a baseball player contract, the methods described in subsection (b)(2), (3), and (4), may not be used, since such contracts are intangible property. Section 167(c) of the Code. For the same reason, the tax credit provided by section 38 of the Code will not be allowed with respect to the acquisition of baseball player contracts. Section 48(a)(1) of the Code.

A change from the current deduction of contract acquisition costs to the capitalization and depreciation of such costs is a change in method of accounting within the meaning of sections 446 and 481 of the Code and the regulations thereunder. Section 481(a) provides, in part, that in computing a taxpayer's taxable income for any taxable year in which there has been a change in method of accounting, there shall be taken into account those adjustments which are determined to be necessary solely by reason of the change in order to prevent amounts from being duplicated or omitted. The basic section 481 adjustment will equal the adjusted basis (undepreciated contract cost under the new method) of the contracts on hand at the beginning of the taxable year of change, since this amount has already been deducted under the old method and would be deplicated under the new method. In appropriate cases, however, section 1.481-1(a)(2) of the regulations will be applicable.

Revenue Ruling 54-441, C.B. 1954-2, 101, which announced the treatment to be accorded to the cost of baseball player contracts acquired through purchase of an entire or substantially entire baseball club; I.T. 2932, C.B. XIV-2, 61 (1935); and I.T. 4078, C.B. 1952-1, 39, are revoked. The acquiescence in Pittsburgh Athletic Co. , 27 B.T.A. 1074 (1933), C.B. XIV-2, 17 (1935), has been withdrawn and nonacquiescence substituted therefor. See page 4, this Bulletin.

The provisions of this Ruling will not be applicable with respect to taxable years beginning before November 1, 1967, under the authority set forth in section 7805(b) of the Code.