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Saturday, June 22, 2013

The Impact of Section 197 on the Valuation of NBA Franchises

NBA LogoLance Taubin (J.D. 2013, Cardozo), Note, Welcome to the Real 2011 NBA Lockout: Where Owner-Friendly Tax Provisions and Non-Monetized Benefits Color the Lockout Landscape, 11 Cardozo Pub. L. Pol'y & Ethics J. 139 (2012):

During the 2011 NBA lockout, the owners, who collectively make up the NBA, cried poverty claiming they were losing millions of dollars each season. The owners cite their balance sheets, which do in fact show consistent losses. However, these allegations ignore other various benefits owners enjoy that cannot necessarily be seen on their balance sheets. The owners receive extremely favorable tax benefits from their ability to depreciate/amortize 100% of the purchase price of the team under §§ 168 and 197 of the nternal Revenue Code and many other non-monetized benefits, which subsequently become monetized when they sell their team. The players, members of a unionized labor group, represented by the NBPA and recognized by the NLRB, rightfully questioned the NBA's claimed losses. This Note will examine the favorable tax benefits from § 197, which are increasingly advantageous to owners due to § 886 of the American Jobs Creation Act of 2004 and the non-monetized benefits inherent in owning an NBA franchise. The tax benefits and ancillary non-monetized benefits, which are innately intertwined, are tremendous assets that do not show up on team balance sheets, but are necessary in evaluating the true economic position of the owners and the NBA as a whole. These non-monetized benefits, coupled with the AJCA's changes to how the IRC governs intangible assets of sports teams through § 197 reveal that owning an NBA franchise is a very valuable investment.

This Note was initially influenced by the disparate statements made by David Stern, Commissioner of the NBA, and Billy Hunter, Executive Director of the NBPA, regarding the magnitude of losses claimed to have been suffered by a majority of NBA owners and the NBA as a whole over the past couple of years. The NBA claimed it lost more than $1 billion since the prior Collective Bargaining Agreement went into effect in 2005-2006, including $380 million in 2009-2010 and more than $300 million in 2010-2011. Billy Hunter and the NBPA stated these numbers were not accurate and the losses were closer to $90 million for the 2010-2011 season. This Note will attempt to explain how the NBA and NBPA reported widely dissimilar losses and why these differences matter. Part I of this Note will provide a brief overview of the 2011 lockout, the history and significance of the CBA, as well as a summary of the main provisions and issues that were at the core of the negotiations. Part II will outline how the IRC regulates the depreciation/amortization of player contracts and highlight the recent notable changes to § 197. Part III will evaluate the positive impact of the § 197 changes to NBA owners and the extremely valuable, non-monetized benefits inherent in owning an NBA franchise. Specifically, the ability for owners to depreciate/amortize 100% of the purchase price over a fifteen-year period (“100/15 Rule”), the majority of which under § 197, has incredible advantages to the owners' other businesses, and thus one cannot evaluate an NBA team as a stand-alone asset. These benefits, which are referred to as “non-monetized benefits” throughout this Note, involve the related business opportunities that owners enjoy as a result of owning an NBA team and the ability to use the amortization deduction in § 197 as a tax shelter for their earnings from other business ventures. Finally, Part IV will sum up with insight in to why the amortization deduction and the non-monetized benefits help to explain the difference between the losses cited by the NBA compared to the position taken by the NBPA, and why these benefits, despite not appearing on teams' balance sheets, should be taken into consideration when evaluating the financial health of an NBA team. This Note concludes by arguing that the new 100/15 Rule may not be the most effective way to accomplish what Congress initially sought out to achieve through the AJCA.

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