With rumors of an impending New York Islanders sale swirling, we decided to reach out to an expert to explain what exactly is being sold. LIB’s resident CPA, Matthew Taus, shares some insight
Over the past couple months, it’s been no secret that after 15 years, majority shareholder of the New York Islanders Charles Wang has been actively shopping his team to anyone willing to meet his asking price (reportedly north of $300 million dollars). This all as the Islanders are set to move from Nassau to Brooklyn. What would the sale mean for the franchise, and what is he really selling?
The Internal Revenue Code distinguishes the sale of a sports franchise from that of your typical corporation (although most sports franchises are organized as S-Corporations). Under IRC 1060, the purchase price of a franchise is broken down into several components, or classes (known as the residual allocation method).
What predominantly falls into these classes are television and broadcasting contracts, merchandising rights, and season ticket and skybox leases, and most significantly, player contracts which will serve as the focal point of this article.
Although most intangible assets are commonly subject to IRC 197 (which grants them a 15 year amortization period) sports franchises are specifically excluded from this definition.
Under IRC 1056, contracts of professional athletes are intangible assets subject to amortization (yearly deterioration) over the life of the contract, providing a major tax benefit to the owner.
In other words, a player is deemed to have usefulness equal to their contract term, each year suffering wear and tear, making them less valuable (similar to your car’s value). Owners will receive a yearly tax deduction for this the same way an owner of a business receives a yearly benefit for wear and tear on a business car or equipment. You may already be thinking this is backwards, as franchise players often become more valuable after a couple good years, and you would be right.
Over the years, this has been a topic of much controversy and criticism as owners had heavily weighted the value of their franchise towards player contracts for tax benefits (among other valuation issues). This has led to increased scrutiny from the IRS who restricts the fair market value of a contract to its cost, plus any gain on its sale.
Further, the total allocation of a franchise’s value to player contracts cannot exceed 50% of the total value of the franchise. In actuality, even that high of a value would be challenged as the rules in this area are complex, requiring a well documented certified appraisal from someone familiar with the NHL and NHLPA’s collective bargaining agreement.
The IRS regulations are not coming down hard on franchises solely to restrict the owner’s tax deduction on player contracts, but also to ensure depreciation recapture on the sale of a team.
As it would seem, a franchise could get away with taking this huge arbitrary deduction every year, sell and walk away. Here enters the concept of recapture.
Under IRC 1245, any gain on the sale of the franchise will be taxed at ordinary income rates (as opposed to favorable long-term capital gain rates) to the extent depreciation/amortization had been taken.
The IRS holds the viewpoint that for letting you get away with this deduction all these years, should you walk away profitable, they deserve a piece back. This can create some controversy at the bargaining table where the seller wishes to report a lower allocation to player contracts to minimize the recapture effects, whereas the buyer wants a higher percentage allocation to take advantage of a higher basis (cost) to amortize. With the vulnerability to manipulation, you can understand the strictness with which the appraisals are reviewed.
While many factors will impact the decision to sell a franchise, and there are many inputs, one of the most important considerations from a tax standpoint, is the ability to claim amortization deductions on player contracts. When that benefit is extinguished on existing contracts, and a team is reporting yearly losses, the impact is surely felt come March 15th. However, with Wang unwilling to budge on his $300 million plus asking price, it is unclear whether with a new stadium will come a new owner.
Matthew Taus is a CPA at Rynkar, Vail & Barrett, LLP. He can be reached at Mtaus@rynkar.com
This article was originally posted in Long Island Based Magazine. Please find the link here: http://libmagazine.com/breaking-sale-professional-hockey-team-tax-standpoint/