Allan H. Selig v. United States
740 F.2d 572, 16 Fed. R. Serv. 196, 54 A.F.T.R.2d (RIA) 5784 (1984)
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Rule of Law:
An appellate court reviews a district court's factual determination of asset valuation for tax purposes under the 'clearly erroneous' standard, affirming if the valuation is supported by evidence derived from the appropriate market for the transaction, such as the 'club market' for entire sports team sales.
Facts:
- In 1965, Allan Selig and others organized the Milwaukee Brewers Baseball Club, Inc. in an effort to secure a major league franchise for Milwaukee.
- The American League awarded an expansion franchise to Seattle, creating the Seattle Pilots, which began play in 1969 but soon experienced significant financial difficulties with operating expenses exceeding $3.7 million.
- By September 1969, Selig tentatively agreed to buy the Seattle Pilots, including their 149 players, for $10.8 million, conditioned on securing league approval to move the team to Milwaukee.
- On March 8, 1970, the Brewers and the Pilots signed a written contract for the purchase and sale of the Pilots for $10.8 million.
- The contract allocated $100,000 of the purchase price to equipment and supplies, $500,000 to the value of the franchise including league membership, and $10.2 million to the player contracts.
- In the fall of 1970, the Brewers solicited four separate appraisals of their 149-man roster as of April 1, 1970, which established an average value of $10,043,000, leading the Brewers to retain the $10.2 million allocation.
- Selig then amortized the $10.2 million cost of the player contracts over the players’ five-year useful lives under Section 167(a) of the Internal Revenue Code.
Procedural Posture:
- The Internal Revenue Service (IRS) disallowed Selig's entire $10.2 million allocation for player contracts, attributing zero value to them, and issued deficiency notices totaling a little over $141,000 for tax years 1967, 1968, and 1970 through 1976 in 1979.
- Selig paid the deficiencies plus interest and applied for a refund in 1980.
- In March 1981, the IRS disallowed Selig's refund application, leading him to file a lawsuit.
- Selig filed a lawsuit against the United States in the U.S. District Court for the Eastern District of Wisconsin.
- The District Court held that Selig's allocation was proper and ruled in his favor. The United States (the government) subsequently appealed this ruling.
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Issue:
Does a district court commit clear error by affirming a taxpayer's allocation of approximately 95% of a baseball team's purchase price to player contracts for tax depreciation purposes, when that allocation is based on evidence from the 'club market' of whole team sales?
Opinions:
Majority - Bauer, Circuit Judge
No, a district court does not commit clear error by affirming a taxpayer's allocation of approximately 95% of a baseball team's purchase price to player contracts for tax depreciation, when that allocation is based on evidence from the 'club market' of whole team sales and is supported by the evidence. The court affirmed the district court's decision, applying the "clearly erroneous" standard of review for factual determinations under Federal Rule of Civil Procedure 52(a). The court found no error in the district court’s determination that the “club market” (sales of entire teams) was the most appropriate market for valuing player contracts in a bulk sale, as opposed to the “player market” (individual player transactions with restraints) or “free agent market” (uncontracted players). Transactions in the club market occur at arm’s length between willing buyers and sellers, reflecting the true economic reality of purchasing a fully staffed enterprise. The court found that the district court properly admitted and relied on two of Selig’s four appraisals, which established player contract values around $10.35 million, and noted that their preparation was sufficiently contemporaneous to constitute business records under Federal Rule of Evidence 803(6). Other evidence, such as the high cost of player development and insurance on the roster, was also deemed relevant and supportive. The court rejected the government’s arguments that the franchise was undervalued, stating that while a franchise has value, the players are the primary assets responsible for winning games, drawing fans, and maintaining the financial health of the franchise. The court also cited Laird v. United States, where an 88% allocation to player contracts in a football team sale was affirmed, finding Selig’s 95% allocation not significantly different, especially because Selig did not purchase television rights from the Pilots, which had been a factor in Laird.
Analysis:
This case reinforces the principle of deference to a trial court's factual findings, particularly in complex valuation matters, under the 'clearly erroneous' standard. It clarifies that for tax purposes, the valuation of bundled assets in a sports franchise acquisition should be based on the market in which the entire club is bought and sold, rather than markets for individual players which may be subject to different economic constraints and restrictions. The decision highlights the significant value attributed to player contracts as depreciable assets in professional sports team sales, potentially influencing how future sports team acquisitions are structured for tax benefits, although later legislation (Tax Reform Act of 1976, § 1056(d)) addressed this by establishing a presumption for player contract allocations.
