Laird v. U.S., 75-2113

• Decision Date: 04 August 1977
• Docket Number: No. 75-2113,75-2113
• Citation: 556 F.2d 1224
• Parties: 77-2 USTC P 9569 E. Cody LAIRD and Joanne H. Laird, Plaintiffs-Appellants Cross-Appellees, v. UNITED STATES of America, Defendant-Appellee Cross-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1224

556 F.2d 1224

77-2 USTC P 9569

E. Cody LAIRD and Joanne H. Laird, Plaintiffs-Appellants Cross-Appellees, v. UNITED STATES of America, Defendant-Appellee Cross-Appellant.

No. 75-2113.

United States Court of Appeals, Fifth Circuit.

Aug. 4, 1977.

Harold E. Abrams, A. Stephens Clay, Emmet J. Bondurant, Atlanta, Ga., for plaintiffs-appellants cross-appellees.

John W. Stokes, Jr., U. S. Atty., William D. Mallard, Jr., Asst. U. S. Atty., Atlanta, Ga., Scott P. Crampton, Asst. Atty. Gen., Tax Div., Alfred S. Lombardi, Atty., Gilbert E. Andrews, Acting Chief, Appellate Section, Dept. of Justice, Washington, D. C., for defendant-appellee cross-appellant.

Appeals from the United States District Court for the Northern District of Georgia.

Before BROWN, Chief Judge, AINSWORTH, Circuit Judge, and JAMESON ^*, District Judge.

AINSWORTH, Circuit Judge:

This suit for refund of federal income taxes involves the tax treatment of the purchase of the Atlanta Falcons professional football team franchise and the assets necessary to establish, field and operate the team. It arises out of the 1966 agreement between The Five Smiths, Inc. (Five Smiths) and the National Football League (NFL) in which, for $8.5 million, Five Smiths bought an NFL professional football franchise for Atlanta, together with the contracts for the services of forty-two veteran football players and other intangible assets. ¹

The questions before us involve the amortization of intangible assets under the Internal Revenue Code by the purchaser. Three issues are presented: (1) whether intangible assets acquired by Five Smiths in this transaction are subject to an allowance for depreciation under 26 U.S.C. § 167(a), where such assets were purchased in a bundle of interrelated intangibles; (2) whether the purchaser is entitled to amortize, and thus to claim a depreciation deduction for its right to share ratably in the revenues produced by a four-year contract between the NFL teams and the CBS Television Network for the televising of NFL games; and (3) assuming the purchaser is entitled to an allowance for depreciation of the players' contracts which it received in the 1966 deal, whether the district court's valuation of those contracts was correct.

We hold that the depreciation allowance applicable to intangible assets is not lost when such assets are purchased in a bundle of interrelated assets. Furthermore, we hold that, though the purchaser is not entitled to an amortization deduction for its rights in the television contract with CBS, the purchaser is entitled to amortize the value of the players' contracts in the amount determined by the district court. The decision of the district court is affirmed, but for reasons which differ somewhat from those expressed by the trial judge.

I.

A. Preliminary Statement of the Case.

Five Smiths paid the NFL and its member teams $8,500,000.02 for the franchise and the other assets acquired in the transaction. Five Smiths, a Georgia corporation set up to operate the professional football team in Atlanta, elected to be taxed in the taxable years involved as a Sub-chapter S small business corporation, pursuant to 26 U.S.C. §§ 1371-79, for its taxable years ending January 31, 1967 and January 31, 1968. Therefore, the corporation's tax consequences were passed on to the individual shareholders. Rankin M. Smith is the owner of 64% of the shares of Five Smiths, and plaintiff taxpayer E. Cody Laird, Jr. owns 6% of the common stock. ² On its tax returns for the taxable years ending January 31, 1967 and January 31, 1968, the years involved in this case, Five Smiths applied the purchase price of $8.5 million in the following manner: $727,086 was deducted from the purchase price as deferred interest, $50,000 was set up as the nondepreciable cost of the NFL franchise, and the remaining $7,722,914.04 was shown as the cost of the players' contracts, with estimated useful life of 5.25 years. Accordingly, amortization deductions of $1,471,031.24 for the players' contracts were taken by the corporation in each of the two tax years involved.

The corporation reported losses of $506,329 in 1967 and $581,047 in 1968, and plaintiffs, accordingly, reported on their personal income tax returns their proportionate share of the corporation's losses, $30,380 for 1967 and $34,638 for 1968.

The Internal Revenue Service (IRS) accepted Five Smiths' treatment of the $50,000 cost of the franchise and the $727,086 deferred interest deduction, but determined that only $1,050,000 should be allocated to the depreciable asset "player contracts and options," amortized over the 5.25-year useful life. The remaining $6,722,914 of the purchase price was allocated by the IRS to the nondepreciable cost of the franchise. Therefore, the $1,471,031.24 depreciation deductions claimed by Five Smiths in each of the tax years were disallowed to the extent of $1,271,031.24. As a consequence thereof, Five Smiths was shown to have taxable income rather than loss for the years in question, and plaintiffs Lairds' proportionate share of the corporation's claimed losses was disallowed. This resulted in the underpayment by plaintiffs of $48,218.99 for the taxable years 1967 and 1968 which is the amount sought in this refund suit, the tax deficiency having been first paid.

B. The Pertinent Facts.

Five Smiths' entry into the game came at a time of competition and expansion in professional football. The NFL and its rival, the American Football League, were competing for available talent during the mid-1960's and, as the district court pointed out, the so-called "war" between the leagues drove up the cost to team owners of players and other assets. In 1965, both leagues were interested in expanding their respective organizations by selling a new team franchise for operation in Atlanta by 1966. Both contacted potential franchise owners, one of whom approached by the NFL was Rankin M. Smith, the successful majority-interest purchaser herein. At that time, entrance into the NFL required the approval of twelve of the (then) fourteen member clubs, and an agreement to be bound by League rules and regulations, to pay all League assessments, and to pay a $50,000 membership fee.

A June 29, 1965 letter of understanding from NFL Commissioner Pete Rozelle to Rankin M. Smith, ³ which was designated as 1. The League granted Rankin M. Smith an NFL franchise in Atlanta, commencing with the 1966 football season, for which Smith was to pay $50,000; ⁴

a binding memorandum agreement, included, importantly, the essential elements of the deal, as follows:

2. Smith agreed to pay the NFL member clubs $8,450,000 over five years for the purchase of players owned by those teams. After the 1965 season, each member club would sell Atlanta three of that club's veteran players who were under contract and were on the club's active list. The letter agreement provided that the selection of those players, in what ultimately was to be the so-called "expansion draft," would take place according to a formula to be subsequently developed by the member clubs;

3. Smith was to have the right to participate in the 1965 college draft and to have a large number of preferential draft choices therein;

4. Smith was to receive "one-fifteenth of any sum paid by any network for any Five Smiths was incorporated in August 1965. The new corporation participated in the college draft for rookie players that November, and was granted draft-choice privileges. On February 14, 1966, after Five Smiths had obtained a lease on the Atlanta stadium, the member teams of the NFL authorized Commissioner Rozelle to execute a formal agreement with Five Smiths for the consummation of the Atlanta deal. The member teams and Five Smiths also reached agreement on a formula for the expansion draft, in which Atlanta was to acquire the forty-two veteran players from the other teams. ⁵ Those players who were so acquired had a total of 149 years of prior NFL experience. At the start of the 1966 season, twenty-five of them were on Atlanta's active roster, and all of those played at least occasionally during the season. ⁶

single network television contract commencing in 1966 and a pro rata share each year thereafter while Atlanta holds a franchise."

The television rights acquired under the February 14, 1966 agreement specified in article VIII, paragraph (f), in terms similar to the previously-quoted provision of the June 29, 1965 letter of understanding, that Smith would participate equally with the other NFL clubs in "any Single Network television contract(s) hereafter executed by the League for the year 1966 and thereafter during the time the Atlanta Club continues as a member of the League." This provision must be considered in the context in which it was written. Television rights were owned by the member teams individually, rather than by the League; however, pursuant to a partial statutory exemption for professional sports leagues from the antitrust laws, ⁷ which exemption pertains to the telecasting of games, the member teams in the NFL bargained collectively for the sale of television rights. In December 1965, Commissioner Rozelle agreed to a television contract with the CBS Television Network, pursuant to which CBS received the right to televise NFL games during the years 1966 through 1969 and, in exchange, agreed to pay the NFL's members the following total amounts for all teams during the four-year term of the contract:

Television revenues were an important element of team income for all clubs, and were crucial to Five Smiths. Before the June 29, 1965 letter of understanding was even executed, counsel for Rankin M. Smith had been told that a contract was being negotiated under which Five Smiths could reasonably expect to receive about $1,000,000 annually in such revenues. According to counsel's testimony, Smith would not have proceeded with the deal if he had not been assured of the TV income. The contract which...