Hollywood Baseball Ass'n v. Comm'r of Internal Revenue, Docket No. 93647.
| Citation | 42 T.C. 234 |
| Decision Date | 21 April 1964 |
| Docket Number | Docket No. 93647. |
| Court | U.S. Tax Court |
| Parties | HOLLYWOOD BASEBALL ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
OPINION TEXT STARTS HERE
Arthur E. Gore, for the petitioner.
Douglas W. Argue and Lawrence S. Kartiganer, for the respondent.
The Brooklyn Dodgers and New York Giants of the major National League transferred their baseball organizations to the Los Angeles and San Francisco areas prior to the commencement of the 1958 professional baseball season. These areas had formerly been controlled by the minor Pacific Coast League. As a result of the transfer, the Pacific Coast League Hollywood Stars baseball organization adopted a plan of liquidation pursuant to section 337, I.R.C. 1954. Held:
1. Payments for the nonbulk sale of certain baseball player contracts are not within the purview of section 337;
2. Consideration for the sale of certain property rights flowing from the system of organized professional baseball is within the intendment of section 337; and
3. Organizational expenses determined.
Respondent has determined deficiencies of $25,502.07, $20,004.38, and $8,760.08 for the taxable years ending October 31, 1955, October 31, 1956, and October 31, 1958,1 respectively. The three remaining issues before us are as follows:
(1) Whether gain realized from the sale of certain baseball player contracts is within the purview of section 337;
(2) Whether an amount realized pursuant to the transfer of two major league baseball teams to the Pacific coast area is taxable as ordinary income to petitioner; and
(3) Whether the petitioner is entitled to a claimed deduction for organizational expenses.
Some of the facts have been stipulated and are so found.
Petitioner, Hollywood Baseball Association, was a corporation organized under the laws of the State of California on December 8, 1938. From December 8, 1938, to December 13, 1946, petitioner was known as Hollywood Baseball Investment Co. (hereinafter sometimes called Investment).
Another corporation, Hollywood Baseball Association, a California corporation (not the petitioner herein, and hereinafter sometimes called Association), was organized on December 18, 1937. This corporation was formed for the purpose of acquiring, owning, and operating a professional baseball team in the Pacific Coast Baseball League (hereinafter called P.C.L.). All of the stock of this corporation was owned, from its inception, by Mission Baseball Association, a California corporation.
As of December 1, 1938, Investment purchased all of the stock of Association from Mission Baseball Association for $40,000.
On June 13, 1946, Association filed a certificate of election to dissolve with the secretary of state of California. On December 16, 1946, it filed a certificate of dissolution with the secretary of state of California. Pursuant to the certificate of election to dissolve, all of its assets and liabilities were transferred to petitioner, its sole stockholder, on December 11, 1946. On December 13, 1946, there was filed with the secretary of state of California, a consent of the shareholders of petitioner to change petitioner's name from Hollywood Baseball Investment Co. to Hollywood Baseball Association. On and after December 13, 1946, petitioner was known as Hollywood Baseball Association.
During and prior to the fiscal years here in issue, petitioner operated under the name of the Hollywood Stars as a member club of the P.C.L.
On December 17, 1957, petitioner's stockholders adopted andassented to a plan of complete liquidation.
On its tax return for the fiscal period ended October 31, 1958, petitioner reported the following as items of nontaxable income:
+-----------------------------------------------------------------------------+
¦SCHEDULE 1—INCOME NONTAXABLE UNDER SECTION 337 OF THE INTERNAL REVENUE CODE ¦
¦AND SECTION 10,352(E) OF CALIFORNIA REVENUE AND TAXATION CODE. ¦
+-----------------------------------------------------------------------------¦
¦Item ¦Date of sale ¦Income ¦
+-------------------------------------------------+-----------------+---------¦
¦Sale of equipment (fully depr.) ¦Dec. 18. 1957 ¦$5,000 ¦
+-------------------------------------------------+-----------------+---------¦
¦Sale of field lights (fully depr.) ¦Feb. 28, 1958 ¦5,000 ¦
+-------------------------------------------------+-----------------+---------¦
¦P.C.L. sale of franchise rights ¦Jan. 27, 1958 ¦150,000 ¦
+-------------------------------------------------+-----------------+---------¦
¦Sale of player contracts ¦Mar. 28, 1958 ¦117,000 ¦
+-------------------------------------------------+-----------------+---------¦
¦Sale of franchise ¦Dec. 18, 1957 ¦100,000 ¦
+-------------------------------------------------+-----------------+---------¦
¦Total nontaxable income ¦ ¦377,000 ¦
+-------------------------------------------------+-----------------+---------¦
¦Less original cost of franchise rights ¦ ¦150,000 ¦
+-------------------------------------------------+-----------------+---------¦
¦Net nontaxable income ¦ ¦227,000 ¦
+-----------------------------------------------------------------------------+
Findings of Fact as to Issue 1. Regarding Whether Amounts Received For the Sale of Certain Baseball Player Contracts Are Within the Purview of Section 337
By documents entitled ‘Uniform Agreement for the Assignment of a Player's Contract to or by a Major League Club’ and dated October 1, 1957, petitioner assigned the contracts of two baseball players to the Pittsburgh Athletic Co., Inc. (hereinafter called Pittsburgh). The following stated conditions were contained in each of the two agreements:
Conditionally: For and in consideration of the sum of $70,000.00 (Seventy Thousand Dollars) of which $25,000.00 (Twenty-Five Thousand Dollars) is payable upon execution of this agreement and the balance of $45,000.00 (Forty-Five Thousand Dollars) is payable if player is retained by Pittsburgh on April 1, 1958.
Petitioner received $25,000 for each player contract and included this total sum of $50,000 in its income tax return for the fiscal period ended October 31, 1957. The cost of the two player contracts to petitioner was $4,500, which amount had been previously deducted by petitioner as an item of current expense offsetting current income for Federal income tax reporting purposes. The remaining $90,000, or $45,000 per contract, was reported by petitioner on its Federal income tax return for the period ended October 31, 1958, as nontaxable income under section 337.
By documents entitled ‘Official Agreement for Outright or Conditional Assignment’ and dated January 3, 10, and 11, 1958, petitioner assigned the contracts of six baseball players to the Columbus Baseball Club of the International League. These have been treated as sales to Pittsburgh, which was connected with the stated buyer. The three agreements, each involving two player contracts, involved the assignment of other player contracts to petitioner and also a total of $27,000 as consideration flowing to petitioner. The cost of the six player contracts to petitioner was $17,650, which amount had been previously deducted by petitioner as an item of current expense offsetting current income for Federal income tax reporting purposes. The $27,000 was reported by petitioner on its Federal income tax return for the period ended October 31, 1958, as nontaxable income under section 337.
The world of professional baseball, made up of major and minor professional baseball leagues and their constituent clubs, is governed by a detailed set of agreements, rules, and regulations, most or all of which are codified in an annual publication entitled ‘The Baseball Blue Book.’ The parties stipulated relevant portions of the Baseball Blue Book for 1957. These provisions may be summarized in the following manner:
(a) Major league agreement— An agreement between the National and American Leagues of professional baseball (hereinafter sometimes called the major leagues) and their (hen) 16 constituent clubs;
(b) Major league rules— A set of rules formulated pursuant to the major league agreement covering the operation of an relations between the National and American major leagues;
(c) Professional baseball agreement— An agreement between the National and American major leagues and the National Association of Professional Baseball Leagues (hereinafter sometimes called the minor leagues);
(d) Major League-National Association rules (hereinafter sometimes called M.L.-N.A. rules)— A set of rules formulated pursuant to the professional baseball agreement covering operations and relations between the major and minor leagues.
(e) National association agreement— An agreement and rules covering the operations of and relations between the various minor leagues and their minor league member clubs.
Under the rules of organized professional baseball, the purchase and sale of player contracts was regulated and controlled by a series of agreements and regulations governing the operations of and relations between the major and minor leagues. As a party to these agreements the P.C.L. was subject to the rules governing a category known as open classification.
The rules or organized professional baseball established a procedure whereby players of minor league teams could be selected by major league teams (hereinafter sometimes called the ‘player draft’). The consideration required under these rules for the selection of a player from an open classification league was $15,000. The rules provided, inter alia, that:
For the purpose of enabling players to advance in their profession, the contracts of ...
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