Hollywood Baseball Ass'n v. Comm'r of Internal Revenue, Docket No. 93647.

• Decision Date: 15 January 1968
• Docket Number: Docket No. 93647.
• Citation: 49 T.C. 338
• Parties: HOLLYWOOD BASEBALL ASSOCIATION, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

49 T.C. 338

HOLLYWOOD BASEBALL ASSOCIATION, PETITIONER

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 93647.

Tax Court of the United States.

Filed January 15, 1968.

Arthur E. Gore, for the petitioner.

Melvin L. Sears and Roger Rhodes, for the respondent.

It was necessary for petitioner, a minor league baseball club, to enter into working agreements and a league agreement in order to obtain player contracts and participate in organized baseball. Such agreements required sales of such contracts on demand. Held: This entire arrangement was an integral part of, and at the heart and core of petitioner's business; therefore, the player contracts were a part of petitioner's stock in trade and petitioner's primary and principal purpose in holding such contracts was to sell them in the ordinary course of its business. Profits from such sales are to be recognized under sec. 337(b)(1), I.R.C. 1954. Cf. Corn Products Co. v. Commissioner, 350 U.S. 46.

FORRESTER, Judge:

This case is before us on remand from the U.S. Court of Appeals for the Ninth Circuit ‘for fresh fact findings, addressed to the statute (sec. 337(b)(1)(A), I.R.C. 1954)¹ as the Supreme Court has now construed it. See Malat v. Riddell, 383 U.S. 569.’

In our original opinion, 42 T.C. 234, filed April 21, 1964, we held, under section 337(b)(1)(A) of the Internal Revenue Code of 1954, that the petitioner held contracts of professional baseball players ‘primarily for sale to customers in the ordinary course of its trade or business.’ At that time we interpreted ‘primarily’ as meaning ‘essentially’ or ‘substantially’ rather than ‘principally’ or ‘of first importance.’ Our decision on this issue was subsequently affirmed by the Ninth Circuit (352 F.2d 350, Nov. 1, 1965). Petitioner then filed a petition for writ of certiorari in the Supreme Court of the United States on the issue of the correct construction of the said section of the statute.

On March 21, 1966, the Supreme Court in the case of Malat v. Riddell, 383 U.S. 569, construed section 1221(1) of the Internal Revenue Code which is materially verbatim to section 337(b)(1)(A), and thereafter granted petitioner's petition for writ of certiorari, vacated the judgment of the Court of Appeals, and remanded the case to that court for further consideration in light of Malat v. Riddell. Pursuant to the remand of the Supreme Court, the Ninth Circuit has remanded the case to us.

On motions granted, the parties have filed briefs on this issue without reopening the record.

FINDINGS OF FACT

The facts giving rise to the issue in this case are set out in our original opinion, 42 T.C.at 235-243. There follows a summary of those facts, together with our fresh findings:

Petitioner was a corporation which under the name of Hollywood Stars operated a professional baseball team in the Pacific Coast Baseball League (hereinafter called P.C.L.). On December 17, 1957, its stockholders adopted a plan of complete liquidation.

At the time the plan was adopted petitioner's assets included contracts for the services of professional baseball players. In the year following the adoption of the plan, it consummated the sale of at least six, and possibly eight, of these contracts to the Pittsburgh Athletic Club (hereinafter called Pittsburg) and to its affiliate, the Columbus Baseball Club. The cost of two of these contracts to petitioner was $4,500. They were sold for a total consideration of $140,000. A total of $27,000 was received for the remaining six contracts which had cost petitioner $17,650.

As we found in our previous opinion, the provisions of a player contract allowed its owner to control a player during his playing life. However, in order to prevent minor league teams such as petitioner's from holding on to a player indefinitely, the P.C.L. and the major leagues entered into an agreement which required petitioner, as a member of the league, to sell each year to any major league team on demand, at least one player contract which had previously been assigned outright to petitioner by a major league team, and to sell the contracts of all players with 5 years or more of service, to any major league team on demand. This arrangement was known as the player draft. (See provisions in detail at pages 237-238 of our prior opinion.)

In addition to the league requirements, petitioner was party to so-called working agreements with major league clubs during relevant years. Its working agreement was with Pittsburg during 1957 and 1958, and such agreement provided, inter alia, that Pittsburg could select at any time any player's contract which petitioner owned. Petitioner insists (and we now find), that it was unable to compete with major league teams in recruiting good young players, and unless it had had such an agreement with a major league team, and unless it had agreed to such provisions as this, that it would not have been able to obtain players to field any baseball team, because all the good and potentially good players were owned by major league teams and would be assigned to petitioner only under these conditions.

Two hundred twenty-four player contracts were sold by petitioner from 1948 through its fiscal year ended October 31, 1957, at a substantial overall profit. Detailed facts regarding petitioner's receipts from this source and its receipts from all other sources are found in our prior opinion. In 1956 and 1957 petitioner realized a profit of approximately $150,000 from the sales of such contracts while losing approximately $130,000 on all of its other activities.

Petitioner's sales of player contracts were made as the direct result of the league rules and the working agreements, and such player contracts were petitioner's stock in trade, held principally for sale to customers in the ordinary course of its trade or business, within the intendment of section 337 as construed by the Supreme Court in Malat v. Riddell, supra.

OPINION

The issue for consideration is whether petitioner's sales of certain player contracts produced income which is not to be recognized by it under section 337 of the Code.²

Respondent contends that the profits from the sales of the players' contracts are excluded from nonrecognition under section 337(b)(1)(A), and that two of the contracts were in fact sold prior to the adoption of the plan of liquidation. As in our previous opinion in this case, we again find it unnecessary to pass upon respondent's later contention, because we find and hold that such contracts did fall within the exclusion of 337(b)(1)(A).

Petitioner's contention is that its primary (principal) purpose (as defined by Malat v. Riddell, supra) for holding player contracts was to further its activity of playing baseball games, winning championships, and thereby drawing customers into the ball parks as paid admissions. It argues that such a purpose is not within the literal language of section 337(b)(1)(A), and contends that therefore those provisions do not apply to exclude its sales of player contracts from nonrecognition.

Under the remand to us we are to consider the facts of this case under section 337 as it has now been construed by the Supreme Court in Malat v. Riddell, supra. At the threshold we note that Malat v. Riddell was dealing with claimed capital gains treatment under the section 1221(a) definition of capital assets, while the instant case involves claimed nonrecognition-of-gain treatment by a corporation under the section 337(b)(1)(A) definition of property. Both sections are relief provisions, their language is substantially identical, and the circumstances of our mandate make it abundantly clear that the two sections are to be construed in an identical manner. Also, cf. Jeanese, Inc. v. United States, 227 F.Supp. 304 (N.D.Cal.)

The Supreme Court in Malat v. Riddell, supra, construed section 1221(1) (and therefore section 337(b)(1)(A)) in the following language:

The purpose of the statutory provision with which we deal is to differentiate between the ‘profits and losses arising from the everyday operation of a business' on the one hand (Corn Products Refining Co. v. Commissioner of Internal Revenue, 350 U.S. 46, 52) and ‘the realization of appreciation in value accrued over a substantial period of time’ on the other. (Commissioner of Internal Revenue v. Gillette Motor Transport, Inc., 364 U.S. 130, 134.) A literal reading of the statute is consistent with this legislative purpose, We hold that as used in Sec. 1221(1), ‘primarily’ means ‘of first importance’ or ‘principally.’

Thus the language of the Supreme Court expressly excludes the profits and losses realized from the normal everyday operation of a business from the beneficial treatment allowed by the statute.

Section 337 is a relief provision, designed to eliminate the difference in corporate tax consequences which formerly depended upon whether a corporation or its shareholders sold a liquidating corporation's assets. S. Rept. No. 1622, 83d Cong., 2d Sess., pp. 258-260 (1954); H. Rept. No. 1337, 83d Cong., 2d Sess., pp. A106-A109 (1954). Cf. Commissioner v. Court Holding Co., 324 U.S. 331; United States v. Cumberland Pub. Serv. Co., 338 U.S. 451. Therefore, compliance with section 337 prevents gain from being recognized at the corporate level. It is clear that the statutory purpose of providing parity of treatment for unusual sales in liquidations would not be served by granting nonrecognition for gain derived from ordinary sales in the ordinary course of a corporation's business.

Petitioner was regularly engaged in various activities, all of which combined and interacted with each other to make up one closely integrated business— the business of operating a minor league baseball club. Petitioner would have us fractionalize this business into classes of those various activities that went to make up its usual, everyday operation of that business and, for the purposes of this case, to ignore or to relegate to a position of minor...