P.D.B. Sports, Ltd. v. Comm'r of Internal Revenue
| Decision Date | 22 December 1997 |
| Docket Number | No. 730–96.,730–96. |
| Citation | 109 T.C. No. 20,109 T.C. 423 |
| Parties | P.D.B. SPORTS, LTD., Bowlen Sports, Inc., Tax Matters Partner, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Richard P. Slivka and Charles D. Henson, for petitioner.
Randall L. Preheim, for respondent.
Respondent issued notices of final partnership administrative adjustments to P.D.B. Sports, Ltd., for the taxable years 1989 and 1990. Among other adjustments, respondent disallowed amortization in the amounts of $1,878,056 and $259,255 for 1989 and 1990, respectively, claimed with respect to professional football player contracts. After concessions, the sole issue remaining for our consideration is whether the partnership, for purposes of determining the amortizable basis in player contracts, is subject to section 1056 1 in addition to, in conjunction with, or instead of the subchapter K partnership provisions. Petitioner contends that the partnership provisions apply exclusively and would, in this case, permit the amortization of the fair market value of the player contracts. Conversely, respondent contends that section 1056 applies to limit amortization to an amount equal to the seller's basis, plus any gain recognized by the seller. In particular, the controversy centers on whether section 1056 was intended to apply where the buyer acquires a partnership interest in a partnership holding player contracts.
Patrick Bowlen (Bowlen), after graduating from the University of Oklahoma law school, practiced law for 2 years in Calgary, Canada. Thereafter, he began a real estate development business which he operated into the late 1980's. During 1984–85, Bowlen acquired an interest as a general partner in a partnership that was the franchised owner and operator of the Denver Broncos (Broncos) professional football team, a member of the National Football League (NFL). That partnership, P.D.B. Sports, Ltd. (Bowlen I), was a Colorado limited partnership with its principal place of business in Colorado at the time the petition was filed.
Prior to Bowlen's involvement in the Broncos, Bowlen I was 99.75–percent owned by Edgar F. Kaiser, Jr. (Kaiser), a Canadian national.3 The remaining .25 percent of Bowlen I was also indirectly owned by Kaiser, through a corporation E.F.K. Sports Holdings, Ltd. (Kaiser I). Due to Bowlen's prior interest in purchasing the Broncos, in late 1983, Kaiser approached Bowlen about acquiring an interest in the partnership.
In 1984, Kaiser disposed of his entire interest in Bowlen I, including his interest held through Kaiser I (the corporate entity), in two separate transactions. First, during March 1984, Kaiser sold about 39 percent of the Bowlen I partnership to John R. Adams, through Adams' Colorado limited partnership, J.R.A. Sports, Ltd. (Adams), for $10 million. Second, during March 1984, Kaiser entered into an agreement with Bowlen for the sale of about 61 percent of the Bowlen I partnership. Bowlen's purchase of Kaiser's Bowlen I partnership interest occurred on June 1, 1984. Bowlen purchased about 59 percent of Kaiser's partnership interest for $25,793,100 plus assumption of $34,689,717 in Kaiser's partnership liabilities. At the same time, Bowlen also purchased the .25–percent partnership interest held by Kaiser I for $106,900. Subsequently, Bowlen transferred his aggregated partnership interest (about 61 percent) in Bowlen I to his corporation, Texas Northern Productions, Inc., also known as Bowlen Sports, Inc., (Bowlen II).
On June 1, 1984, Bowlen I was owned as follows:
+--------------------------------------------------------------------+
¦Partner ¦Percentage Ownership ¦Type of Interest ¦
+----------------------+----------------------+----------------------¦
¦ ¦ ¦ ¦
+----------------------+----------------------+----------------------¦
¦Bowlen II ¦60.8 ¦General partner ¦
+----------------------+----------------------+----------------------¦
¦Adams ¦39.2 ¦Limited partner ¦
+--------------------------------------------------------------------+
Bowlen II's and Adams' aggregate basis in their partnership interests in Bowlen I was approximately $72,242,770. At the time of Bowlen's purchase, Bowlen I owned the following assets: the NFL franchise for the Broncos, professional football player contracts, a stadium lease, and television rights. Bowlen I's adjusted basis in the player contracts on May 31, 1984, before the sale of the partnership interests to Bowlen II, was $6,510,555. 4
Bowlen I treated the sale of the partnership interest to Bowlen as causing a section 708(b)(1)(B) termination of the partnership for Federal tax purposes. Adams consented to the transfer of Kaiser's partnership interests to Bowlen and entered into a new partnership agreement with Bowlen II in order to prevent dissolution of the partnership under State law. The Broncos franchise, held by Bowlen I, was not separately for sale. The parties' transactions were in form and substance the sale of partnership interests as opposed to a sale of the underlying partnership assets.
A list of players, whose contracts existed at the time that Bowlen acquired his interest, was used to determine the value of the player contracts. During June 1984, the Broncos' general manager contacted four individuals, including general managers and/or individuals responsible for negotiating player contracts at four NFL teams, to wit, Chicago Bears, Cleveland Browns, New York Giants, and Houston Oilers. These four individuals assigned estimated values to the existing Bronco player contracts, which when aggregated totaled $44,325,000, $43,450,000, $59,215,000, and $35,790,000, respectively. The average of these assigned or estimated total values is $45,695,000. Bowlen I's accountant evaluated the assets of the partnership and the values assigned to them by the partnership personnel. The accountant analyzed and adjusted the values of the partnership assets and determined that the fair market value of the player contracts was $36,121,385 as of June 1, 1984, the date of the transfer of the partnership interest to Bowlen. The accountant's analysis was conducted under the approach contained in the subchapter K partnership provisions where the appreciation in the value of the assets over the partnership's presale basis in the assets is allocated to the assets to account for the difference. The difference between the partnership presale basis (approximately $26 million) and Bowlen's and Adams' purchase price for the partnership interests including assumptions of liability (approximately $72 million) was about $46 million.5 The accountant's asset valuations and conclusions regarding the partnership's basis in the assets, including the player contracts, were premised on the assumption that the mandatory basis adjustment rules of section 732(d) applied.
Bowlen I began amortizing the player contracts on June 1, 1984, using a 5–year useful life. After assigning values to the partnership's assets other than the NFL Broncos franchise, the partnership assigned the residual amount of Bowlen and Adams' basis in their partnership interests to the franchise. Bowlen I did not make a section 754 election in 1984. During 1984 through 1988, Bowlen I reported amortization expenses and writeoffs of the player contracts in issue in excess of $34 million.
In September 1985, P.D.B. Enterprises, Inc. (Bowlen III), purchased Adams' 39.2–percent partnership interest in Bowlen I for $20 million. BowleA III was wholly owned by Bowlen II. During the years in issue, Bowlen I was owned as follows:
+--------------------------------------------------------------------+
¦Partner ¦Percentage Ownership ¦Type of Interest ¦
+----------------------+----------------------+----------------------¦
¦ ¦ ¦ ¦
+----------------------+----------------------+----------------------¦
¦Bowlen III ¦60.8 ¦General partner ¦
+----------------------+----------------------+----------------------¦
¦Bowlen III ¦39.2 ¦Limited partner ¦
+--------------------------------------------------------------------+
When the 60.80–percent partnership interest in Bowlen I was originally purchased, Kaiser did not provide Bowlen with information about whether Kaiser recognized any gain attributable to the player contracts. Nor did Bowlen ask Kaiser for such information. No evidence was presented at trial by either party about the amount of gain recognized by Kaiser from the sale of his partnership interest to Bowlen or the portion of that gain attributable to player contracts. Evidence of the gain recognized by Kaiser may have been contained in Kaiser's 1984 Federal income tax return. The Internal Revenue Service destroyed Kaiser's return as part of its normal practices and procedures for destruction of old tax returns. Kaiser, a Canadian national, did not testify at trial.
OPINIONAs part of the Tax Reform Act of 1976, Pub.L. 94–455, 90 Star. 1520, legislation was enacted to address certain tax aspects of transactions involving professional sports franchises. One major aspect concerned the amortization of the costs of player contracts. Laird v. United States, 556 F.2d 1224 (5th Cir.1977); First Northwest Indus. v. Commissioner, 70 T.C. 817, 1978 WL 3257 (1978), revd. and remanded on other grounds 649 F.2d 707 (9th Cir.1981). Section 1245(a)(4) was enacted to require depreciation recapture regarding player contracts when a sports team is sold irrespective of whether the contracts are actually resold.6 Concerning the issues in this case, legislation was enacted to prevent a sports team purchaser from allocating more than a fair market value portion of the...
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