FanPost

Rules about payroll when teams are purchased

The following quote is from an old ESPN article maintained on the web by one of the attorneys quoted in the piece.

Whereas it used to be automatic that a team owner could attribute a huge chunk of the franchise price to player salaries, team owners now have to hire auditors who determine a true market value for the player's contract instead of the actual dollars being paid to player.

It is that value, according to Fortner, that is shown to the IRS. Unlike decades ago, where owners would simply spread the costs over the first five years of ownership, player contracts in most cases now may be depreciated based on the length of individual contacts [sic]. This debunks the theory that new owners are more likely to sell after their fifth year of ownership because the write-off period is longer. Plus, owners are allowed to depreciate other intangible assets, including season ticket waiting lists and suite revenues.

My point in posting this is that the Cubs may still add to payroll even while waiting for the team to be sold.  Apparently the new owners would be able to depreciate the player contract over the term of that contract.  

I'm not disagreeing with those who believe an impending sale will limit Hendry's spending.  That might well be true.  But, according to the article, since a change to tax laws in 1976, numerous precedents have been set about how much of the purchase price of a ballclub can be written off, and over how many years.  

Also, from an old Doug Pappas piece (RIP):

An ingenious way to transfer funds from the team's treasury to the owner's. If Bill Gates decided to buy the Mariners for $100 million, he wouldn't write a personal check; instead the franchise would be purchased by a corporation he owned. If Gates contributed $100 million in capital to the corporation, its books would look the same as if he personally owned the team -- but if Gates instead loaned the corporation $100 million at 8% interest, the Mariners would owe him interest of $8 million/year for as long as he owned the club. Even if the Mariners had an operating profit of $7.5 million, their books would still show a loss.

If anyone else has more information or other sources, please post it here.  I would also consider it appropriate to link to other blogs that have discussed this issue.  

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