Donald L. Korb Chief Counsel, Internal Revenue Service Speech
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Donald L. Korb Chief Counsel, Internal Revenue Service Speech at Baseball Hall of Fame to Tax Section of New York State Bar Association in Cooperstown, New York Saturday, July 15, 2006 Thanks to Kim Blanchard for thinking of me and inviting me to speak here this evening. And thanks for the great reports you and your colleagues prepare for us. My wife Pat came with me to Cooperstown for the weekend. She just joined me in Washington, D.C. after two years of my commuting back and forth to our home to Cleveland. When I told her that we were going to celebrate her arrival in Washington by going to the Baseball Hall of Fame, and not only that, but we were going there to attend a meeting of tax lawyers, her response was “After all of these years” – and we have been married for 34 years – “you still really know how to win a girl’s heart.” When I was a young boy playing pick-up baseball on the sandlots back in Cleveland, I would often daydream – as I was standing out there in right field – about being enshrined in the Baseball Hall of Fame here in Cooperstown. And I would also fantasize about what I would say during my acceptance speech on that momentous – albeit hypothetical – occasion. Well since I am now 58 years old and still can’t hit a curve ball, I guess my talk to you tonight is about as close as I will ever get to fulfilling that particular dream. I was walking around the museum earlier this afternoon and I came across an exhibit that I suspect is little noticed by the average baseball fan who visits here. But for this crowd – we who are tax geeks – it is a display that should not be missed. Of course I am talking about the exhibit “The 10 Most Significant Tax Events in the History of Baseball.” Let me count down the list for you: 10. Baseball and the Investment Tax Credit. In 1969, the IRS issued Revenue Ruling, 69-170, 1969-1 C.B. 28, which answered the question whether stadium seats and other miscellaneous items appurtenant to a baseball stadium qualified for the Investment Tax Credit (ITC). In a decision worthy of Solomon, the IRS ruled that the stadium seats, the backstop, the flagpoles mounted on the stadium, and the equipment and circuiting contained or attached to the scoreboard as well as the message boards qualified for the ITC while the rest of the scoreboard and the message boards, the field lights (including those mounted on the stadium), the batter’s eye screen, the foul poles, the flagpoles (excluding, of course, those mounted on the stadium), and the signs in the parking lot did not qualify for the ITC. Say what? 2 9. Deductibility of Baseball Players’ Business Expenses. In 1970, the IRS ruled in Revenue Ruling 70-476, 1970-2 C.B. 35, that the amount paid by a professional baseball player for his uniform is deductible as a business expense. However, in the 1920’s, the IRS took Walter Schmidt, a catcher for the Pittsburgh Pirates, to Tax Court because Schmidt (who hit .257 over his 10-year career with the Pirates and the Cardinals) had deducted from his taxes for the year 1921, (1) his travel expenses from his home in California to spring training in Hot Springs, Arkansas, (2) his wife and child’s travel expenses from California to Pittsburgh to be with him during the regular season, and (3) the travel expenses for all three of them to return home to California after the end of the baseball season. Schmidt, who represented himself in Tax Court, lost his case, first, because his wife and child’s expenses were nondeductible personal living expenses, and second, because his travel expenses from his home (California) to his places of business (Hot Springs and Pittsburgh) were not considered deductible business expenses but instead were in the nature of nondeductible commuting expenses. Schmidt v. Commissioner, 11 B.T.A. 1199 (1928). Bobby Dews, who was a coach with the Atlanta Braves in 1980 and 1981, and who lived in Albany, Georgia during the off-season, suffered the same fate with respect to his living expenses in Atlanta during those two seasons. Dews v. Commissioner, 53 T.C.M. 1378 3 (1987). On the other hand in Revenue Ruling 54-147, 1954-1 C.B. 51, the IRS ruled that expenses incurred by professional baseball players, managers, workers, and trainers for travel, meals, and lodging while on the road during the baseball season are in fact deductible business expenses. 8. Are the Costs of Player Contracts Purchased by a Team Deductible in the Year Paid or Accrued or Are They Amortizable Over the Life of the Contract? The answer to this question has actually changed over the years. A series of court cases in the mid-1930’s held that the cost of a uniform player contract owned by a major league team (at that time, commonly a one-year contract with a standard renewal option) could be deducted in full in the year paid or accrued. Commissioner v. Pittsburgh Athletic Co., 72 F.2d 883 (3d Cir. 1934), affirming 27 B.T.A. 1074 (1933), acquiescence XIV-2 C.B. 17 (1935); Commissioner v. Chicago National League Ball Club, 74 F.2d 1010 (7th Cir. 1935); and Helvering v. Kansas City American Assn. Baseball Co., 75 F.2d 600 (8th Cir. 1935). The Pittsburgh, Kansas City, and Chicago decisions were accepted by the IRS in two administrative pronouncements, I.T. 2932, XIV-2 C.B. 61 (1935) and I.T. 4078, 1952-1 C.B. 39. However, in 1967, the IRS reconsidered the issue and changed its mind in Revenue Ruling 67-379, 1967-2 C.B. 127, where it announced that it would no longer treat the purchase price or other acquisition cost of a 4 baseball player’s contract as an ordinary and necessary business expense. From then on, the cost of a uniform baseball player contract owned or controlled by a Major League club had to be capitalized and depreciated over its useful life. 7. The Dahl Fords of Kenosha, Wisconsin – Deduction of Advertising Expenses. In the 1920’s, Andrew Dahl was the owner of Ford automobile dealerships in six cities and towns in Wisconsin, including Kenosha. In 1925, Mr. Dahl purchased equipment for a baseball team, consisting of uniforms, bats, balls, and a catcher’s mitt, mask, and protector at a cost of $132.35. The members of the team were mostly all employees of Mr. Dahl’s dealership in Kenosha. The uniforms had the words “Dahl Ford” on them and the team was known and referred to as the “Dahl Fords” in the local newspaper and around town. Quite a bit of publicity arose on account of the team in 1925 and Mr. Dahl continued to field the team in subsequent years. The shop foreman had charge of the equipment other than the uniforms and whenever he needed new equipment he was told to order it and Mr. Dahl would pay for it. On average the equipment lasted for a season, but if it lasted longer, whoever had the equipment could keep it. The IRS challenged Mr. Dahl’s business expense deduction of $132.35 claiming that since the equipment lasted more than one season, the amount expended had to be amortized on the life of the equipment rather than 5 deducted in the year the expenses were incurred. The Tax Court disagreed; instead of focusing on the useful life of the equipment, it focused on the publicity generated by the team for Mr. Dahl’s Kenosha Ford dealership, thus permitting the entire amount to be deducted as an advertising expense in 1925. 6. Collusion Payments, the Cleveland Indians, and FICA/FUTA Taxes. In the 1980’s, the Major League Baseball Players’ Association filed grievances against the then 26 Major League teams alleging that the teams had violated the collective bargaining agreement between the union and MLB by colluding to inhibit free agency. The union and MLB eventually settled the grievances, and the teams agreed to pay the union $280 million in 1994. In turn, the union agreed to distribute pro rata portions of the settlement fund to the players harmed by the collusion. The Cleveland Indians owed backpay for wages to 8 players in 1986 and 14 players in 1987. The tax issue, which eventually went all the way to the United States Supreme Court, was whether for purposes of the FICA (social security) and FUTA (unemployment) taxes, the back wages should be taxed by reference to the year they were actually paid (1994) or, instead, by reference to the years they should have been paid (1986 and 1987). Since both the tax rates and the amount of wages subject to tax rose over that time, treating the back wages as taxable in 1994 would subject the team (and the players too) to 6 significant tax liability. In the Supreme Court, my Indians won (something, unfortunately, they did not do in the World Series in 1995 when they played the Atlanta Braves or in 1997 when they played the Florida Marlins). Other teams with similar court cases included the Cardinals, the Phillies, and the Giants. 5. Are Signing Bonuses Considered Wages Subject to FICA/FUTA Taxes? In 2004, the IRS ruled in Revenue Ruling 2004-109, 2004- 2 C.B. 958, that amounts paid to a ball player as a signing bonus for his first baseball contract are considered “wages” for purposes of the FICA and FUTA taxes.