When the Sox brass and others start using veiled threats and guilt trips to get me to buy more tickets to games that I really can’t afford, I think about the need for sports franchise operators to pony up for their share of seats in the great ballpark of life . . .
In Bill Veeck's SABR bio, Warren Corbett describes the two-time owner of the White Sox as a "baseball impresario." That's a pleasant way of putting it. Veeck, who spent his entire life in the baseball business, described himself as a "hustler."
It was an image Veeck embraced, and so have his admirers (myself included), for whom Veeck symbolized the joyous huckster amidst a group of stoic profiteers who shared his occupation then and since.
But the hustler is always looking for angles, and Veeck was no exception. One grift in particular continues to profoundly affect the fiscal landscape of professional sports, and has helped owners withhold millions, if not billions of dollars in federal taxes. Veeck’s loophole is known as the “roster depreciation allowance” (RDA).
In his1962 memoir, The Hustler’s Handbook, Veeck describes how he first claimed the RDA with the IRS in 1946 following his purchase of the Cleveland Indians. Veeck assigned 90% of the team’s value to ‘intangible assets,’ or player contracts, which Veeck argued depreciated over time as players’ skills diminished. It’s a tax rule meant to address, for example, depreciations in the productive value of aging livestock used for work, breeding, or milk production.
What does baseball have to do with keeping livestock? Well, the balls are covered in cowhide. Other than that, eh . . .
This academic paper makes pretty clear the difference between cattle and athletes as far as taxation is concerned (pp2-3). For one, while the skills of some players on the roster are declining at any given time, there are others who are improving, or appreciating in value. Owners don’t own players like they own livestock. And such a deduction involves “double –counting” (a no-no in accounting, like writing positive numbers in red, I guess), since player salaries and development are treated as expenses elsewhere in the return.
The IRS found that Veeck’s claim was in accordance with U.S. tax law, suggesting that the IRS knows nothing about baseball. Maybe the entire government body consists of clones of my Italian-immigrant grandmother (they sure can cook, though). Or maybe they just found Veeck’s quarrel well-founded:
"Look, we play the Star-Spangled Banner before every game — you want us to pay income taxes, too?" Veeck wrote in the The Hustler's Handbook.
“Sport Coat Bill” attempted again to take advantage of his tax scheme when he bought the White Sox for the first time in 1959. But Comiskey II (the man, not the ballpark) refused to sell his shares to Veeck and co., whose 54% stake in the Sox was not enough for what Veeck claimed would have been a $2 million tax break.
Well, other sports team owners did not sit idly by while Veeck shirked the United States tax code! They joined in, naturally. And what began as a gentle breeze from an open window in Veeck’s accountant’s office more than six decades ago has become a cash windfall for owners across professional sports. "This can't be emphasized enough," writes Tommy Craggs of Deadspin, "Every year, taxpayers hand the plutocrats who own sports franchises a fat pile of money for no other reason than that one of those plutocrats, many years ago, convinced the IRS that his franchise is basically a herd of cattle."
In 1970, Bud Selig, presently of MLB commissioner status, bought the Seattle Pilots and moved them to Milwaukee (where fittingly, Veeck got his start as a minor league owner). Selig bought the franchise for $10.8 million but reported to the IRS a purchase price of $600,000, attributing the rest to depreciating player payroll. Leonard Tose bought the Philadelphia Eagles in 1969 for $16.4 million; he reported a $50,000 franchise sale price to the federal government.
Over the past forty years, the RDA has become more complicated, though not necessarily more stringent. From 1977 to 2004, owners who bought teams could write off 50% of the purchase price over 5 years because of declining player values. On paper then, their teams would be operating in the red and owners could transfer “losses” over to their personal income tax forms, meaning millions in tax savings. Once again, for emphasis: all of this is legal.
"Anyone who quotes profits of a baseball club is missing the point," said Paul Beeston when he was Vice President of the Toronto Blue Jays, "Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss and I could get every national accounting firm to agree with me."
There are certain periods when taking a loss on paper affects more than a sports team owner on a tax form, like when a team is maneuvering for a stadium subsidy deal or when the league is involved in labor negotiations. When owners claimed to be operating at a loss during last year’s NBA lockout, the players union argued that the numbers were “merely an accounting artifact” that relied heavily on depreciation.
Beginning in 2004, the tax rules were changed so that owners claiming the RDA could write off 100% of their franchise purchase price over 15 years of team ownership. Somehow, this was supposed to increase tax revenue. Not sure how, like I said, it’s complicated (interested in the ins-and-outs of the RDA? Here’s a link to that academic paper again).
In 2004, sports owners downplayed the RDA’s impact on franchise values and revenues. "The IRS has been much less receptive to greater deductions because franchises cost so much these days," said the COO of Major League Baseball. And of course, owners were crying poor despite the tax advantages. "When owners are losing millions of dollars in real money, it's crazy to think that they're fine with it because they are not paying as much tax," said Jeff Smulyan, former Seattle Mariners owner. (Curiously, despite his misgivings Smulyan made a run at purchasing the Washington Nationals the next year.)
"The total money for the tax benefit should be increasing in terms of dollars because the salaries have been on the rise for so long," said Scott Rosner, university lecturer and author of The Business of Sports. "The value is just diminished due to the astronomical wealth of the owners coming into the sport. So the old-guard owner might have saved $2 million in taxes and that meant a lot. The new age owner could be saving $20 million and that's less of a deal."
Less of a deal for the owner maybe, but that’s still $20 million in taxes not going to the government, right? Anyways . . .
Then there are the informed opinions of others who have no stake in making claims about the RDA (except maybe as irritated taxpayers). Time magazine’s Gary Belsky wrote in March this year, when $1.5 billion was being bandied about as the going price for the Frank McCourts’s Los Angeles Dodgers: “never believe a word owners say when they talk about money.… Owning a pro team is almost always a good-to-great investment in the long term, and team owners are almost always being dishonest when they talk about franchise values and the day-to-day finances of their clubs.”
Belsky continues, "it’s hard not to win when the rules are stacked in your favor. To understand the economics of team ownership—and to see why owners and league officials aren’t to be trusted when it comes to money—you must understand a peculiarity of U.S. tax law....the so-called Roster Depreciation Allowance….Ledgers that routinely show lower profits (or even losses) than in reality exist."
The main reason the Dodgers demanded such a high price, despite being $412 million in debt, was a lucrative new television deal. However, the $2 billion agreed to by an ownership group that included Magic Johnson was a whopping $500 million more than the next highest offer. Mike Ozanian, who knows a lot about the business of baseball (he writes the book on it), has a theory as to why the new Dodgers owners were willing to go that high; one that suggests how the RDA tax code has changed and new ownership groups have adapted.
The ownership group that was thought to have had the inside track on the deal was going to pay out of their own private accounts, from which they would not have enjoyed tax breaks from depreciation. Magic’s group, led by Guggenheim hedge fund CEO Mark R. Walter, paid for the Dodgers with money from their businesses, meaning "Those businesses stand to have big tax breaks from the accounting losses the Dodgers will have as a result of the amortization and depreciation of the team’s intangible assets and the stadium." The tax write-off, "can be traced back to the so-called 'roster depreciation allowance' invented by flamboyant baseball entrepreneur Bill Veeck."
Sports owners, what a stand-up bunch. I’d like to think that Veeck, perhaps the last of the non-independently wealthy sports franchise operators, would have been sickened today by the monster he’s created. Then again, the unabashed con man once wrote, "A hustler gets a free ride and makes it seem as if he's doing you a favor,” as if it was something to be proud of.
So, the moral of this story about Bill Veeck, for whom I have great nostalgic affection, is that nothing is sacred, there is no honor among thieves and . . . oh, sports franchise owners are legally hording millions of dollars from the government through tax loopholes, thereby turning profits into losses for the benefit of labor negotiations and stadium subsidies while simultaneously increasing the values of their franchises.
Note: Thanks to sports and urban historian Sean Dinces for turning me on to Bill Veeck the tax schemer. Sean will be in Chicago next week if anyone wants to track him down and pelt him with refuse.