Baseball Player's Signing Bonus Must Be Amortized Over Life of Contract
(Parker Tax Publishing: October 10, 2013)

A minor league baseball player's signing bonus should be amortized over the useful life of the player's contract. CCM 20133901F.

Under the facts in CCM 20133901F, the taxpayer operates a professional baseball team under a franchise agreement and is affiliated with several minor league baseball teams. The taxpayer operates under an agreement whereby it incurs and pays the payroll expense and certain operating costs as defined under Major League Baseball rules for all of its affiliates. When a player signs a contract to play on the taxpayer's team, a signing bonus may be paid. The taxpayer capitalizes and amortizes the signing bonuses of its major league players over the life of the players' contracts. The taxpayer capitalizes and amortizes the signing bonuses of the players that sign with the minor league teams over a one-year life. The taxpayer chooses to use a year life based on the average of the actual life of the contracts disposed of during the year.

The players that agreed to play for the taxpayer's minor league teams signed the Minor League Uniform Player Contract, Article IV, which provides that the player is required to provide services to the team for seven separate championship playing seasons. Unless the player contract is terminated under the contract, the agreement continues until the player has played for the taxpayer for seven championship seasons. Under Article XIX, the player can apply to the Commissioner of Major League Baseball to have the contract terminated only if the taxpayer is in arrears to the player for any payments due for more than 15 days or if the taxpayer fails to perform any other obligations required of it for more than 15 days. The Baseball Commissioner will terminate the agreement only if the taxpayer fails to remedy the situation by a fixed date. The taxpayer may terminate the player contract by written notice if the player at any time:

(1) fails, refuses, or neglects to conform his personal conduct to high standards of good citizenship and good sportsmanship; (2) fails, refuses, or neglects to keep himself in first-class physical condition;

(3) fails, refuses, or neglects to obey the club's requirements respecting the player's conduct and service;

(4) fails, in the judgment of the club, to exhibit sufficient skill or competitive ability to qualify or to continue as a professional baseball player as a member of the club's teams; or

(5) fails, refuses, or neglects to render the player's services under the agreement, or in any other manner to materially breach the Minor League Uniform Player Contract.

Under the contract, the taxpayer may also terminate the player's contract if the player becomes disabled. After the player has completed seven championship seasons for the taxpayer, the player becomes a minor league free agent.

The Office of Chief Counsel advised that the signing bonus of the minor league players should be amortized over the useful life of the player's contract, which is the seven-year term of the player's contract. The Chief Counsel's Office noted that Reg. Sec. 1.167(a)-3(a) provides a safe harbor rule under which an intangible asset may be the subject of a depreciation allowance if it is known from experience or other factors to be of use in the business or in the production of income for only a limited period, the length of which can be estimated with reasonable accuracy.

In Rev. Rul. 67-379, the IRS ruled that the useful life for a baseball player's contract generally is the period over which the team controls the player's ability to sign a contract with another team. Under Reg. Sec. 1.167(a)-14(c)(1)(ii), the cost or other basis of a taxpayer's right to receive an unspecified amount of tangible property or services over a fixed period is amortizable ratably over the period of that right.

In this situation, the taxpayer has control over the player until the player has played seven championship seasons with the taxpayer, and the player cannot unilaterally terminate the contract with the taxpayer. Even if the player opts to not play for the taxpayer, the Chief Counsel's Office noted, he cannot play with another team until he is released by the taxpayer or finishes playing the required seven championship seasons for the taxpayer. The player cannot choose to play for a different team after entering into a contract with the taxpayer. Although a player's contract may be terminated if he signs a major league contract or if he is released or traded by the taxpayer, the useful life is determined by how long the player contract would have been useful to the taxpayer if the contract was not terminated. It appeared to the Office of Chief Counsel that if the player contract is not terminated, then it is useful to the taxpayer for the seven-year term of the contract because during that time, the taxpayer has control over the player and the player is prevented from playing for a competitor of the taxpayer. Thus, the useful life of the player contract is seven years.

For a discussion of the safe harbor amortization rule, see Parker Tax ¶95,107.

Parker Tax Publishing Staff Writers

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