Deadspin Is Excellent on a Bogus Tax Break for Wealthy Team Owners

Gawker’s sports site Deadspin got hold of some New Jersey Nets financial statements from a few years ago and uses them to report on how tax law gives multimillionaire ballclub owners egregious benefits.

Tommy Craggs does a good job showing how the Nets could earn $7 million but report a $28 million loss in 2004, or as he aptly puts it, “how a team makes money and how it pretends not to be making any money at all.”

The Nets benefit from a writeoff called the roster depreciation allowance that allows pro teams to depreciate their assets, which in this case are workers:

The RDA dates back to 1959, and was maybe Bill Veeck’s biggest hustle in a long lifetime of hustles. Veeck argued to the IRS that professional athletes, once they’ve been paid for, “waste away” like livestock. Therefore a sports team’s roster, like a farmer’s cattle or an office copy machine or a new Volvo, is a depreciable asset.

The underlying logic is specious at best. As Fort points out, a team’s roster at any given moment isn’t actually depreciating. While some players are fading with age, others are developing and improving. But the Nets don’t have to pay more taxes when a player becomes more valuable. And in any case, the cost of depreciation is borne by the athletes themselves, when they pass their primes and lose their personal earning power.

Nevertheless, the IRS not only agreed with Veeck but allowed any owner claiming the write-off to deduct roster expenses twice — first under “player salaries,” in the case of the Nets’ documents, and then under “loss on players’ contracts” — and an enormous tax shelter sprang up within the balance sheets of franchises everywhere. This can’t be emphasized enough: 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. Fort calls it “special-interest legislation.” “It’s not illegal,” he says. “It’s just weird.”

The uncomfortable parallels between professional sports and slavery have long been noted, and you can add this to the list . Livestock! And is any other industry allowed to depreciate its workforce? I’ve never heard of it.

The upshot is that this bogus millionaires-only (with the exception, presumably, of the socialist Green Bay Packers) tax break potentially cost taxpayers up to $10 million (the owners, the Ratners, almost surely can pass on those tax losses to other profitable parts of their empire or deduct them from their personal income.

In other words, even if a team loses money, it can make its owners money via this tax break. Net that out across Ratner’s businesses gives the Nets an effective profit margin of about 7 percent. Not bad for a money-losing team.

I’d like to see some mainstream press followup on this story broadening it across all teams and all leagues. How much does this tax giveaway cost us every year? I imagine it’s a stunning number.

It’s well known that taxpayers subsidize sports teams, their wealthy owners, and their wealthy players too much by paying for new stadiums (and parking garages) every twenty years or so. That context makes this hidden subsidy that much more obscene.

Very nice work by Craggs and Deadspin to bring this into the light.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum. Tags: , , , ,