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NBA Lockout, 'Losses' and Flimflam

The NBA lockout started yesterday, and one might ask, who cares about millionaires fighting billionaires? Looking at the details, it appears that even NBA player millionaires are, like 'little people', ripe targets for scams by greedy and rich corporate run organizations. I side with the players for the reasons below. The following is my interpretation of facts presented from ESPN articles linked below..

Is the NBA really losing money? If so how much? ESPN:The league contends that 22 of the 30 teams are losing money, to the tune of about $370 million per season collectively.

When an NBA team is bought, 100% of the cost of 'intangible assets' can be deducted from taxes over 15 years. Prior to 2005, 50% of the purchase price of the team could be deducted over 5 years.  Tangible assets like physical equipment, buildings, cars, office equipment can of course be amortized separately if appropriate.

The primary 'non-tangible' asset comes under what is called the RDA, or Roster Depreciation Allowance. The RDA is a huge legal loophole for owners to avoid taxes. A way to paper over profits for free. The team members and their salaries are considered to be assets that are depreciating a set amount each year, and this number can be deducted from profits, along with and addition to actual year by year player's salaries. In other words, salaries are deducted twice.  Dairy cows are depreciating assets too, as they give less milk as they age. Of course, with an NBA roster, unlike cows, many players appreciate is skill and worth over time, while others don't.  Yet the IRS allows the original roster costs at purchase to be handled in total, as a 'depreciating asset', the RDA.

The RDA all started many years ago:

In 1946, Major League Baseball (MLB) entrepreneur Bill Veeck convinced the IRS that the
roster of players on his newly acquired Cleveland Indians was a depreciable asset (Veeck,
1962). Okner’s (1974) assessment of this “roster depreciation allowance” (RDA) first appeared
nearly 30 yr later....Under previous tax laws established in 1976, from 1977 to 2004, sports team owners were allowed to treat 50% of the team purchase price as an asset depreciable over no more than 5 yr, what we refer to as the “50/5 Rule.” The 2004 revision set the RDA at 100% of the purchase price depreciable over no more than 15 yr, what we will refer to as the “100/15 Rule.” All interested parties agreed that administrative enforcement costs would be driven to zero...

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.

In 2004 team documents claimed a $27 million dollar loss for the Nets, the RDA comprised $25 million of that loss. But no one had to write a check for that amount. It was a percentage of the 50%/5 year 'intangible' depreciation amount. If the team is later sold for an even larger amount than it was bought for, it would appear the 'roster depreciation' was just flimflam. This may be why prior to 2004 so many teams were sold after 5 years, the tax deduction could start all over again!

Baseball operates under similar tax law (same link as above): Paul Beeston once said (at the time he was a Blue Jays vice president). "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." If anything, he was being too modest.

So, after writing off half or more of the original cost of a team over a number of years,  a team owner who bought a team for, say, $200 million, may sell it for $300 million, with a $100 million capital gain.  At the same time, over the time he owned it, he may have sheltered $100 million in profits from taxes due to the Roster Depreciation Allowance, along with player salaries every year. What a deal. But it's not good enough for the owners, they want the players to pay for their tax write off 'losses'.

Do the NBA players on the roster get an RDA tax deduction? No.  Do they get a piece of the profits when the team is sold? No. But now the team owners want the players to reduce their salaries so that the players, in effect, will be making up for the paper losses the owners use to avoid taxes.  In effect, the players would be helping to pay the owner back for buying the team.

.ESPN....some issues simply aren't the players' problem. Unless the players can share in the profit when a team is sold, they don't want to be burdened with the costs associated with buying the team in the first place. And if they don't have a say in the team's management decisions, they don't want to pay the cost when those decisions go awry.

It is for these and likely other reasons that NBA players say the league is not being honest about losses, some or most of the stated losses are accounting gimmicks, and are in fact just sugar plums the owners use to avoid taxes. It's bad enough that professional sports team owners have been able to, in essence, double deduct player expenses for over 30 years, thanks to Congress giving them special tax breaks. Now the team owners want to scam not only the taxpayers, but the players, to make even more profits. I hope they fail.

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