San Francisco Giants fans, giddy from their team’s third World Series win in five years, would be forgiven for scoffing at the notion that their team’s reputation will be worth nothing in 15 years.
Yet an obscure federal tax law allows professional sports team owners to make just that assertion—and to financially benefit from it. A new analysis from the Financial Times suggests part of the impetus behind the L.A. Clippers’ absurd purchase price—at $2 billion, more than 3 times the previous record for an NBA franchise’s sale price—is that new owner Steve Ballmer may be able to receive a tax write off worth more than half of his purchase costs. The source of Ballmer’s tax break, which FT pegs at a cumulative $1 billion, is an obscure tax rule, enacted in 1993 and expanded a decade ago under former Texas Rangers owner George W. Bush, that lets Ballmer reduce his taxable income by the value of something called “goodwill.”
In this case, goodwill is the difference between the $2 billion Ballmer paid for the Clippers and the value of the team’s tangible assets, such as the ballpark and the land it sits on. Goodwill represents intangible assets as varied as media rights, the value of the Clippers logo, and the team’s reputation. Any company with a recognized logo, from Coca-Cola to Burger King, likely has some “goodwill” value associated with the logo and the company’s reputation.
Before 1993, companies were not allowed to gradually write off the value of intangible assets (goodwill) in the same way that they could write off the cost of machinery and equipment. This approach generally made sense because there’s no reason to assume the value of logos and trademarks will decline, let alone disappear. But in 1993, Congress made goodwill an amortizable expense—something to be gradually written off in the same way as items such as heavy machinery, which lose value over time.
The 1993 law allows companies to write off the goodwill of companies they acquire over the fifteen-year period following the acquisition. The law, a boon for corporations, explicitly excluded professional sports teams from using this tax break. But in 2004, President George W. Bush’s American Jobs Creation Act made sure that sports teams were invited to the party, extending the same treatment to sports team owners that had already been given to most other businesses.
The path from the 2004 law to the historically mediocre Clippers’ absurd purchase price seems clearer when one considers Ballmer may be able to get a tax break worth half the cost of the team.
It’s bad enough that the goodwill tax rule allows companies to deduct costs they may never incur—but it’s even worse that wealthy team owners can bid up the asking price of their teams as a tax shelter. In addressing this disturbing practice, Congress could certainly start by reversing the 2004 change allowing sports team owners to use the goodwill tax break, but a more complete response would be to gut the 1993 law.