In a recent field attorney advice (FAA 20133901F), the IRS concluded that signing bonuses paid to professional baseball players should be amortized over the length of the player’s contract, despite the fact that players do not always stay with the team for the full length of the contract.
The taxpayer is a professional baseball franchise that operates major and minor league baseball teams. When players sign a contract to play for one of the taxpayer’s teams, the taxpayer capitalizes and amortizes those bonuses. Major league signing bonuses are amortized by the taxpayer over the life of the player contract. Minor league signing bonuses, however, are amortized over a shorter period, based on a disposal report that shows the average life of minor league contracts over the taxpayer’s history.
The minor league contracts require the player to play for the taxpayer for seven consecutive seasons. The player can terminate the contract only by appealing to the commissioner and only if the taxpayer is in arrears to the player for any payments under the contract. The taxpayer may terminate the contract if the player fails to maintain physical condition or good sportsmanship, obey club requirements or player conduct rules, exhibit skills to continue as a professional baseball player, or breach the minor league uniform player contract.
During the contract period, the player is bound to the organization and cannot play for another baseball team until the taxpayer releases him from the contract. A contract can be terminated if the player has signed a major league contract or is traded to another team. In either situation, however, the taxpayer must agree to the release of the contract.
The baseball contract is an intangible asset eligible for amortization under Section 167. Under Treas. Reg. Sec. 1.167(a)-1(b), the “estimated useful life of an asset is not necessarily the useful life inherent in the asset but is the period over which the asset may reasonably be expected to be useful to the taxpayer in his trade or business or in the production of income.” The field attorney advice also cites Rev. Rul. 67-379, in which the IRS ruled that baseball player contracts, in conjunction with the major league baseball rules, had the effect of long-term contracts in which the team had control over the player so that the player could not play for another baseball team unless released from the contract, regardless of annual salary negotiations.
The IRS concluded that because the taxpayer controlled the player for the entire seven-year life of the contract, seven years was the appropriate amortization period.
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