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Tax write-off may help ease owners' losses
Seattle Times staff reporter
The losses suffered by Sonics owners over the past five years could grant them a substantial tax break — either now or when they sell the team.
When owners complain about losing money, they usually refer to nearly $60 million in operating losses since 2001. That figure represents real cash losses, and is backed up by team financial documents released to state lawmakers earlier this year.
But the same documents show the owners' partnership, The Basketball Club of Seattle, has reported on-paper losses of at least three times that amount — $183 million — to the IRS.
That larger loss can be cited by owners to cut taxes on other business investments.
The tax write-off stems from an accounting rule that allows sports-franchise owners to claim a special expense associated with player contracts. Basically, for the first several years after they buy a team, owners get to treat player contracts like new cars — which lose value as soon as they leave the lot.
Teams get to claim that decrease in value as an expense even though it doesn't actually cost them money.
One Sonics investor, Mercer Island businessman Jack Rodgers, confirmed he has used the write-off. "It doesn't change a loss to a profit, but it does give me an opportunity to write off some losses," Rodgers said.
But Rodgers and other owners said the real operating losses suffered by the team outweigh any tax advantages.
Last year, the team issued a "capital call" requiring owners to contribute a total of $17 million to cover team expenses in the wake of its ongoing operating losses.
"It's a painful thing writing a big check like that," said Pete Nordstrom, a team owner and president of merchandising for his family's upscale retail chain. "We're staring down the barrel of more of those."
"You always have to take into account the tax benefit, particularly with people who have income from other sources," said Robert Willens, who specializes in sports banking and tax policy as a managing director at Lehman Brothers, a New York-based investment bank. "Is it their primary focus? Probably not. But it is a great benefit to have along the way."
There are limits to the write-off. For most owners, the Sonics' annual losses cannot offset taxes on their salaries or profits from stock sales. Sonics chairman Howard Schultz, for example, cannot use the team's losses to cut taxes on his income from Starbucks. But the losses can be counted against profits from other types of investments, such as rental properties or private business partnerships.
If owners don't use the tax write-off now, they can use it later if the team is sold. That's because the "piled up" losses become fully tax deductible in the year the team is sold, Willens said. In that case, Schultz, for example, could write off his losses from the team against anything, including profits from the team sale or his Starbucks income, according to Willens.
The write-off can be traced back to the so-called "roster depreciation allowance" invented by flamboyant baseball entrepreneur Bill Veeck, who owned the Cleveland Indians, Chicago White Sox and St. Louis Browns.
After buying the White Sox in 1959, Veeck wanted to write off the value of the player roster for tax purposes. He argued players "waste away" like livestock, and so players, like cows, should be tax deductible, according to Rodney Fort, a professor of economics at Washington State University.
"Look, we play the Star-Spangled Banner before every game — you want us to pay income taxes, too?" Veeck wrote in his 1962 memoir, "The Hustler's Handbook."
Veeck filed tax returns claiming the roster depreciation write-off, and the IRS agreed.
The write-off can be difficult to make sense of outside the arcane world of accounting. But there is a justification, Willens said. Congress allows such write-offs essentially to subsidize businesses — allowing them to pay less in taxes so that they'll have money to replenish machinery and other assets as they wear out. For sports teams, the most valuable assets are their players.
Essentially, the owners get to write off the declining market value of the player contracts as a loss while also counting the annual salaries paid the players as an expense.
Hypothetically, if a Sonics owner was in the 35-percent income-tax bracket, and could claim a $10 million share of the team's losses, the owner could erase $3.5 million in taxes on profits from other investments.
The potential tax write-off is often biggest in the early years of ownership. For example, in 2002, the Sonics reported an operating loss of about $9.5 million, based on actual expenses, but claimed additional depreciation, allowing the team to report a loss of more than $50 million to the IRS.
The tax benefit fades over time. That's because owners can only write off contracts of players who were on the team when it was purchased. For example, the Sonics were able to write off the contract of former point guard Gary Payton, but not the contract of shooting guard Ray Allen, who joined the team in 2003 as part of a trade for Payton.
Sonics President Wally Walker said tax issues have never influenced the owners' decisions. "In the five years of our partnership, I haven't heard the tax benefits come up at all," he said.
But in 2004, Congress changed the tax rules in a way that could make the Sonics even more valuable if the team is sold.
The new rules allow future buyers of sports franchises to write off 100 percent of a team's purchase price over 15 years. Tax experts told The New York Times the change would likely boost the collective value of the nation's professional sports teams by $2 billion.
The new rules could provide additional motivation to sell the team.
"Now might be a good time to get out," said Fort, of WSU, who has written or edited five books on sports economics. "They have simply run out of their depreciation shelter. It is time to make some real business decisions."
Jim Brunner: 206-515-5628 or email@example.com
Copyright © 2006 The Seattle Times Company