Selig v. United States

Bud Selig was part of an effort to bring a new baseball franchise to Wisconsin. As part-owner of the Milwaukee Brewers, Selig negotiated to purchase an American League team that was in financial difficulty, the Seattle Pilots. The deal was contingent upon the team moving from Seattle to Milwaukee and payment of the purchase price, $10.8 million. The contract allocated the $10.8 million to equipment and supplies, league membership, and player contracts (representing $10.2 million of the $10.8 million). The Brewers' financial officer decided to retain the $10.2 million allocation. Selig then amortized that cost over the players' five-year useful lives under Section 167(a) of the Internal Revenue Code. The IRS disallowed the entire $10.2 million allocation, arguing that the players' contracts had zero value. Selig paid the deficiency amount assessed by the IRS, but subsequently filed a lawsuit.

The key issue in this case was whether there was proper allocation of the purchase price to the franchise and the cost of the player contracts.

The district court held that Selig properly allocated $10.2 million of the $10.8 million purchase price of the Seattle Pilots to the value of the 149 players that he bought.

On appeal, the government argued that the $10.2 million allocation was "contrary to common sense."[4] The government focused on the specific value of the allocation (i.e. $10.2 million) by attempting to prove that the players were not "worth" $10.2 million.

The players' contracts were properly valued as a whole (rather than combining individual contract values), and the franchise was not worth more than the purchase price.

At the time of the sale, Milwaukee was not a commercially successful baseball climate. As such, a baseball franchise in Milwaukee was not as valuable as franchises located elsewhere. For this reason, the court determined that the Pilots' franchise was not worth more than Selig claimed. Rather, the key inquiry was the value attributed to the players.

The purchase price of the club itself required allocating that price among all of the club's assets (e.g., equipment, players, league fees), not simply assigning a dollar value to each player (as in the free agent market). This transaction was essentially the bulk purchase of all of the Pilots' players in an arms-length transaction with no restrictions. Because this sort of bulk sale was the reality of the "club" market, the players should be valued in accordance with the market's nature.

Congress enacted Section 197 of the Internal Revenue Code to clarify disputes and provide rules for amortization (i.e. cost recovery for intangible assets).