Owners Losing Money? Don't Believe It!

Two months after Financial World estimated that Major League Baseball earned $204.9 million last year, MLB claims it actually lost $185 million in 1996. Owners have cited these alleged losses to support their demands for everything from a salary cap to new stadiums: these civic-minded businessmen say that they can no longer subsidize our summer entertainment, which will survive only if the players and the taxpayers open their wallets and give generously.

Can they be believed? Well, MLB’s new chief operating officer, accountant Paul Beeston, once admitted, “Anyone who quotes profits of a baseball club is missing the point. Under generally accepted accounting principles, I can turn a $4 million profit into a $2 million loss, and I can get every national accounting firm to agree with me.” Here are some of the tricks owners have used to create phantom losses.

Depreciation of player contracts. When a franchise changes hands, the IRS allows the purchaser to allocate half its price to the value of player contracts, and depreciate this half over five years. Thus if a team sells for $100 million in 1997, it will report $10 million of depreciation in each year through 2001 -- artificial losses which reduce the new owner’s tax liability without actually costing a cent.

Explaining away income. Wayne Huizenga recently placed the Florida Marlins on the market, announcing that the team would lose $30 million in 1997. Huizenga, who also owns the Marlins’ stadium, asserted that the millions he received from luxury box rentals shouldn’t count because it was used to pay off the bonds issued to finance the park. If this is correct, then your mortgage and car payments shouldn’t count against your income, either. Try that one on the IRS...

Hiding income in related businesses. A favorite of large corporations which own teams, this tactic shifts team profits to other divisions of the same company. For example, when Anheuser-Busch owned the Cardinals, the club received no money from the beer and snacks sold at the park. The money a different supplier might have paid the Cardinals for concession rights instead went to Busch’s Budweiser and Eagle Snacks divisions.

The Atlanta Braves show how far this strategy can be taken. Despite their high attendance, NL championship and national cable-TV exposure, the Braves lost money in 1996, according to Financial World. Since Turner Communications owned both the Braves and WTBS, and investors watched WTBS’s bottom line while ignoring the Braves, Turner kept Wall Street happy by shifting at least $40 million in profits from the Braves to WTBS. In fact, the Braves were paid less for their 120-game national cable package (which earned higher ratings than ESPN’s midweek games) than the Red Sox received for games aired only in New England.

Loaning yourself money to buy a team. An ingenious way to transfer funds from the team’s treasury to the owner’s. If Bill Gates decided to buy the Mariners for $100 million, he wouldn’t write a personal check; instead the franchise would be purchased by a corporation he owned. If Gates contributed $100 million in capital to the corporation, its books would look the same as if he personally owned the team -- but if Gates instead loaned the corporation $100 million at 8% interest, the Mariners would owe him interest of $8 million/year for as long as he owned the club. Even if the Mariners had an operating profit of $7.5 million, their books would still show a loss.

So if John Harrington asks you for a handout, just keep walking. Give your money to the Jimmy Fund instead.

Copyright © 1997 Doug Pappas. All rights reserved.
Originally published in the August 1997 issue of Boston Baseball.

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