Opinion ID: 390549
Heading Depth: 1
Heading Rank: 2

Heading: issue on appeal and positions of the parties

Text: 18 In 1970 the NBA expanded by selling new teams in Portland, Buffalo, and Cleveland. The proceeds were distributed equally to the existing owners, including the taxpayer. The issue on appeal concerns the tax treatment of these proceeds.
19 The commissioner conceded that capital gains treatment is appropriate. The Tax Court reasoned from this concession that there was a transfer of a capital asset, and that taxpayer may subtract its basis (the cost of acquiring that asset) in computing the gain it realized from the expansion proceeds. 20 Taxpayer has a unique dual role. First, it is a member of the joint venture which exists to administer a professional basketball league. Second, it is an independent business entity, with full responsibility for its own profits and losses. 21 All team owners make small capital contributions to the joint venture. The amount paid for a new team, however, does not pay for an interest in the joint venture but for the property rights outlined above. The Tax Court labelled these rights (other than the two it permitted taxpayer to amortize) as the basic nonterminable rights possessed by all NBA team owners. 22 The Tax Court reasoned that, because there were 14 owners prior to the 1970 expansion, taxpayer had a 1/14 interest in these rights. After expansion, it had a 1/17 interest. Hence, a proportion of its original interest 3 had been transferred to the expansion teams. The Tax Court held that taxpayer could subtract from the expansion proceeds an equivalent proportion of its $1,000,000 cost (approximately $175,000). 4
23 The commissioner argues that the rights transferred to the new owners were created by the existing teams. 24 (T)he rights obtained by the new teams were not siphoned from the existing teams but rather were entirely new rights created when the league approved the expansion plan and granted the franchises. 5 25 The commissioner concludes that the franchise rights acquired by the taxpayer were not transferred to the new owners and, therefore, taxpayer has no basis to subtract from the amount realized in computing taxable gain. 6
26 Taxpayer makes two arguments in support of the Tax Court's decision. First, it argues that its basic nonterminable rights can be treated as a partnership interest, and that it sold a portion of this partnership interest to the new owners. Second, taxpayer identifies specific, valuable rights that it transferred to the new owners.