Court Opinion

ID: 4483800
Source: CourtListenerOpinion
Date Created: 2020-01-16 21:16:18.522211+00
Date Added: 2024-06-11T14:53:42.378167
License: Public Domain

Wilbur, J., dissenting: The majority opinion, after correctly rejecting respondent’s mass asset theory, accepts respondent’s concession that the expansion proceeds are taxable as capital gains. The majority states: In the circumstances, we do not consider the possible question whether there was, in fact, a disposition of a portion of a capital asset by reason of the addition of an expansion team to the NBA. Despite this disclaimer, the majority deals with the basis issue by assuming that the league expansion involved the disposition of a capital asset (that is, of a proportionate part of each franchise). This is done by permitting petitioner to reduce the expansion income by the cost of the asset “sold” (a proportionate cost of its entire franchise). I must dissent from this treatment. Over the 8-year period from 1966-74, nine new franchises developed by the efforts of the members yielded total expansion proceeds of over $26 million — and this does not include the subsequent expansion to include several ABA teams. This $26 million did not arise from the “sale” of a portion of each of the existing member’s franchises. The proceeds arise from the development efforts of the members to maximize profits, to use Commissioner Walter Kennedy’s phrase, in a monopolistic situation. As the majority tells us “new successful expansion franchises were the insurance for the continued growth and success of the league.” All of the expansion income arises from these efforts by the owners to develop their business rather than from the sale of a part of their franchises, for they still have their franchises. This can easily be seen by looking at what petitioner had before and after the expansion. As the majority explains: We have said that the most important right possessed by petitioner is the right to play its fellow joint venturers. The second most important right is the right to participate in the college draft, leading to exclusive NBA bargaining rights with the selected players, and thereby giving petitioner an opportunity to field a competitive team. Generally, the greater the artistic success of a team on the court, the larger the gate receipts and local TV and radio proceeds. Clearly, then, these two rights, along with the expansion veteran player rights, generate almost all of an expansion franchise’s income [Supra at 866.] “On these two rights hang all the rest,” the majority notes, adding in the quote above that “these two rights, along with the expansion player rights, generate almost all of the expansion franchise income.” Each expansion enhanced these two rights; and the members possessed these two rights both before and after the expansion. The first and most important of these two rights, according to the majority, “is the right [of petitioner] to play its fellow joint venturers.”1 But it is clear that wo part of this particular right was sold when a new team, such as Phoenix, entered the league. Seattle plays exactly the same number of home games and away games, although against a greater variety of opponents.2 The majority’s findings of fact contain Seattle’s won-lost record for the season 1967-68 through 1970-71, showing the number of games played (half of them at home, the other half away): Total regular Season season games Won Lost 1967-68 .82 23 59 1968-69 .82 30 52 1969-70 .82 36 46 1970-71 .82 38 44 Thus the majority opinion makes it crystal clear that this most important of the two rights, “on which all the rest hang,” is retained intact. Yet they actually go on to allow the expansion proceeds to be reduced as though a portion of this right was sold. The only possible explanation for this extremely surprising result is this following statement by the majority: Exclusive territorial rights, in and of themselves, do not generate income. Certainly in the NBA, and other sports leagues, amateur and professional, the home court or field produces an advantage in economic gain as well as an artistic success. However, without an opposing team to play the game with, these local rights are de minimis. Without an opposing team, there is no game, no gate receipts, no television (local or national), and no league. The rights are not de minimis — they are nonexistent. But this has absolutely nothing to do with the facts before us. Petitioner played 82 home games, both before and after the expansion. Of what relevance then is a discussion about a club “without an opposing team to play the game with”? “The second and most important right” the majority continues, “is the right to participate in the college draft” because “the greater the artistic success of a team on the court, the larger the gate receipts and local TV and radio proceeds.” But the economic basis of this argument simply does not survive analysis. Draft rights have economic value only in the operation of an NBA franchise. The value of the right of each franchise to participate in the future college draft is not measurably diluted by careful expansion. After an expansion, the owners of an existing franchise retain player selection rights in the draft that are as valuable to their franchise as those they possessed before the expansion. It is true that the right to draft has value in enabling a team vis-a-vis its competitors to keep its player pool at a relatively comparable level of competence. It is principally through the relationship of the competence of its players to other NBA teams that the players add value to each franchise. When an additional team is added, so that 15 teams are drafting on each round rather than 14 teams, the relative competence of the players acquired in the draft by any one team vis-a-vis the competence of players acquired by any other team remains constant. Therefore, the value of the players drafted for exploiting the franchise rights do not diminish. It may be true that if the league expanded too quickly the overall quality of the league would decline significantly (even though the competitive balance among the teams remains relatively constant), and the interest in professional basketball would decline and all the franchises would suffer. However, the measured increases through the years, given the increasing pool of fine talent, have not resulted in any discernible decline in talent. Indeed the majority opinion specifically finds (p.832) that “there was a sufficient number of talented basketball players coming out of college to stock the teams as the expansion movement progressed without significant dilution of talented players on the then-existing teams.” It is clear that the value of the draft is attributable to the development efforts of the owners in running the business, the league. Does realizing the fruits of this development through increased sharing of its college draft rights, carefully calculated to avoid diminution of the overall talent pool and to maintain petitioner’s talent pool relative to its competitors, diminish its monopolistic exploitation or simply provide a business means for its enhancement? It seems clear to me that this “second most important right” (like the first one) was not diminished by expansion. ¡ The basis attributable to these interests that were retained undiminished (indeed enhanced) cannot be allowed as a deduction from expansion income. According to the majority, these are the two most important rights “on which the others hang,” since they (along with veteran player rights) “generate almost all of the expansion franchises income.” Since these rights are retained intact, the majority is clearly wrong in allowing a deduction on the assumption that they were disposed of in part. This much is clear without more. But there is more. For a similar comment may be made about local television and broadcast rights (the right to telecast local games not interfering with natiohally telecast games). The findings of fact make clear that this was an important part of the local or territorial franchise rights, yielding $1 million during the first 5 years — more than one-half of the Sonics’ television income during this period. These rights were also retained intact. The majority also lists the right to play and exhibit NBA games within Seattle’s 75-mile territorial radius, the right to exercise a monopoly franchise within that radius, and the right to exploit local goodwill. All these rights were clearly retained and to allow a deduction for part of the basis attributable to these rights makes no sense at all.3  Additionally, petitioner retained its right to share in receipts from a national television contract, the expansion being designed to enlarge those receipts. By adding Phoenix, Seattle, and other prime large city markets in the Northwest and Southwest, the overall interest in professional basketball increases, and the value of a national television contract (particularly if inter-network bidding can be stimulated) increases substantially. The majority opinion makes it clear that one of the main purposes of expansion was to enhance the value of a national television contract. Thus, while there will be additional participants dividing the proceeds of the contract as the result of expansion, it is anticipated in each instance that the increased revenues will more than offset them. Expansion was a result of the development efforts of the NBA members in the ordinary course of their business. The $26 million realized from expansions over the 8-year period from 1966-74 (exclusive of subsequent expansions to include ABA teams) were generated by business operations, by the members exploiting their professional basketball monopoly. Respondent has decided which theories to pursue in this very complex case, and has conceded for purposes of this case that upon failure of his mass asset theory, the expansion income herein is taxable as a long-term capital gain. But he has not conceded that petitioner has parted with assets that entitle it to deduct a portion of its basis in the Seattle franchise. Given the growth in the professional sports — from box lacrosse to soccer — this is an important question.4 The majority, based on the findings and discussions of its own opinion, has clearly decided it wrong. Raum, Tannenwald, Irwin, Quealy, and Hall, JJ., agree with this dissenting opinion.  “It had to be assumed,” the majority informs us, “that petitioner’s principal source of revenue during its early years would be from home box office receipts, it having no right to share in the gate while on the road.”   Presumably this variety encourages regional rivalries, enhancing both home gate receipts and local television revenue. Certainly, introducing the NBA to the major cities of the Southwest is expected to increase substantially the value of a national television contract. (See supra).    Indeed, it is common knowledge that if an expansion team is allowed to encroach on these local or territorial rights, the specific team concerned is awarded compensation in addition to and distinct from the expansion proceeds shared by all of the members generally.    In view of the magnitude of the expansions in the NBA alone, the impact on the other NBA clubs will be significant. When other sports are considered, the potential impact of the decision is even greater.