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Must-click link: how team owners are allowed to lie about their financial losses

Jul 1, 2011, 9:13 AM EDT

Money Bag

This is a basketball item in its genesis, dealing with the New Jersey Nets’ financial documents and inspired by the NBA lockout, but it is relevant for baseball and all other sports as well.

Over at Deadspin, Tommy Craggs, using some older Nets docs, explains how team owners are allowed to list player salaries on their balance sheets twice, thereby dramatically inflating their on-paper financial losses. The little trick — thanks to a specious tax loophole argued for and obtained by Bill Veeck back in the day — allows them to cry poor when it’s time to do battle with the players’ unions at collective bargaining agreement time.

Well, the players unions know about this little tax loophole too, so it’s more about crying poor to the gullible media and gullible fans, but you get the idea.

The specifics here are quite instructive, but even if you don’t care about Craggs’ use of the specifics Nets’ documents, you should at least read the piece to understand that this sort of manipulation of the facts on the ground is a trick that sports owners have been using for years, be it in labor talks, threats to move or contract teams or in their efforts to obtain new stadiums and/or other incentives from local governments and tax payers.

You shouldn’t take anyone’s word about anything when money is involved, but boy howdy, be extra, extra dubious of anything the owner of a sports team tells you when he has his hand out.

  1. Patrick - Jul 1, 2011 at 9:32 AM

    Andrew Zimbalist’s “May the Best Team Win” is another good example of how teams can alter their books to skew financial data.

    • randomdigits - Jul 1, 2011 at 10:11 AM

      As is his “Baseball and Billions”.

  2. opiedamus - Jul 1, 2011 at 9:39 AM

    Nice job, Craig, bringing this to the “everyfan’s” attention. I’ve had this argument w/friends & bar stool pigeons alike. Although, I never went into this kind of detail. My simple explaination was “these guys are big time business men and if you think for a second that they would run a team and accept losing money, you are just dirt dumb.” —– Of course, Mr. McCourt is pushing this theory to their limits….

    Saying that, you have to appreciate the guy who bought the Nets just to get his development approved. That’s brilliant!

  3. Joe - Jul 1, 2011 at 11:44 AM

    The other thing that galls me about this is that the “roster depreciation” minimizes operating income, which is taxable at normal rates. Now, as a result, the value basis of the franchise is reduced. When the franchise is sold (for than the previous purchase price), the seller does get a taxable capital gain, but the capital gain is taxed at a much lower rate. Unless the seller finds a capital “loss” to offset the gain, in which case they probably don’t pay any taxes at all.

    That’s something to remember when all the talk about reducing CG tax rates centers around how this will encourage investment. It does no such thing. What it does is encourage manipulating the numbers so that operating transactions become capital transactions, in order to avoid the payment of income taxes.

    • ta192 - Jul 1, 2011 at 5:04 PM

      Not sure about MLB, but that’s a CATV scam…

  4. tbliggins - Jul 1, 2011 at 12:35 PM

    I refuse to comment on Deadspin, so I will ask it here: if the loss (depreciation) on contracts is a paper only loss, why is there no adjustment for it on the 2004 statement of cash flows? They had an operating cash loss of $20M in 2004 per the audited f/s and had to borrow cash to cover it. I seriously doubt they get double deductions for this – there may be a timing difference, though. What I am missing? I

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