*1698 Petitioner is entitled to deduct exhaustion of players' contracts in the computation of its net taxable income and it is also entitled to deduct the cost, less exhaustion, of such contracts sold during the taxable years in determining the gain or loss sustained thereon.
*69 The above entitled proceedings, consolidated for hearing and decision, are for the redetermination of deficiencies of $2,619.26 and $873.28 for the years 1926 and 1927, respectively, growing out of the following alleged errors on the part of the respondent:
1. Disallowance of $16,200 in 1926 and $18,200 in 1927 as ordinary and necessary expenses, representing the cost of baseball players' contracts purchased during said years, respectively, or
2. If the respondent did not so err, he erred in failing to determine that gross income should be reduced by the cost of players' contracts purchased prior to the taxable years which were sold in said years, or
3. If the respondent did not err with respect to the sum of $18,200 in the manner alleged, he erred*1699 in failing to determine that gross income should be reduced by $10,000, representing the exhaustion of players' contracts, and
4. In disallowing $129.00 as an ordinary and necessary expense, representing donations and additional compensation paid employees.
The foregoing issues were presented for consideration upon the pleadings and stipulation of facts read into the record at the hearing, from which the following findings are made.
FINDINGS OF FACT.
Petitioner is a corporation, organized and incorporated under the laws of the State of Texas, with principal office at Houston.
The following is a typical form of contract of employment used by the contracting parties in respect to the issues here involved:
*70 CONTRACT
Approved by the
NATIONAL ASSOCIATION OF PROFESSIONAL BASE BALL LEAGUES
Uniform Player's Contract
IMPORTANT NOTICE - The attention of both Club and Player is specifically directed to the following excerpt from Article II, Section 1, of the Major-Minor League Rules:
"No Club shall make a contract differing from the uniform contract and no club shall make a contract containing a non-reserve clause, except permission first be secured * * * *1700 from the National Board or the Advisory Council. The making of any agreement between a Club and Player nt embodied in the contract shall subject both parties to discipline by the Commissioner or the National Board."
IMPORTANT NOTICE - The attention of both Manager and Player is directed to the constitutional change which requires that all claims must be presented prior to the next annual meeting of the National Association and within 60 days of the maturity of claim.
The herein called the Club and of herein called the Player.
The Club is a member of the National Association Baseball Leagues. As such, and jointly with the other members of the National Association of Professional Baseball Leagues, it is a party to the National Association Agreement, and to the Major-Minor League Agreement and Rules with the American League of Professional Baseball Clubs and its constituent clubs and with the National League of Professional Baseball Clubs and its constituent clubs. The purpose of these agreements and rules is to insure to the public wholesome and high-class professional baseball by defining the relations between club and player, between club and club, between league and league*1701 and by vesting in a designated Commissioner and National Board broad powers of control and discipline and decision in cases of disputes.
In view of the facts above recited the parties agree as follows:
1. The Club hereby employs the Player to render skilled service as a baseball player in connection with all games of the Club during the year 1930 including the Club's training season, the Club's exhibition games, the Club's playing season, and any official series in which the Club may participate and in any receipts of which the Player may be entitled to share; and the Player covenants that he will perform with diligence and fidelity the service stated and such duties as may be required of him in such employment.
2. For the service aforesaid the Club will pay the Player an aggregate salary of $ as follows:
In semi-monthly installments after the commencement of the playing season covered by this contract, unless the Player is "abroad" with the Club for the purpose of playing games, in which event the amount then due shall be paid on the first week day after the return "home" of the Club, the terms "home" and "abroad" meaning, respectively, at and away from the city in which*1702 the Club has its baseball field.
If a monthly salary is stipulated above, it shall begin with the commencement of the Club's playing season, (or such subsequent date as the player's service *71 may commence) and end with the termination of the Club's scheduled playing season, and shall be payable in semi-monthly installments as above provided.
3. (a) The Player during said season will faithfully serve the Club or any other Club to which, in conformity with the agreements above recited, this contract may be assigned, and pledges himself to the American public to conform to high standards of fair play and good sportsmanship.
(b) The Player represents that he does not, directly or indirectly, own stock or have any financial interest in the ownership or earnings of any club, except as herein expressly set forth, and covenants that he will not hereafter, while connected with any club, acquire or hold any such stock or interest except in accordance with the Major-Minor League Rules.
4. The Player will not play during said year otherwise than for the Club or for such other Clubs as may become assignees of this contract in conformity with said agreements.
5. (a) In case*1703 of assignment of this contract to another Clubthe Player shall promptly report to the assignee club; accrued salary shall be payable when he so reports; and each successive assignee shall become liable to the Player for his salary during his term of service with such assignee, and the Club shall not be liable therefor. If the transaction of transfer of services is between two clubs of of same classification in the National Association of Professional Baseball Leagues, the salary rate shall be as first specified in contract. If the assignee is any other Club, the salary rate shall be the same as that usually paid by said club to other players of like ability.
(b) This contract may be terminated at any time by the Club or by any assignee.
6. The Player accepts as part of this contract the regulations printed on the third page hereof and also such reasonable modifications of them and such other regulations as the Club may announce from time to time.
7. (a) The National Association Agreement and the Major-Minor League Agreement and Rules, and all amendments thereto hereafter adopted, are hereby made a part of this contract, and the Club and Player agree to accept, abide by*1704 and comply with the same and all decisions of the National Board and Commissioner pursuant thereto.
(b) It is further expressly agreed that, in consideration of the rights and interest of the public, the Club, the league president, the National Board or the Commissioner may make public the record of any inquiry, investigation or hearing held or conducted, including in such record all evidence or information given, received or obtained in connection therewith, and including further the findings and decisions therein and the reasons therefor.
8. (a) Each year, on or before March 1st (or if Sunday, then the succeeding business day) next following the playing season covered by this contract by written notice to the Player, the Club or any assignee thereof may renew this contract for the term of that year except that the salary rate shall be such as the parties may then agree upon, or, in default of agreement, such as the Club may fix.
(b) In default of agreement, the Player will accept the salary rate thus fixed or else will not play otherwise than for the Club orf for an assignee hereof, subject to the right of appeal as provided in paragraph 9.
(c) The reservation to the*1705 Club of the valuable right thus to fix the salary rate for the succeeding year and the promise of the player not to play during said year otherwise than with the Club or an assignee hereof, have been taken into consideration in determining the salary specified herein and the undertaking by the Club to pay said salary is the consideration for both the reservation, renewal option and promise, and the Player's service.
*72 9. In case of dispute between the Player and the Club or any assignee hereof the same shall be referred to the National Board or the Commissioner as the case may be, as an umpire, and the Board's decision shall be accepted by all parties as final, subject only to such right of appeal as is given to the Player only, under the terms of the National Association Agreement and Major-Minor League Agreement and Rules.
10. The Club and Player covenant that this contract fully sets forth all understandings and agreements between them, and agree that no other alleged understandings or agreements, whether heretofore or hereafter made, shall be valid, recognizable, or of any effect whatsoever, unless expressly set forth in a new or supplemental contract executed*1706 by the Player and the Club (acting by its president - and that no other Club officer or employee shall have any authority to represent or act for the Club in that respect), complying with all agreements and rules to which this contract is subject.
This contract shall not be valid or effective unless and until approved by the league president and National Board. * * *
The parties have stipulated that, if under the law the petitioner is to be allowed any amount as a deduction for the cost of players' contracts purchased prior to each of the taxable years 1926 and 1927 which were sold in said years, the unexhausted cost thereof was $18,168.19 in 1926 and $3,931.81 in 1927, and the cost less exhaustion was $16,166.14 in 1926 and $2,538.18 in 1927; that the exhaustion of such contracts in both taxable periods should be calculated on the basis of the useful playing life of a professional baseball player of 10 years, or 10 per cent; that if it is found, as a matter of law, that petitioner is entitled to exhaustion upon players' contracts, the proper allowance therefor is $2,233.43 for 1926 and $2,260.25 for 1927; and that $110 is properly allowable as a deduction on account of donations*1707 as set forth in the fourth numbered issue hereinabove.
It was further stipulated, respecting the second numbered issue, hereinabove, that is, the disallowance of deductions on account of the cost of contracts purchased prior to the taxable years, that the petitioner has already received allowance for those amounts as to both years by reason of the deduction in its returns, in previous years, as current business expenses.
In the determination of these deficiencies the respondent has disallowed $16,200 in 1926 and $18,200 in 1927, as deductions from gross income, representing the purchase price of contracts for the services of baseball players, which sums he capitalized in accordance with the decision of this Board in . In the respondent's deficiency notice for 1927 he allowed a deduction of $11,850 as the "cost of contracts sold" representing those contracts which he capitalized in 1926 and which were sold or relinquished during 1927, and he states therein that "Due to method of reporting income, no claim for cost was made, *73 since the cost was charged to expense for the year 1926. The cost set up on December 31, 1926, has*1708 therefore been allowed. * * *"
OPINION.
LOVE: Issue numbered 1 hereinabove has been expressly abandoned by the petitioner and need not be considered.
With respect to the issue numbered 4, the parties have stipulated that $110 is the proper amount allowable as a deduction from gross income in 1926.
Therefore, our considerations may be confined to issues numbered 2 and 3.
Petitioner contends, as set forth in issue numbered 2, that it is entitled to deduct the cost of players' contracts which it purchased prior to each of the taxable years in question and which were sold in said years, irrespective of the fact that such cost had been deducted as ordinary and necessary business expenses in prior years.
The contracts, and in fact the issues presented, are for all practical purposes identical with those involved in the . There the Board denied petitioner's contention that the costs of such contracts were deductible as ordinary and necessary business expenses and it held, because of the renewal clause in such contracts, giving petitioner or its assignee the right to renew from year to year throughout the professional*1709 life of the player, and notwithstanding the initial engagement of the contracting parties was only one year, that the costs thereof were capital expenditures instead. With the nature of these contracts thus defined by the Board, clearly the petitioner is entitled to compute its gain or loss upon the future sale thereof in the same manner as any other capital asset.
The respondent's counsel concedes that "This allowance, as well as allowance for exhaustion, would be proper under the Dallas Athletic Association decision, but the petitioner has already been allowed deduction of the full cost of all Players' contracts purchased in prior years, as current business expenses." This we can not concede. The mere fact that an error was committed in prior years, which appears to have been in perfect good faith, does not justify the commission of additional errors. This same state of affairs has been found to exist in innumerable cases heretofore prosecuted before this Board, and we have repeatedly held in accordance with , wherein we said:
If the amounts expended were actually paid out in acquiring patents, the deduction*1710 of such amounts as ordinary and necessary expenses of carrying on a trade or business was not proper. The fact that a taxpayer did deduct such *74 items or considered them as expenses does not alter the situation. Such treatment was erroneous. The taxpayer has no option to treat expense items as capital or capital expenditures as ordinary and necessary expenses of carrying on a trade or business and had a right, as it did, to change its eroneous accounting methods. The patents, when acquired, formed a part of the capital investment of the taxpayer and the costs thereof were not ordinary and necessary expenses of carrying on its trade or business.
See also ; ; ; and .
We are, therefore, of the opinion that petitioner should be sustained as to the second issue.
The third and final issue for determination is whth respect to the exhaustion of players' contracts.
The respondent concedes that normally this issue, too, would be controlled by the Dallas Athletic Association*1711 case, but he contends, as he did with respect to the preceding issue, that deduction has already been allowed for the full cost of players' contracts as current expenses and therefore no exhaustion should be allowed. For the same reason already given respecting the said preceding issue, we can not concede the respondent's contention. In , we said:
Having concluded that the amounts paid for the contracts represent capital expenditures, can it be said that these contracts were exhausted by the lapse of time? Each contract covered only the playing season the year in which or for which it was made, but was according to its terms renewable by the club or its assignee for the succeeding year. By virtue of the renewal provisions, the rights acquired under each contract extended beyond the year when the contracts were acquired. The ultimate result would have been the same if a single contract had been made with each player for an indefinite or undetermined period, subject to an annual salary adjustment under the conditions stated. While under certain facts and conditions contracts for an indefinite period may in fact become exhausted*1712 over a reasonably ascertained or estimated period of time, no evidence has been introduced in this case from which it can be ascertained when the contracts will become exhausted for the purpose of determining the allowance with respect thereto. The determination of the respondent must, therefore, be approved.
The evidence found missing there has been supplied here by the stipulation of the parties by which they have not only agreed that the exhaustion of such contracts should be calculated upon the basis of the useful playing life of a professional baseball player of 10 years, but they have actually determined and stipulated the amounts deductible in each of the taxable years in question. We are of the opinion, therefore, that this issue should also be resolved in favor of the petitioner.
Decision will be entered under Rule 50.