1968 U.S. Tax Ct. LEXIS 194">*194
It was necessary for petitioner, a minor league baseball club, to enter into working agreements and a league agreement in order to obtain player contracts and participate in organized baseball. Such agreements required sales of such contracts on demand.
49 T.C. 338">*338 This case is before us on remand from the U.S. Court of Appeals for the Ninth Circuit "for fresh fact findings, addressed to the statute
In our original opinion,
On March 21, 1966, the Supreme Court in the case of
On motions granted, 1968 U.S. Tax Ct. LEXIS 194">*197 the parties have filed briefs on this issue without reopening the record.
FINDINGS OF FACT
The facts giving rise to the issue in this case are set out in our original opinion,
Petitioner was a corporation which under the name of Hollywood Stars operated a professional baseball team in the Pacific Coast Baseball League (hereinafter called P.C.L.). On December 17, 1957, its stockholders adopted a plan of complete liquidation.
At the time the plan was adopted petitioner's assets included contracts for the services of professional baseball players. In the year following the adoption of the plan, it consummated the sale of at least six, and possibly eight, of these contracts to the Pittsburgh Athletic Club (hereinafter called Pittsburgh) and to its affiliate, the Columbus Baseball Club. The cost of two of these contracts to petitioner was $ 4,500. They were sold for a total consideration of $ 140,000. A total of $ 27,000 was received for the remaining six contracts which had cost petitioner $ 17,650.
As we found in our previous opinion, the provisions of a player1968 U.S. Tax Ct. LEXIS 194">*198 contract allowed its owner to control a player during his playing life. However, in order to prevent minor league teams such as petitioner's from holding on to a player indefinitely, the P.C.L. and the major leagues entered into an agreement which required petitioner, as a member of the league, to sell each year to any major league team on demand, at least one player contract which had previously been assigned outright to petitioner by a major league team, and to sell the 49 T.C. 338">*340 contracts of all players with 5 years or more of service, to any major league team on demand. This arrangement was known as the player draft. (See provisions in detail at pages 237-238 of our prior opinion.)
In addition to the league requirements, petitioner was party to so-called working agreements with major league clubs during relevant years. Its working agreement was with Pittsburgh during 1957 and 1958, and such agreement provided,
Two hundred twenty-four player contracts were sold by petitioner from 1948 through its fiscal year ended October 31, 1957, at a substantial overall profit. Detailed facts regarding petitioner's receipts from this source and its receipts from all other sources are found in our prior opinion. In 1956 and 1957 petitioner realized a profit of approximately $ 150,000 from the sales of such contracts while losing approximately $ 130,000 on all of its other activities.
Petitioner's sales of player contracts were made as the direct result of the league rules and the working agreements, and such player contracts were petitioner's stock in trade, held principally for sale to customers in the ordinary course of its trade or business, within the intendment of
OPINION
The issue for consideration1968 U.S. Tax Ct. LEXIS 194">*200 is whether petitioner's sales of certain player contracts produced income which is not to be recognized by it under
1968 U.S. Tax Ct. LEXIS 194">*201 49 T.C. 338">*341 Respondent contends that the profits from the sales of the players' contracts are excluded from nonrecognition under
Petitioner's contention is that its primary (principal) purpose (as defined by
Under the remand to us we are to consider the facts of this case under
The Supreme Court in
The purpose of the statutory provision with which we deal is to differentiate between the "profits and losses arising from the everyday operation of a business" on the one hand (
Thus the language of the Supreme Court expressly excludes the profits and losses realized from the normal everyday operation of a business from the beneficial treatment allowed by the statute.
Petitioner was regularly engaged in various activities, all of which combined and interacted with each other to make up one closely integrated business -- the business of operating a minor league baseball club. Petitioner would have us fractionalize this business into classes of those various activities that went to make up its usual, everyday operation of that business and, for the purposes of this case, to ignore or to relegate to a position of minor importance an activity that was a prerequisite to its being in the baseball business at all. This is so because, as petitioner insists and as we have found, petitioner could not have initially obtained or continued to acquire any player contracts suitable for its business without having entered into the league agreement and the working agreements which required that petitioner sell such contracts on demand.
In
The taxpayer in that case had bought corn futures to protect itself against an increase in the price of its principal raw material needed in its manufacturing operations. The Supreme Court held that the transactions were an integral part of the operation of the taxpayer's business, for without them it was faced with the possibility that it would not be able to obtain a ready1968 U.S. Tax Ct. LEXIS 194">*206 supply of its necessary raw material, and at a price to permit of profitable operation.
In attempting to show that profits derived from the futures transactions were to be given capital gains treatment, the taxpayer pointed out that such transactions did not come within any of the exclusions from the term "capital asset" as enumerated in
49 T.C. 338">*343 The Supreme Court held that such transactions were in fact excluded from the definition of capital assets and that their gains were to be taxed as ordinary income, stating:
Nor can we find support for petitioner's contention that hedging is not within the exclusions of
Petitioner's obligations under the league agreement and the working agreements were quite similar to the futures contracts in
In
There are other respects in which the integral tie-in to petitioner's business activities is greater than that in
The sale of 224 player contracts from 1948 through 1957 shows that petitioner's obligation to sell had substance and was a vital, integral 49 T.C. 338">*344 part of the day-to-day operation of its business. As in
Petitioner cites a number of cases where assets used in a business were allowed capital gains treatment upon disposition, even though the sales took place on a regular basis. These include
In the instant case, petitioner had to agree to sell player contracts at a fixed price before it could obtain them. Without entering into the working agreements and the league agreement, it could not have engaged in the professional baseball business at all. The agreements1968 U.S. Tax Ct. LEXIS 194">*211 and the sales thereunder were at the heart and core of its business, essential for its existence, let alone the efficient operation of same.
The situation here is more nearly similar to those found in
Consideration of the entire record in the instant case, and giving due weight to all of the circumstances1968 U.S. Tax Ct. LEXIS 194">*212 surrounding the player contracts, requires us to find and hold that they were an integral part of, and at the heart and core of petitioner's business. They were its stock in trade and were being held by petitioner principally for sale to customers in 49 T.C. 338">*345 the ordinary course of its trade or business within the meaning of
1. All statutory references are to the Internal Revenue Code of 1954 unless otherwise indicated.↩
2.
(a) General Rule. -- If -- (1) a corporation adopts a plan of complete liquidation on or after June 22, 1954, and (2) within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation, less assets retained to meet claims,
(b) Property Defined. -- (1) In General. -- For purposes of subsection (a), the term "property" does not include -- (A) stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year, and property held by the corporation primarily for sale to customers in the ordinary course of its trade or business,↩
3.
For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include -- (1) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;↩