Selig v. United States.

Facts

P and others organized the Milwaukee Brewers Baseball Club, Incorporated in an effort to secure another franchise for the city. The American League voted to add two expansion teams to begin play in 1969. The league awarded the franchises to organizations in Kansas City and Seattle. The Seattle Pilots and the Kansas City Royals each paid $5.25 million for thirty players ($175,000 each) acquired from the ten other AL teams through an expansion draft, and $100,000 for their franchises. In anticipation of getting its franchise, the Seattle organization bought the Seattle Angels, a AAA minor league club, and signed a working agreement with another minor league club in Newark, New York. The Seattle Pilots sunk into financial difficulties with operating expenses of more than $3.7 million. The Pilots' owners decided to sell the team. By September 1969, the parties tentatively agreed that P would buy the Pilots, including 149 players, for $10.8 million. The deal was stymied by the league's continued reluctance to approve the move to Milwaukee. The bankruptcy court rescued the deal by ordering the sale of the Pilots by April 1, 1970, and on that day the transaction was completed. The contract allocated $100,000 of the purchase price to equipment and supplies, $500,000 to the value of the franchise including league membership, and $10.2 million to the player contracts. The $100,000 allocation is not contested. In the fall of 1970, the Brewers solicited four separate appraisals of their 149-man roster as of April 1, 1970. The appraisals established an average value of $10,043,000, and the Brewers' financial officer decided to retain the $10.2 million allocation. P then amortized that cost over the players' five-year useful lives under Section 167(a) of the Internal Revenue Code. The $500,000 allocated to the franchise could not be amortized, because the franchise had no definable limited useful life. P thus benefited by allocating as much of the purchase price of the Pilots as possible to the value of the player contracts. D disallowed the entire $10.2 million allocation and attributed zero value to the player contracts. P received deficiency notices totaling a little more than $141,000. P paid the deficiencies plus interest and applied for a refund in 1980. In March 1981, the refunds were disallowed and P filed this suit. The court held that P's allocation was proper. The court noted that baseball players are bought, sold, and traded in three principal markets. The most common is the 'player' market, in which the teams negotiate transactions involving individuals or small groups of players. Most of the transactions in the player market involve players traded individually for dollars or for other players given up at the time of the trade or a specified later time. The player market reflects the value of individual players to existing teams dealing with other existing teams. The player market is not a 'free' market. Under certain circumstances, the rules fix the price of players in this market. The district court thus determined that data from transactions in the player market were not reliable for establishing the value of the Brewers' 149-man roster in 1970. The second market is the free agent market. In that market, players who have never before contracted with a major league or minor league club individually negotiate their contracts. Prices are not fixed in the free agent market. The district court determined that the values of individual free agents were not representative of the value of players in a bulk sale of club assets. Player contracts also are purchased when entire teams are sold. Those sales include all of a team's physical assets in addition to the player contracts and the franchise rights. The district court held that this 'club' market most accurately reflects the value of the team and its players because the purchase price results from arms-length negotiations between a willing buyer and a willing seller. P offered four appraisals. The first appraisal, prepared by Frank 'Trader' Lane, established a roster value of $10.35 million. Lane was a friend of P and later became general manager of the Brewers. The court ruled that this relationship did not taint the appraisal. Cedric Tallis, general manager of the other 1968 expansion club (Kansas City), prepared the second appraisal. He also calculated a value of $10.35 million for the Brewers' player contracts. Tallis relied both on personal observations and on statistics in formulating his appraisal. The court accepted these two and claimed the other two were not done by someone who was sufficiently independent. An economics expert testified that because Milwaukee had a smaller population than most other major league cities and competed with several other franchises for fan support, the Brewers franchise was not very valuable. The district court ruled that all of this evidence was admissible and supported the $10.2 million allocation to the player contracts. D offered the expert testimony of economist Roger Noll. One method calculated the percentage of revenues that were sensitive to the quality of the team. This was set at one-third of all revenues. Once determined, the same percentage became the percentage of the purchase price of the team properly allocable to the player contracts. The second method employed a sophisticated multiple regression analysis to set a value for each of the 149 players. Noll concluded that the players' contracts were worth no more than $6 million. The court rejected the income sensitivity analysis because the percentage of revenues assigned to team quality bore no necessary relationship to the fair market value of the player contracts. The court accepted the validity of the regression analysis but nonetheless deemed the results unpersuasive principally because the initial data relied on player values set in the player market rather than in the club market. D offered two appraisals. The first was prepared by Dewey Soriano, president of the Seattle organization that secured the Pilots in 1968. He set a value of $3.2 million for the player contracts. The court ruled that Soriano's estimate was unreliable because it was significantly lower than the value Soriano put on the players when he sold the team to the Brewers in 1970. Richard Walsh was general manager of the California Angels from 1968 to 1971. He calculated the roster value at $5.1 million. The court discounted it because it was based mainly on transactions in the player market and was the product of statistical research rather than first-hand knowledge of the players. The court did not accept D's evidence that was based on transactions in other markets other than the club market. The court ruled for P. D appealed.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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