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Unfair Trade Advantage: Salary Deprecation Allowance (Part 3 of 4)

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Unfair Trade Advantage: Salary Deprecation Allowance (Part 3 of 4)

by Robert Whiting (April 2008)

Continuing our discussion of unfair trade advantages, begun in a previous column, here is the basic thesis re-stated: MLB enjoys certain benefits under US law and custom that give it a decided advantage over the NPB in competition on the international market for players and for fans. NPB teams may be poor at making money through baseball, but the gap between them and MLB teams would not be so great if the MLB did not have what could reasonably be called these "unfair trade advantages."

One of these unfair trade advantages is in something called salary depreciation. Consider the following example: Super financier and commodities trader John Henry and his partner Tom Werner bought the Boston Red Sox and the Red Sox affiliated TV company New England Sports Network in 2002 for a total of $700,000,000. According to U.S. tax and accounting rules, the buyer of a baseball team can claim 50% of the purchase price as residing in player contracts and that owner is allowed to amortize this over the first five years of his team ownership. Now 50% may seem high, but you must remember that the Red Sox (like most MLB teams and unlike NPB teams) have signed most of their players to long term contracts -- like Daisuke Matsuzaka's six-year $50 million pact. That depreciation rule means the Red Sox, for each of the past five years, have been able to make a whopping bookkeeping entry of $70 million annually in the loss column. Given a total yearly revenue of around $200 million dollars and expenses of about $150 million, the depreciation rule allows the Red Sox to operate at a loss, which means a big savings of millions of dollars in federal and state taxes.

The Red Sox can play other tricks as well. The Red Sox and NESN are owned jointly by the same people, even though they are technically separate companies. NESN telecasts Red Sox games, but pays a price of far below market value for them. This practice lowers the total revenue the Red Sox have on the accounting books which will in turn further increase savings on taxes, thereby freeing up more money to spend on acquiring expensive players like Daisuke Matsuzaka. Red ink on the books is always useful when it comes to contract negotiation time with 'greedy' players (or when it comes time to convince the city that you need a new ballpark and want the municipal government to pay for it).

Red Sox owner John Henry, a super-successful commodities trader sitting on his $84 million yacht in the Bahamas is praised in the media as a business genius. However, the truth of the matter is that all you really need to do to make money in Major League Baseball, is have enough money to buy a team and have a certain social standing.

Henry bought the Red Sox and NESN for $700 million. In five years, the total overall value of that purchase has nearly doubled. And he will walk away with an enormous profit, if and when he decides to sell the team. This state of affairs would change instantly if the taxpayer subsides were taken away and MLB club owners really had to work for their money.

It might also help the NPB be a little more competitive in keeping their own talent.

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