Hollywood Baseball Association v. Commissioner of Internal Revenue

42 T.C. 234 (1964)

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Hollywood Baseball Association v. Commissioner of Internal Revenue

United States Tax Court
42 T.C. 234 (1964)

Facts

In October 1957, the Brooklyn Dodgers (Dodgers) and New York Giants (Giants) of the National League (NL) of Major League Baseball (MLB) decided to move from New York City to Los Angeles (LA) and San Francisco (SF), respectively. The Pacific Coast League (PCL) was an eight-team minor league, with franchises in, among other places, LA, Hollywood (in LA), and SF. The Dodgers and Giants owned the PCL’s LA and SF clubs. The Hollywood Baseball Association (HBA) (plaintiff) owned the Hollywood club. Pursuant to an agreement between the PCL and MLB, the PCL had the exclusive right to play organized baseball (i.e., MLB or MLB-affiliated minor-league baseball) in LA and SF. This exclusivity provided the PCL’s clubs with the sole and valuable rights to, among other things, sell tickets, concessions, advertisements, and broadcasting rights in LA and SF. The PCL thus was entitled to compensation if MLB located a club in LA or SF. After extended negotiations in which the parties evinced their intent that the PCL transfer—and the NL acquire—the right to play organized baseball in LA and SF, the NL paid the PCL $900,000, with each of the six PCL clubs not owned by the Dodgers or Giants to receive $150,000. To preserve the PCL and to give the Dodgers and Giants a monopoly on organized baseball in LA and SF, (1) the Hollywood club was liquidated, (2) a new replacement club was introduced in Salt Lake City, and (3) the PCL’s LA and SF clubs moved elsewhere. The HBA treated its $150,000 payment as nontaxable pursuant to § 337 of the federal tax code, which provided that “no gain or loss shall be recognized . . . from the sale or exchange . . . of property” in connection with a liquidation. The commissioner of the Internal Revenue Service (IRS) disagreed, issuing an assessment of almost $9,000. Per the IRS, § 337 was inapplicable because the PCL did not sell property to the NL. The HBA challenged the assessment in the United States Tax Court, arguing that the IRS failed to meet its burden of proving that § 337 did not apply.

Rule of Law

Issue

Holding and Reasoning (Forrester, J.)

Dissent (Raum, J.)

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