In 1975, a trial was held to settle a tax dispute between the owners of the Atlanta Falcons of the NFL and the IRS. In 1996, the owners of the Falcons paid $8.5 million to purchase the franchise. The owners considered $50,000 to be the cost of the franchise (which is not depreciable for income tax reporting), $727,000 was deferred interest, and the remaining $7.7 million was claimed to be the cost of players' contracts and options. The dispute centered around the following:
- How much of the purchase price was assigned to television rights?
- Can the value assignable to television rights be amortized? If so, what is the expected life?
- How much of the purchase price was assignable to player contracts and options?
- Over what life should the value assigned to the players be depreciated?
- What is the value of the franchise?
As a public accountant hired to assist in this case, explain what approach you would take and the information you would need to provide advice to the court for the resolution of the points in dispute.
In your opinion, do these valuation issues also create any ethical issues? If so what are they?