## Facts

- Hollywood Baseball Association (HBA), a California corporation, owned and operated the Hollywood Stars, a minor-league club in the Pacific Coast League (PCL).
- The PCL held exclusive organized-baseball territorial rights in Los Angeles and San Francisco, including the related commercial rights to exploit those markets.
- Before the 1958 season, the Brooklyn Dodgers and New York Giants relocated to Los Angeles and San Francisco, displacing PCL interests in those territories.
- HBA adopted a plan of complete liquidation intended to qualify under Internal Revenue Code (I.R.C.) § 337 (1954).
- During the liquidation period, HBA sold certain individual professional baseball player contracts pursuant to established baseball rules permitting and, in some situations, requiring such sales.
- As part of league arrangements to permit the major-league moves, the National League paid $900,000 to the PCL; six PCL clubs, including HBA, each received $150,000 for surrender of territorial and related organized-baseball rights.
- The Commissioner determined income-tax deficiencies for fiscal years ending October 31, 1955, 1956, and 1958, and denied HBA’s claimed § 337 nonrecognition for (i) player-contract sale gains and (ii) the $150,000 territorial-rights receipt.
- HBA also claimed a deduction for organizational expenditures, which the Commissioner partially disallowed.

## Issues

1. Whether gain from non-bulk sales of certain baseball player contracts during a § 337 liquidation was nonrecognizable, or excluded from § 337 as stock in trade, inventory-type property, or property held primarily for sale to customers in the ordinary course of business.
2. Whether HBA’s $150,000 receipt connected to the major-league teams’ move west was ordinary income, or consideration for the sale of property rights covered by § 337 nonrecognition.
3. Whether, and to what extent, HBA could deduct claimed organizational expenses.

## Decision

- The Tax Court held that payments from the non-bulk sale of certain baseball player contracts were not within § 337 and were taxable (ordinary in character).
- The Tax Court held that the $150,000 received for surrender of territorial and related organized-baseball rights was consideration for the sale of property rights within § 337, so gain was not recognized (subject to basis and computational adjustments).
- The Tax Court determined the proper treatment of organizational expenses, allowing some items and requiring capitalization or disallowance of others based on their nature.

## Legal Principles

- Under I.R.C. § 337 (1954), a corporation generally recognizes no gain or loss on sales or exchanges of “property” made within the statutory liquidation period after adopting a plan of complete liquidation.
- Section 337(b)(1)(A) excludes from “property” stock in trade, inventory-type property, and property held primarily for sale to customers in the ordinary course of business; dispositions of such excluded property do not receive § 337 nonrecognition.
- In determining whether an asset is excluded under § 337(b)(1)(A), courts examine the asset’s function in the taxpayer’s business and whether its holding and sale are recurring, operational features of that business.
- Player contracts held by a professional baseball club can be treated as inventory-like/stock-in-trade property when the rules and business practice make acquisition and sale of contracts a central, regular component of operations.
- Payments for surrender of territorial and related organized-baseball rights can constitute consideration for the sale of capital-type property rights rather than ordinary operating receipts, making them eligible for § 337 nonrecognition when disposed of in liquidation.
- Organizational expenditures are generally capital in nature unless shown to be currently deductible under applicable tax rules; proper classification turns on the character and purpose of each expense item.

## Conclusion

The Tax Court distinguished between operational assets and structural property rights: gains from individual player-contract sales were outside § 337 because the contracts functioned as inventory-like property held for sale in the ordinary course, while the territorial-rights payment was treated as consideration for the sale of property rights covered by § 337’s liquidation nonrecognition rule, with organizational expenses resolved through item-by-item classification.


Hollywood Baseball Ass’n v. Comm’r, 42 T.C. 234 (1964)