                        T.C. Memo. 2002-248




                      UNITED STATES TAX COURT



           TAMPA BAY DEVIL RAYS, LTD., NAIMOLI BASEBALL
      ENTERPRISES, INC., TAX MATTERS PARTNER, Petitioner v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 7452-00.              Filed September 30, 2002.



     Denton N. Thomas and Susan V. Sample, for petitioner.

     Robert W. Dillard, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   Respondent determined adjustments to the

Federal partnership tax returns of the Tampa Bay Devil Rays, Ltd.

(the partnership) for 1995 and 1996 as follows:
                                - 2 -

                                           Income
                    Year                Adjustments
                    1995                $3,328,455
                    1996                 3,689,182


     Unless otherwise indicated all section references are to the

Internal Revenue Code for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

     The primary issue for decision is whether deposits the

partnership received in 1995 and 1996 on advance season tickets

and on private suite reservations for major league baseball games

expected to be played in 1998 are to be included in the income of

the partnership when received in 1995 and 1996, or in 1998, the

year to which the advance season tickets and the private suite

reservations related and the first year in which the

partnership’s major league baseball team (the Devil Rays) played

major league baseball.


                           FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

     The partnership was formed as a limited partnership on

August 10, 1994, under the laws of the State of Florida.   At the

time the petition was filed, the partnership’s principal place of

business was located in St. Petersburg, Florida.

     The partnership was formed to acquire, own, manage, and

operate a major league baseball team in St. Petersburg, Florida.
                                - 3 -

     Petitioner, Naimoli Baseball Enterprises, Inc., is a Florida

corporation and functions as the tax matters partner of the

partnership.

     On March 9, 1995, in return for commitments by the

partnership to pay a $130 million franchise fee and to meet other

specified conditions, members of the American and National

Leagues of major league baseball (hereinafter generally referred

to simply as major league baseball) adopted a resolution under

which the partnership was conditionally awarded one of major

league baseball’s expansion franchises.   The resolution

established a procedure for the eventual approval of the

partnership and the Devil Rays to participate in major league

baseball.

     On March 24, 1995, the partnership and major league baseball

entered into an agreement under which the partnership would

become a full, participating member of major league baseball upon

the satisfaction, no later than November 30, 1997, of the

conditions specified in the above resolution and agreement.

     Under the resolution and agreement, the major requirements

and conditions that the partnership had to satisfy prior to

receiving final approval for participation in major league

baseball are described below:
                                - 4 -

     (1) Obtain the funding and lines of credit sufficient to pay
     the $130 million franchise fee and to provide the working
     capital funds necessary for operation of a major league
     baseball team;

     (2) Make full payment of the $130 million franchise fee
     according to the following schedule:


                   Due Date                 Amount
                 July 1, 1995            $32 million
                 July 1, 1996             25 million
                 July 1, 1997             40 million
                 Nov. 1, 1997             33 million


     (3) Obtain the funding for and complete renovation of the
     Thunderdome, the existing, domed stadium in St. Petersburg,
     Florida, obtain approval from the Commissioner of major
     league baseball of the completed renovations to the stadium,
     and obtain a use lease on the stadium effective January
     1998;

     (4) Obtain from the pre-existing minor league baseball
     teams located in the geographic region of
     St. Petersburg, Florida, the territorial or license
     rights to operate in the region a professional baseball
     team; and

     (5) Establish a minor league baseball system.


     As indicated, the resolution and agreement did not

constitute either the partnership or the Devil Rays a final

member of and participant in major league baseball.    The

partnership and the Devil Rays were not yet permitted to sign

players to major league contracts, nor to field a major league

baseball team.   Rather, the resolution and agreement authorized

the partnership to proceed to establish an expansion franchise

that would, subject to the fulfillment of the various conditions
                                - 5 -

no later than November 30, 1997, be subject to final approval by

the members of major league baseball.   If approved, the

partnership would then be permitted to sign major league baseball

players and to field a major league baseball team for

participation in major league baseball beginning with the 1998

major league baseball season.

     On April 28, 1995,1 the partnership executed with the city

of St. Petersburg, Florida, an agreement for the renovation,

management, operation, and use of the Thunderdome for major

league baseball beginning with the 1998 season.   Renovations to

the stadium began in 1995.

     From March 1995 through early November 1997, representatives

of the partnership were entitled to attend the periodic meetings

of the members of major league baseball.   The partnership,

however, had no vote at the member meetings, was not yet

permitted to field a major league baseball team, and generally

was not yet authorized to participate or share in major league

baseball’s central fund (i.e., the revenue and liabilities

associated with the play each season of major league baseball).

     Beginning in 1996, the partnership did receive limited

funds from major league baseball in connection with third-party


1
     Dates for events reflected in our findings of fact conform
to the dates reflected in the parties’ stipulation of facts and
other trial evidence. Some of those dates differ by a day or two
from dates for the same events reflected in the mass media. See,
e.g., http://www.tampabay.devilrays.mlb.com.
                               - 6 -

licenses of major league baseball names, logos, and emblems

(apparently because the partnership in 1996 began selling

merchandise reflecting the Devil Rays’ logo).

     From March 1995 until November 6, 1997, the partnership

worked diligently to satisfy the above requirements and

conditions, working with third parties whose cooperation and

approval was necessary.   The partnership obtained the financing,

and on the scheduled installment dates the partnership paid major

league baseball the $130 million franchise fee.

     Beginning in 1995 and continuing through 1996, 1997, and

1998, through various affiliation agreements with, among others,

Suncoast Baseball, Inc., Orlando Rays, Inc. (a subsidiary of

petitioner), and The Durham Bulls Baseball Club, Inc., the

partnership established minor league baseball teams based in

Florida, North Carolina, and elsewhere.

     By fall 1997, the partnership had satisfied all of the

conditions of the March 1995 resolution and agreement with major

league baseball.   Accordingly, on November 6, 1997, final

agreements were entered into between the partnership and major

league baseball.   Thereunder, a major league baseball membership

certificate was transferred to the partnership entitling the

partnership to field a major league baseball team and to play in

the American League at the beginning of the 1998 season.
                               - 7 -

     Also, on November 6, 1997, and with respect to the 1998

major league baseball season, the partnership and the Devil Rays

for the first time received the right to participate in, and

assumed the liabilities associated with, major league baseball’s

central fund.   Further, beginning with the 1998 season, the

partnership became subject to other agreements relating to its

participation, and to the Devil Rays’ play, in major league

baseball.   For example, beginning with the 1998 season the

partnership and the Devil Rays became subject to:


     (1) The major league baseball rules;

     (2) The union agreement between major league baseball
     and the major league baseball Players Association;

     (3) The agreements between major league baseball and
     network television and other media;

     (4) The agreement between major league baseball and the
     major league baseball Umpires Association; and

     (5) The major league baseball Players Benefit Plan.


     On November 17, 1997, the partnership participated in an

expansion draft of players already under contract with other

major league baseball teams that was held for the benefit of the

Devil Rays and the Arizona Diamondbacks, the other expansion

team.   In the expansion draft, the partnership drafted 35 major

league baseball players for the Devil Rays.   Approximately one

half, or $74,725,000, of the $130 million franchise fee was

allocated by the partnership to the contracts of the major league
                               - 8 -

baseball players that the partnership drafted and signed in late

1997 and early 1998 for the Devil Rays’ 1998 major league

baseball season.

     During 1995 and 1996, the partnership received funds from

customers as deposits on advance season tickets (representing 25

percent of the total stated season ticket price), as deposits on

reservations for private suites, and one sponsor fee in

anticipation of major league baseball games to be played by the

Devil Rays in St. Petersburg, Florida, during the 1998 major

league baseball season.

     On the application form for the advance 1998 season tickets,

it was indicated that the customers’ deposits were

“nonrefundable”.   However, in spite of the reference to

nonrefundability on the application forms for advance season

tickets, if the partnership did not fulfill the conditions

specified in the March 1995 major league baseball resolution and

agreement, if the partnership and the Devil Rays were not

eventually and finally approved to participate in major league

baseball, and if the Devil Rays failed to play major league

baseball games in 1998, the partnership would have been required

to refund the deposits received from customers in 1995 and 1996
                                - 9 -

on advance season tickets and on private suite reservations

relating to the 1998 major league baseball season.2

     With regard to the private suite reservations, if the

partnership was admitted to membership in major league baseball

and if the Devil Rays did play major league baseball during the

1998 season, but if five or fewer of the Devil Rays’ games were

canceled, due, for example, to weather, the partnership would be

required to provide the holders of private suite reservations

with tickets to makeup games.

     If six or more of the Devil Rays’ games were canceled during

the 1998 season, the partnership would be required to provide

holders of private suite reservations with appropriate credits

toward the purchase of private suite reservations for the

following season.

     During 1995, the partnership adopted and followed a policy

of allowing refunds to customers, upon their request, of deposits

made for advance season tickets and for private suite

reservations relating to expected games of the Devil Rays to be

played in the 1998 major league baseball season.   During 1995,


2
     The conditional nature of the partnership’s right to retain
the deposits for advance season tickets and private suite
reservations was implicitly acknowledged by respondent in his
proposed findings of fact by stating conversely as follows:

     [The partnership] was assured that, so long as it
     fulfilled its contractual obligation to play baseball
     games in 1998 [the partnership] could keep the
     payments.
                                - 10 -

the partnership made refunds to customers relating to the 1998

major league baseball season in the total amount of $260,010 from

deposits received on advance season tickets and $35,000 from

deposits received on private suite reservations.

       In 1996, the partnership received a $125,0003 sponsor fee

that was used to convert a large truck into a mobile exhibit to

promote the Devil Rays.    The exhibit was completed in 1997, and

it was promoted as “The Devil Rays’ Express”.

       Funds that the partnership received during 1995 and 1996

relating to advance season tickets, to private suite

reservations, and to the sponsor fee were used by the partnership

during 1995 and 1996 for general operating purposes.

       Set forth below are the total funds the partnership received

in 1995 and in 1996 as deposits on advance season tickets and on

private suite reservations, and as a sponsor fee, relating to the

partnership’s and to the Devil Rays’ anticipated participation in

the 1998 major league baseball season:


                          Deposits On                    Sponsor
Year        Advance Season Tickets    Private Suites       Fee

1995              $2,906,401             $  449,807         --
1996               1,932,182              1,640,500      $125,000




3
     An additional $175,000 also received in 1996 as a sponsor
fee is not in issue.
                              - 11 -

     On March 31, 1998, the Devil Rays played its first major

league baseball game against the Detroit Tigers and lost the game

11 to 6.   The Devil Rays apparently played all its scheduled

major league baseball games for 1998 on their scheduled dates.

     In 1998, the partnership began incurring significant

additional expenses (that it had not incurred in prior years)

relating to its first season in major league baseball.

Substantially all the additional expenses relating directly to

the major league baseball games the Devil Rays played in 1998

were incurred in 1998 (e.g., player salaries, stadium rental, and

game-day operations).

     For financial and tax purposes, the partnership maintains

its books and records on the accrual method of accounting.

     On its financial books and records for 1995 and 1996, taking

into account yearend adjusting entries, the partnership treated

the deposits it received in 1995 and in 1996 on advance season

tickets and on private suite reservations as deferred revenue

(i.e., as liabilities, not as income).

     On its Federal partnership tax returns for 1995 and 1996,

the partnership treated expenses relating to its minor league

baseball activities and to general operating and overhead costs

as current business expense deductions.4




4
     The partnership did deduct on its 1995 and 1996 partnership
tax returns the current year annual interest expense relating to
the loan obtained to pay the $130 million franchise fee.
                             - 12 -

     On its Federal partnership tax returns for 1995 and 1996,

the partnership did not deduct as accrued expenses any of the

anticipated expenses relating directly to the major league

baseball games to be played by the Devil Rays in 1998 (e.g.,

major league baseball player salaries, stadium rental, and game-

day operations).

     Further, on its 1995 and 1996 Federal partnership tax

returns, the partnership did not accrue business expense

deductions of $27,753 and $8,500 incurred in 1995 and 1996,

respectively, relating to the marketing and sale in 1995 and 1996

of advance season tickets and private suite reservations.

Rather, those expenses were deferred and deducted on the

partnership’s 1998 Federal partnership tax return for 1998, the

year in which the games were played.

     On its Federal partnership tax returns for 1995 and 1996,

the partnership did not include in income the deposits the

partnership received during 1995 and 1996 (on the advance season

tickets and on the private suite reservations relating to the

anticipated 1998 major league baseball season).   Rather, the

deposits received in 1995 and 1996 on the advance season tickets

and on the private suite reservations were reported by the

partnership as income on the partnership’s Federal partnership

tax return for 1998, the year in which the Devil Rays played the
                              - 13 -

games to which the advance season tickets and the suite

reservations related.

     The $125,000 sponsor fee received in 1996 was reported as

income on the partnership’s 1997 Federal partnership tax return.

     The funds the partnership received in 1996 from major league

baseball in connection with third-party licenses of major league

baseball names, logos, and emblems were reported as income on the

partnership’s Federal partnership tax return for 1996.

     No portion of the $130 million franchise fee (fully paid by

the partnership prior to 1998) was deducted or amortized by the

partnership for Federal partnership tax purposes until 1998, the

year in which the Devil Rays began playing major league baseball

games.   In 1995, 1996, and 1997, the partnership capitalized the

$130 million franchise fee.   The $74,725,000 portion of the

franchise fee that the partnership allocated to player contracts

the partnership amortized and deducted over the lives of the

player contracts, beginning in 1998, the year in which the Devil

Rays played its first game.   For 1998, the partnership deducted

$18,764,389 as amortization on the $74,725,000 allocated to the

player contracts.

     On audit, respondent treated the deposits the partnership

received in 1995 and in 1996 on advance season tickets and on

private suite reservations as income to the partnership for 1995
                              - 14 -

and 1996.   Respondent treated the $125,000 sponsor fee received

in 1996 as income to the partnership for 1996.


                              OPINION

     Section 451 provides the general rule that items of income

are to be included in taxpayers’ income in the year of receipt,

unless the items of income are properly includable in a different

year under the taxpayers’ method of accounting.   Section 446

provides generally that taxpayers are to compute taxable income

using the method of accounting that they use in computing income

for book purposes, unless such method does not clearly reflect

income.

     Under section 446(c), the accrual method is a permissible

method of accounting.   Sec. 446(c)(2).

     Specifically, under the accrual method of accounting, where

funds are received by taxpayers as deposits on services to be

rendered in the future the funds generally are to be included in

the taxpayers’ income in the year of receipt, as opposed to being

deferred until the year in which taxpayers perform the related

services.   See Schlude v. Commissioner, 372 U.S. 128 (1963);

AAA v. United States, 367 U.S. 687 (1961); Auto. Club of Mich. v.

Commissioner, 353 U.S. 180 (1957).

     In both Auto. Club of Mich. v. Commissioner, supra (Auto.

Club), and AAA v. United States, supra, accrual basis taxpayers

included prepaid membership dues they received in income ratably
                              - 15 -

over the 12-month period covered by the membership agreements,

which at times extended beyond the year in which the dues were

received.   The Supreme Court held in both Auto. Club and AAA that

the taxpayers’ deferral of the prepaid membership dues did not

clearly reflect the taxpayers’ income and that the dues should be

included in the taxpayers’ income in the year of receipt.     AAA v.

United States, supra at 694-695, 698; Auto. Club of Mich. v.

Commissioner, supra at 189-190.   The Supreme Court noted the

“artificial” nature of accruing advance dues in income on a 12-

month ratable basis and over two periods where performance of the

services to be rendered by the taxpayers was indefinite and

uncertain (i.e., where no fixed dates for performance of the

services were specified and where the specific services for which

the funds were received were to be performed by the taxpayers

only upon customer demand).   AAA v. United States, supra at 690-

691; Auto. Club of Mich. v. Commissioner, supra at 189-190.

     In Schlude v. Commissioner, supra, a taxpayer received funds

as advance payments on dance lessons to be given at unspecified

times in the future to be determined by the students.   In

requiring the taxpayer to include the funds in income in the year

of receipt, the Supreme Court relied upon its prior decisions in

Auto. Club and AAA, focusing on the uncertainty as to when the

dance lessons were to be given.   Schlude v. Commissioner, supra

at 135-137.
                                - 16 -

     Artnell Co. v. Commissioner, 400 F.2d 981 (7th Cir. 1968),

acq. 1968-2 C.B. 1, revg. and remanding 48 T.C. 411 (1967),

involved facts very similar to those involved herein.    Therein

the Court of Appeals for the Seventh Circuit concluded that funds

received by the Chicago White Sox, Inc. (White Sox) on advance

ticket sales relating to major league baseball games to be played

in a following year may appropriately be deferred and included in

the White Sox’s income in the year when the games were to be

played if that deferral would clearly reflect the White Sox’s

income.    Id. at 985.   The Court of Appeals for the Seventh

Circuit remanded the case to us for analysis of whether the White

Sox’s deferral of reporting the funds as income until the year in

which the games were played would clearly reflect income.       Id. at

985-986.

     On remand in Artnell Co. v. Commissioner, T.C. Memo. 1970-

85, we concluded that the White Sox’s method of accounting for

the funds clearly reflected income because deferral of the funds

until the year in which the games were played more clearly than

respondent’s method matched the income with the White Sox’s major

expenses that were incurred in the year when the games were

played.

     In subsequent opinions, we have stated that Artnell Co. will

be limited to its facts.    See Johnson v. Commissioner, 108 T.C.

448, 492 (1997), affd. in part, revd. in part, and remanded on
                             - 17 -

another issue 184 F.3d 786 (8th Cir. 1999); T.F.H. Publications,

Inc. v. Commissioner, 72 T.C. 623, 644-645 (1979), affd. without

published opinion 622 F.2d 579 (3d Cir. 1980); see also

Chesapeake Fin. Corp. v. Commissioner, 78 T.C. 869, 880-882

(1982); Standard Television Tube Corp. v. Commissioner, 64 T.C.

238, 242 (1975).

     We agree with petitioner that the facts before us in the

instant case fall within the narrow fact pattern of Artnell Co.

     If played, the Devil Rays’ games would be played in 1998

according to a fixed and definite schedule.    Had any games been

postponed, the Devil Rays would have played makeup games on fixed

dates in 1998, to which makeup games the season tickets and the

suite reservations would have been applicable.   The partnership’s

major expenses of operating the Devil Rays and playing major

league baseball were incurred in 1998.

     If the partnership and the Devil Rays had never received

final approval to participate in major league baseball for the

1998 season, the partnership never would have incurred the major

expenses of operating a major league baseball team.   The

partnership would have been required to refund the deposits on

advance season tickets and on private suite reservations.   The

deposits and refunds would have been a wash.

     On the facts before us involving deposits received for major

league baseball games to be played by the Devil Rays in 1998,
                             - 18 -

with no major league baseball games played by the Devil Rays

until 1998, and the related expenses incurred by the partnership

in 1998,5 the application of Artnell Co. is appropriate.    The

partnership’s deferral of reporting the deposits in income until

1998, the first year in which the Devil Rays played major league

baseball games, more clearly matches the partnership’s related

expenses that were incurred and deducted in 1998.   The

partnership may defer until 1998 reporting as income the deposits

received in 1995 and 1996 on the advance season tickets and on

the private suite reservations.

     Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203

(1990), on which respondent relies, concerns whether deposits

received by a utility company constituted taxable advance

payments of income or nontaxable security deposits.   It does not

require a different result in this case.   Therein, the Supreme

Court held that because a taxpayer was required to return

deposits to customers upon termination of service or upon

verification of the customers’ creditworthiness, the security

deposits did not constitute taxable income.   Id. at 204-205, 214.

As presented to us by the parties, the question herein is not

whether the deposits the partnership received in 1995 and 1996



5
     The $130 million franchise fee was incurred before 1998 but
as indicated it was capitalized, and no amortization of the
portion allocable to player salaries was begun until 1998.
Respondent does not contest this treatment.
                              - 19 -

constitute income to petitioner, but rather when the deposits

should be included in the partnership’s income under the clear

reflection of income standard of section 446.

     Respondent notes the partnership’s deduction in 1995 and

1996 of expenses relating to its minor league baseball operation,

to general operations, and to interest on the financing obtained

to pay the $130 million franchise fee.   We agree with petitioner

that the partnership’s deduction in years prior to 1998 of minor

league baseball expenses, of general startup operating expenses,

and of current year interest expense is not inconsistent with the

deferral until 1998 of deposits relating specifically to the

Devil Rays’ 1998 major league baseball season.

     With regard to the $125,000 sponsor fee that the partnership

received in 1996, the evidence is incomplete and does not

adequately establish any basis for deferring the sponsor fee to

1998.   We sustain respondent’s determination that the sponsor fee

should be included in petitioner’s income when received in 1996.


                                    Decision will be entered

                               under Rule 155.
