                         T.C. Memo. 1997-246



                     UNITED STATES TAX COURT



   NEW ORLEANS LOUISIANA SAINTS, LIMITED PARTNERSHIP, BENSON
    FOOTBALL, INC., TAX MATTERS PARTNER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 2632-94.                       Filed June 2, 1997.



     Douglas D. Drysdale, Trevor W. Swett III, and Matthew W.

Frank, for petitioner.

     Derek B. Matta, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     WRIGHT, Judge: Respondent issued five notices of final

partnership administrative adjustments to petitioner, determining

adjustments for taxable years 1985 through 1989.   After

concessions by the parties, the sole issue for consideration is
                                 - 2 -

whether any portion of the amount petitioner paid for the

purchase of the New Orleans Saints football franchise is

allocable to a leasehold which grants petitioner certain rights

in the Superdome, located in New Orleans, Louisiana.    Unless

otherwise indicated, all section references are to the Internal

Revenue Code in effect during the years at issue, and all Rule

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

                           FINDINGS OF FACT

     Petitioner, a Texas corporation owned by Thomas H. Benson,

Jr. (Benson), is the general partner of a Texas limited

partnership known as the New Orleans Louisiana Saints Limited

Partnership (the partnership).    The partnership was formed April

23, 1985, and its address and principal place of business is in

Metairie, Louisiana.   Since the partnership's inception,

petitioner has been responsible for controlling the management of

the partnership's affairs.    During the years at issue, the

partnership was an accrual basis taxpayer and operated with a

December 31 fiscal yearend.    The partnership timely filed its

Federal information tax returns for each taxable year at issue.

The Saints Football Team

     The New Orleans Saints (interchangeably the Saints and the

team) is a professional football team and has been an official

member of the National Football League (NFL) since 1967.    Since

its formation, the team's home city has been New Orleans,

Louisiana.   The team failed to experience a winning season during
                                 - 3 -

its first 20 years in the NFL.     Its first winning season occurred

in 1987.    From 1967 through 1974, the Saints played their home

games at a stadium owned by Tulane University (the Tulane

stadium).    The Tulane stadium is located in New Orleans.     During

that period, the Tulane stadium had an approximate seating

capacity of 81,000 for football games.       The Saints drew an

average attendance per home game of approximately 70,966 while

using the Tulane stadium.    In 1975, the Saints began playing

their home games at the New Orleans, Louisiana, Superdome (the

Superdome).    From 1975 through 1984, the Saints drew an average

attendance per home game of approximately 55,000.       During the 5-

year period immediately preceding petitioner's acquisition of the

Saints, the number of tickets sold for preseason and regular

season home games was as follows:

            Year      Tickets Sold

            1980        548,026
            1981        639,890
            1982        378,3971
            1983        674,066
            1984        639,470

     Until May 31, 1985, the Saints were owned by a Louisiana

partnership in which John W. Mecom, Jr., (Mecom) was a general

partner and the principal investor       (collectively, the Mecom

Group).    Mecom purchased the Saints franchise agreement from the


     1
      There was a 2-month player-strike during the 1982 NFL
season. Because the Saints played fewer home games, fewer
tickets were sold.
                                - 4 -

NFL for approximately $8.5 million.     On May 31, 1985, petitioner

acquired control of the Saints by the purchase of certain assets

and the assumption of certain liabilities and obligations of the

Mecom Group.    The partnership paid the Mecom Group $70,494,789

for the Saints.

The Superdome

     The Superdome is an indoor stadium located in downtown New

Orleans.   It is owned by the Louisiana Stadium and Exposition

District (LSED), a body politic and corporate and political

subdivision of the State of Louisiana (occasionally the State).

The LSED was created in 1966 by amendment to the Louisiana

Constitution for the purpose of planning, financing,

constructing, and operating the Superdome.    At all relevant

times, the Superdome has been managed by Facility Management of

Louisiana, Inc. (FML), a corporation owned and controlled,

directly or indirectly, by the A.N. Pritzger family of Chicago,

Illinois (Pritzger).    Pritzger also owned or controlled, directly

or indirectly, the Hyatt Hotel chain, including the Hyatt Hotel

adjacent to the Superdome.

     Construction of the Superdome was authorized by a

constitutional amendment passed by Louisiana voters in 1966.

Actual construction began in 1971 and the Superdome opened in

August 1975.    The structure was financed by LSED through three

private bond issues totaling $137.5 million and by a 4-percent

lodging tax levied on hotel and motel rooms located within LSED's
                                - 5 -

geographical boundaries.    The Superdome is a 27-story arena

capped by a dome that is 680 feet in diameter.    As of May 31,

1985, it housed a complete television broadcast facility, a

closed circuit television system, four ballrooms, a stadium club,

two restaurants, two cocktail lounges, a gift shop, 64 box suites

(increased to 132 in 1987), and parking garages sufficient for

5,000 automobiles and 250 buses.    The stadium, garages, and

grounds occupy 52 acres situated in the vicinity of many major

hotels and less than a mile from the French Quarter of New

Orleans.

     The Superdome is well suited to host a large variety of

activities.   Over the years, it has provided a forum for

football, baseball, and basketball exhibitions, as well as

concerts, festivals, conventions, trade shows, and other various

meetings.   Seating capacity varies and depends on the activity.

Regular seating for football games is approximately 70,000, but

this can be expanded to approximately 76,800 by adjusting the

stadium's movable stands.

     Since its construction, the Superdome has been the site of

many prominent sporting events, including the NCAA Basketball

Championships in 1982 and 1987, and the annual college Sugar Bowl

Football Classic.   The NFL's Super Bowl has been played there

five times since 1978.
                                 - 6 -

 The Stadium Leases

     From 1967 through 1974, the Mecom group rented the Tulane

stadium for use by the Saints.     From 1967 through 1969, the

Saints paid rent to Tulane University for each home game under

this arrangement at the rate of 12 percent of total net receipts

derived from all concessions sales, except programs and

copyrighted items.2    On June 23, 1975, the Mecom Group entered

into a lease with the State and LSED for the use of the Superdome

(the 1975 Lease).     At all times subsequent to the effective date

of the 1975 Lease, the Saints have been the Superdome's anchor

tenant.   The 1975 Lease was for a primary term of 10 years and

commenced on August 9, 1975.     It contained a provision permitting

the Mecom Group to extend the primary term of the lease for two

successive 5-year periods.     The terms of the renewal provision

required that the Mecom Group give appropriate notice of its

intent to exercise each option to extend the lease not less than

120 days before the expiring primary or extended term.     Article

4, of the 1975 Lease required the Mecom Group to pay rent equal

to the greater of $25,000 or 10 percent of gross ticket sales per

game, plus $2,000 per home game for utilities, plus the cost of

hiring game-day personnel for clean-up and crowd control, and to

perform technical and miscellaneous functions.


     2
      The record does not contain information regarding the
Saints' payment arrangement with Tulane University for the 1970
through 1974 football seasons.
                                - 7 -

     The 1975 Lease granted the Mecom Group exclusive use and

occupancy of the Superdome for each day on which a Saints home

game (home game) was scheduled to be played in the Superdome.

It also granted the team access to the playing field during

specified hours on the day before each home game and exclusive

and continuous possession of an equipment and training room in

the Superdome from 1 week prior to the Saints' first home game

until 1 week after the team's last home game for each year of the

lease.   Under the 1975 Lease, the Mecom Group was not entitled to

share in any of the receipts from stadium advertising,

concessions, parking, box suites, or other stadium sources.   All

of the revenues were retained by LSED.   The 1975 Lease was

amended in 1976 to address an issue concerning the seating

configuration in the Superdome.

     On February 22, 1984, LSED entered into a lease with the New

Orleans Breakers (the Breakers), a member of the former United

States Football League (USFL) to use the Superdome for football

games.   This lease required the Breakers to pay a base rent for

each home game played in the Superdome equal to the greater of

$20,000 or 7 percent of gross ticket sales after taxes, plus 1

percent of all gross revenues received by the Breakers in respect

of television broadcasts or rebroadcasts of any USFL games, plus

the cost of various services.   This lease, which became effective

on July 6, 1984, allegedly violated the exclusivity provisions

contained in the 1975 Lease.
                               - 8 -

     In July 1984, the Mecom Group and LSED executed a second

amendment to the 1975 Lease (the Second Lease Amendment).     This

amendment was in response to the alleged contractual breach that

occurred when LSED entered its lease with the Breakers.     In

exchange for relinquishing its breach of contract claim against

LSED and the State, the Mecom Group received a reduction in its

rental terms under the 1975 Lease.     The Second Lease Amendment

reduced the rent payable by the Mecom Group for the Saints' use

of the Superdome to the greater of $25,000 per game or 5 percent

of gross ticket sales, and provided that all costs and expenses

of providing utilities and day-of-game staff are part of the

consideration for the rent paid by the Mecom Group.     According to

petitioner's calculations, the improved rental terms generated an

annual saving of approximately $730,000.

The NFL and Public Financial Assistance

     In 1985, the NFL consisted of 28 teams and was the focal

point of professional football.   The USFL's attempt to establish

itself as a reputable professional football league had failed and

that league was in its final year of existence.     By this time,

municipalities across the country had begun to appreciate that

substantial economic incentives were associated with hosting a

professional football franchise and demand for those teams out

paced their supply.   Despite this notable disparity, the NFL was

reluctant to expand and that reluctance fostered a competitive

environment among localities interested in attracting an NFL team
                               - 9 -

to their communities.   The increasing demand for professional

football teams gave rise to an increasing willingness on behalf

of State and local governments to provide public sector financial

assistance to team owners.   That is, in order to attract a

professional football team to their communities, State and

municipal governments were becoming more willing to contribute

large amounts of financial assistance to team owners.   Financial

assistance was commonly conveyed through subsidized stadium

leases underwritten by the public sector.

     Stimulated by the competition to secure and retain

professional sports teams, State and municipal governments

entered the stadium facility business and began offering those

facilities and related benefits as inducements to team owners.

These inducements took various forms, including:   (1) The

construction, renovation, or expansion of stadiums at the expense

of the public sector; (2) public sector financing of luxury

suites, stadium clubs, and other forms of premium seating the

revenues of which could be assigned to the resident team; and (3)

the assignment to the resident team of the right to operate or

profit from cash-generating functions of the stadiums, such as

parking garages and concessions and souvenir stands.    Inducements

of this nature were particularly valuable to team owners because

of the growth of stadium revenues and the preferred treatment

accorded stadium revenues and related assets under the NFL's

revenue-sharing rules and team debt limitations.
                                - 10 -

     During the years at issue, the NFL revenue sharing program

applied to gross revenues derived from national broadcasting

rights and ticket sales, the two major sources of revenue for

each team.   All broadcasting of regular and post-season games was

carried out under the terms of periodic league-wide contracts.

The revenues from the broadcasting were shared equally among all

NFL teams.   Revenues derived from ticket sales were also shared,

but on a different basis.   Generally, the home team received 60

percent of ticket revenues, plus an additional 15 percent for

expenses, and the visiting team was entitled to the balance.

     By 1985, stadium operations provided a third potential

revenue source for NFL teams.    These included revenues from

luxury suites, advertising, parking, concessions, novelty sales,

promotional allowances, and similar payments.    The NFL's revenue

sharing rules, however, did not apply to revenues generated from

stadium operations.   Consequently, if structured appropriately, a

team's stadium lease could be converted from an expense item to a

source of revenue.

Economic Impact of the Saints

     At all relevant times during the years at issue, tourism and

entertainment have been among the leading industries in the City

of New Orleans (occasionally the City or New Orleans) and the

State of Louisiana.   Moreover, because of the team's ability to

attract fans and stimulate local business, the Saints have been

one of several important elements in that industry.
                                - 11 -

The Sale of the Saints

     Mecom decided to sell the Saints after a disappointing 1984

football season.    He established a sale price of $75 million for

the team and subsequently engaged the services of Thomas E.

Thompson (Thompson), Gary Jones, Gus Blackshire, Jack Allendar,

and Bill Becknell, as well as certain other individuals

(collectively Mecom's negotiating team), in order to attain his

desired selling price.     Mecom derived the sale price without

assistance of an appraisal evaluation or other expert advice

regarding the fair market value of the Saints.     Similarly, he did

not consider or plan for the tax consequences associated with the

sale of the team.

     Despite having had no prior business experience with

professional football, Thompson was the chief negotiator among

the members of Mecom's negotiating team.     Thompson initially

thought that Mecom's asking price of $75 million was excessive

because the Saints had a poor financial record and recent reports

indicated that the fair market value of the Saints ranged between

$40 and $45 million.     Thompson's concerns, however, were

eventually dispelled, and he became convinced that the price was

reasonable.   Facilitating the change in Thompson's point of view

was the prospect of public sector financing.     More specifically,

Thompson came to view the impending expiration of the initial

term of the 1975 Lease as a viable tool that could be used to

generate interest among cities and States interested in luring
                              - 12 -

the Saints away from New Orleans.   Consequently, Thompson

believed that the potential departure of the Saints from

Louisiana would cause the City of New Orleans and the State of

Louisiana to propose generous financial assistance in order to

retain the Saints.   To this end, Thompson adopted a strategy

designed to exploit the earnings potential of the Superdome.    In

its simplest terms, Thompson's plan was to threaten to move or

sell the Saints for relocation unless the City and the State

agreed to provide an interested buyer public sector financial

support in the neighborhood of $20 to $25 million.

     Consistent with Thompson's strategy, the Mecom Group held

discussions with various parties interested in acquiring the

Saints and relocating the team to another city.   Proposals were

entertained from groups in various cities, including Baltimore,

Maryland; Phoenix, Arizona; and Jacksonville, Florida.   Pritzger

and Benson also expressed interest in acquiring the Saints.

Unlike the proposals from Baltimore, Phoenix, and Jacksonville,

however, Pritzger and Benson both were interested in keeping the

Saints in New Orleans.   About this time, reports began surfacing

in Louisiana that the Saints might be sold and moved to another

State.

      In late 1984, the Mecom Group began negotiating to sell the

Saints to a company controlled by Pritzger.   In order to approach

Mecom's asking price of $75 million, Pritzger offered to pay

between $40 and $45 million for the Saints and asked the State to
                               - 13 -

contribute an additional $20 to $25 million.    After weeks of

negotiation, Pritzger signed a letter of intent to buy the Saints

but conditioned the purchase on the receipt of an assistance

package from the State.

     Beginning in late 1984, Louisiana's State Government began

to seriously consider the potential ramifications of losing the

Saints to another State.   Louisiana's Governor Edwin Edwards

(Governor Edwards) believed that the loss of the Saints would be

catastrophic to the City of New Orleans and the State of

Louisiana.   On or about February 1, 1985, Governor Edwards

publicly announced that Pritzger had signed a tentative purchase

agreement to buy the Saints from Mecom contingent on an

unspecified amount of State aid.

     On February 4, 1985, Governor Edwards addressed members of

the State Legislature and informed them of both Mecom's desired

selling price of $75 million and Pritzger's offer of $45 million.

He then proposed a means for bridging the gap between these two

figures.   His proposal entailed (1) an appropriation of $25

million, either in cash from the State's general fund or through

a bond sale; (2) a declaration converting the Superdome to a tax

exempt political subdivision; (3) a bond sale to construct a

conference training center on land to be leased to the Pritzgers

by the State for a minimal fee; and, (4) a 30-year extension of

the contract between the State and the Pritzger interests for the

management of the Superdome.
                               - 14 -

     Governor Edwards' proposal was not well received by members

of the Legislature.    The principal concern involved the $25

million "front-end" appropriation.      Negotiations between Mecom

and Pritzger ultimately reached an impasse.

     On February 18, 1985, Benson announced that he was

negotiating with the Mecom Group to acquire the Saints.      On or

about March 8, 1985, Benson and the Mecom Group executed a sales

contract (the Sales Contract) with respect to the sale of the

team.    Section 5.02 of the Sales Contract conditioned

petitioner's obligation as buyer on the State's prior execution

of a lease or a further amendment to the 1975 Lease containing

specified provisions.    The required provisions included, among

other things, (a) assignment to the buyer of all revenue derived

by the State and the City from parking and sale of concessions at

the Superdome; (b) assignment to the buyer by the State of all

revenues derived from box suites; and, (c) the agreement of the

State and the City to exempt all transactions occurring in the

Superdome from any and all sales, amusement, and use taxes.3

It was estimated that these concessions, consisting of both the

tax exemptions and the assignment of revenues, would cost the

City and the State between $7.8 and $8.4 million per year.

     3
      This tax exemption refers to the sales and amusement taxes
totaling 14 percent theretofore imposed on Superdome revenues.
The State's portion of this was 4 percent; the remaining 10
percent was split among the City (7.5 percent), the Regional
Transit Authority (1 percent), and the Orleans Parish School
District (1.5 percent).
                               - 15 -

     Shortly after the Sales Contract was executed, Benson began

lobbying the State Legislature to promote approval of the

proposed lease inducements.   The Mecom group also engaged a

lobbyist for this purpose.    Both parties were aware that Benson

would be unable to acquire the Saints without first obtaining

public sector support.   Accordingly, both resolved to persuade

the Legislature to approve the conditions set forth in the Sales

Contract.   Despite this collaborative effort, a resolution was

introduced in the Louisiana House of Representatives on May 16,

1985, to impose a dollar limit on the total lease inducements to

be provided by the State in the form of revenue derived from

concessions, box suites, and parking.   A similar resolution was

introduced in the Louisiana Senate on May 22, 1985.   Governor

Edwards actively opposed both resolutions, and both were

subsequently defeated.

     Dissatisfied with the progress of negotiations and in light

of the recent legislative resolutions imposing a limit on total

lease inducements, Benson's representatives, in cooperation with

the Mecom Group, subsequently prepared a memorandum entitled "The

Saints Legislative Program" and presented it to the State

Legislature.   Among other things, the document stressed that the

pending expiration of the 1975 Lease effected a substantial

increase in the fair market value of the team due to the team's

ability to relocate to another State.   These efforts proved
                                - 16 -

successful and prompted the Legislature to urge Governor Edwards

to execute the Revised Lease.

The Sale of the Saints

     On April 1, 1985, the State and the Mecom Group executed a

third amendment to the 1975 Lease.       This amendment extended to

May 9, 1985, the deadline for the Mecom Group to exercise its

first option to extend the term of the Superdome lease for 5

years.   Similarly, in light of the ongoing negotiations, the

State and the Mecom Group again amended the 1975 Lease on May 7,

1985, further extending to May 25, 1985, the deadline for the

Mecom Group to exercise its option to extend the term of the

Superdome lease.   The deadline was again extended on May 23,

1985.

     On May 23, 1985, the State and Benson executed a document

entitled "Fifth Amendment to New Orleans Saints Superdome Stadium

Lease" (the Revised Lease).   As provided therein, the Revised

Lease was intended to induce the Saints to maintain its domicile

in the Superdome by granting certain inducements in the form of

reduced rentals and the assignment of certain revenues.       The

assignment of those revenues, when combined with rental and tax

savings, made the Revised Lease a source of positive annual net

cash flow to the partnership.    By amendment to Article 2 of the

1975 Lease, the Revised Lease extends the term of the Superdome

lease by 21 years, to June 30, 2006.       Similarly, by amendment to

Article 7 of the 1975 Lease, the Revised Lease requires FML to
                                - 17 -

remit to the partnership on a monthly basis all rental receipts

collected in the preceding month in respect of existing box

suites.4    The Revised Lease, by amendment to Article 8 of the

1975 Lease, requires FML to pay the partnership on a monthly

basis an amount equal to all receipts paid to FML in the

preceding month with respect to sales of food, beverages,

novelties, and other merchandise concessions sold in the

Superdome during a Saints home game.     By further amendment to

Article 8, the Revised Lease requires FML to remit to the

partnership on a monthly basis an amount equal to the receipts

collected in the preceding month in respect of any advertising at

the Superdome.    The Revised Lease further amends Article 8 and

requires FML to pay the partnership on a monthly basis an amount

equal to gross receipts collected in the preceding month in

respect of parking at the Superdome during the Saints' home

games.     The Revised Lease also amends Article 8 and requires FML

to remit to the partnership on a monthly basis an amount equal to

FML's receipts collected in the preceding month in respect of

dues and other membership fees paid by members of the Superdome's

"Stadium Club," and receipts attributable to guided tours of the

Superdome.    The Revised Lease also requires FML to pay the

partnership on a monthly basis a sum equal to 50 percent of the



     4
      This amendment also granted both FML and petitioner certain
other rights with respect to box suites.
                                - 18 -

amount of FML's receipts for the preceding month from the

"Superdome Marketing and Promotional Fund."

     Pursuant to the terms of section K of the Revised Lease, the

obligations of the parties thereto were to take effect only if

and when (a) the partnership acquired "all of the right, title

and interest of the New Orleans Saints Football Club in the

Original Lease and in substantially all of [the team's] other

assets," and (b) the parties "executed Amendments to extend or

re-execute existing leases of office space and ticket offices in

the Superdome" (administrative leases).    On May 31, 1985, the

partnership and the Mecom Group closed the sale of the Saints

(the closing).   On that same date, the Mecom Group and the

partnership executed an Assignment of Leases, and the partnership

executed a letter agreement with LSED and FML extending the

Saints' existing administrative leases.    If Benson had been

unable to close on the sale of the team, the Mecom Group had no

right, title, or interest to the Revised Lease.

Allocation of the Sales Price

     Pursuant to sections 2.01 and 4.04 of the Sales Contract,

the Mecom Group and petitioner allocated the price petitioner

paid to acquire the Saints (often the acquisition price) among

the assets sold to petitioner.    To this end, they adopted a

preliminary allocation, but agreed that a final allocation would

await the results of a formal appraisal.    In the preliminary

allocation, the Mecom Group and Benson allocated $6.1 million to
                              - 19 -

the Superdome leasehold and $10 million to the nonamortizable NFL

franchise.5

     After the closing, petitioner engaged the services of

American Appraisal Associates, Inc. (AAA), for the purposes of

conducting an independent appraisal of specified tangible and

intangible assets associated with the purchase of the team.

Among the tangible assets appraised were furniture, machinery and

equipment, uniforms and supplies, camera equipment, game films,

and vehicles.   Among the intangible assets appraised were rights

to player contracts, an assembled work force of nonplayer

personnel, software, broadcasting and rebroadcasting agreements,

the leasehold interest in the Superdome, and the NFL franchise.

The AAA appraisal valued the Saints' leasehold interest in the

Superdome at $21 million.

     The Mecom Group generally agreed with the AAA appraisal

except as to the value allocated to the Superdome leasehold.

Eventually, the Mecom Group and petitioner agreed to allocate $16

million to the Superdome leasehold.

     Giving effect to adjustments, and including assumed

liabilities, the contracting parties later determined that the

acquisition price under the Sales Contract was $70,494,789.     To


     5
      The term “Superdome leasehold” refers to petitioner’s
leasehold interest in the Superdome without distinction between
the 1975 Lease and the Revised Lease. The term is used
interchangeably with the phrase “petitioner’s leasehold interest
in the Superdome.”
                                - 20 -

finance its acquisition of the Saints, petitioner relied upon

capital contributions of $20 million, a $29 million loan from

Allied Bank of Texas (Allied), and a $10 million loan from the

Mecom Group.   Petitioner also assumed $11,264,129 in liabilities

and contributed approximately $231,000 from other sources.

Separate and apart from any consideration paid to the Mecom

Group, petitioner incurred acquisition expenses of $252,189 with

respect to its Superdome leasehold.

Stipulated Premises

     For purpose of this case, the parties have stipulated that

the appropriate method of allocating the acquisition price is the

residual method, as illustrated by section 1.1060-1T(d),

Temporary Income Tax Regs., 53 Fed. Reg. 20739 (July 18, 1988).

With respect to the residual method, the sole class IV asset is

the Saints' NFL franchise. Of the total acquisition price, the

parties have agreed to allocate $46,132,780 to assets other than

leases and the NFL franchise.    Hence, the amount of the

acquisition price remaining to be allocated is $24,362,009.    The

parties have further stipulated that if any amount is to be

allocated to the Superdome leasehold, that amount will be $16

million.

                                OPINION

     This case involves the acquisition of a professional

football team and its accompanying assets, both tangible and

intangible.    At issue is whether petitioner, having purchased the
                               - 21 -

team and its assets, is entitled to allocate a portion of the

acquisition price to its leasehold interest in the Superdome.

The parties have stipulated that petitioner's leasehold interest

is an intangible asset that is used in petitioner's business and

in the production of income.   They have also agreed that the

leasehold has a limited useful life corresponding to the term

established by the Revised Lease.   Additionally, the parties have

stipulated that if any portion of the acquisition price is

allocable to the Superdome leasehold, the amount so allocable

will be $16 million.   Accordingly, we must decide whether

petitioner is entitled to allocate any portion of the price it

paid to acquire the Saints to its Superdome leasehold.

     Petitioner advances two arguments in its attempt to refute

respondent's determination.    Petitioner's principal argument is

that the Revised Lease, because of what petitioner characterizes

as "mutual conditionality" between the Sales Contract and the

Revised Lease, was an asset among those acquired from the Mecom

Group, and that a portion of the acquisition price is therefore

allocable to the Superdome leasehold.

     Petitioner also argues that irrespective of whether the

Revised Lease is construed as being an asset among those received

from the Mecom Group, the 1975 Lease, which was the lease

actually transferred to petitioner, had value immediately prior

to the formation of the Revised Lease, and that it is to that
                              - 22 -

value that petitioner has allocated a portion of the acquisition

price.

     Respondent agrees with neither of petitioner's contentions.

Instead, respondent argues that petitioner cannot allocate a

portion of the acquisition price to the Superdome leasehold

because the Revised Lease was not an asset obtained from the

Mecom Group.   Respondent also contends that the allocation lacks

economic reality and was arbitrarily assigned for the purpose of

achieving favorable tax consequences.   Moreover, with respect to

petitioner's alternative argument, respondent maintains that the

1975 Lease was without substantial value and fails to qualify as

a premium lease.   We find petitioner's alternative argument

persuasive.

     Section 1012 sets forth the general rule that the basis of

property shall be the cost of such property.   Additionally,

section 1060 sets forth special allocation rules for determining

a transferee's basis in certain asset acquisitions.   Section 1060

was added to the Internal Revenue Code in 1986, Tax Reform Act of

1986, Pub. L. 99-514, sec. 641(a), 100 Stat. 2085, 2282, and was

made effective for any acquisition of assets after May 6, 1986.

The parties have agreed to allocate the acquisition price in

accordance with the "residual method," as described in sec.

1.1060-1T(d)(2), Temporary Income Tax Regs., 53 Fed. Reg. 27040

(July 18, 1988).
                               - 23 -

     Under section 1060, assets are divided into four classes.

Class I assets consist of cash, demand deposits, and like

accounts in banks, savings and loan associations, and other

depository institutions.    Class II assets consist of certificates

of deposit, Federal securities, readily marketable stock and

securities, and foreign currency.   Class IV assets are intangible

assets in the nature of goodwill and going-concern value.     Class

III assets are all assets that are not class I, class II , or

class IV assets, including accounts receivable, equipment,

buildings, land, and covenants not to compete.   Sec.

1.1060-1T(a)(1), (b)(1), (d), Temporary Income Tax Regs., 53 Fed.

Reg. 27039-27040 (July 18, 1988).   The total consideration is

allocated to class I assets in an amount equal to each asset's

face value.   The remaining consideration is then allocated to

class II assets in proportion to the fair market value of each

class II asset.   The remaining consideration is then allocated to

class III assets in an amount equal to the fair market value of

each class III asset.   Any residue is allocated to class IV

assets.   Sec. 1.1060-1T(d), Temporary Income Tax Regs.

     The 1975 Lease is a class III asset.   Sec. 1.1060-1T(d),

Temporary Income Tax Regs.   Moreover, the parties have stipulated

that the sole class IV asset consists of the team's NFL

franchise.    Hence, the NFL franchise is the sole residual asset.

     It is well settled that "the cost of acquiring a * * *

[lease] is a capital expenditure, recoverable through
                               - 24 -

amortization over the remaining life of the lease."     Steinway &

Sons v. Commissioner, 46 T.C. 375, 381 (1966); sec. 1.162-11(a),

Income Tax Regs.   It is clear, however, that the taxpayer must

have incurred some cost, by an outlay of consideration, as a

necessary prerequisite to the allowance of the deductions.     A

leasehold is an intangible asset that is gradually exhausted by

the passage of time.   Its cost is recoverable ratably by way of

amortization deductions over the period of exhaustion in the same

manner that costs of tangible assets are recoverable by way of

depreciation deductions.   Of course, the amortization deductions

are in addition to those for rent required to be paid under the

lease.    See Washington Package Store, Inc. v. Commissioner, T.C.

Memo. 1964-294.

     We turn now to petitioner's principal argument that a

portion of the acquisition price is allocable to the Superdome

leasehold due to what petitioner refers to as "mutual

conditionality" between section 5.02 of the Sales Contract and

section K of the Revised Lease.   Petitioner argues that the

"operative instruments [the Sales Contract and the Revised Lease]

wove the enhanced stadium lease into the fabric of the sale."

And, as such, petitioner further argues that it "was not liable

for the purchase price unless it received the Revised Lease, and

was entitled to the Revised Lease only if it paid the purchase

price."   Accordingly, petitioner's argument concludes, the

conditions set forth in section 5.02 of the Sales Contract and
                                - 25 -

section K of the Revised Lease "leave no doubt that the

[acquisition] price is attributable in part to the value of the

Revised Lease."

     Respondent's principal argument in this case is that

petitioner cannot allocate a portion of the acquisition price to

the Superdome leasehold because the Revised Lease was not

obtained from the Mecom Group, but rather from the State of

Louisiana for no consideration.    As support for this argument,

respondent relies on Barnes Group, Inc. v. United States, 697 F.

Supp. 591 (D. Conn. 1988), vacated and remanded 872 F.2d 528 (2d

Cir. 1989), reconsidered 724 F. Supp. 37 (D. Conn. 1989), affd.

902 F.2d 1114 (2d Cir. 1990).    We agree with respondent.

     The facts make it clear that, despite the interplay between

the Sales Contract and the Revised Lease, petitioner obtained the

Revised Lease from the State of Louisiana, not from the Mecom

Group.   To be sure, in establishing the terms of the Revised

Lease, petitioner and the State negotiated virtually every term

contained in the 1975 Lease.    Furthermore, petitioner entered the

Revised Lease in its own name.    See Washington Package Store,

Inc. v. Commissioner, T.C. Memo. 1964-294.    The Mecom Group never

possessed an interest in the Revised Lease, and it necessarily

follows that petitioner could not have obtained the Revised Lease

from the Mecom Group.   Although it is couched in terms of an

amendment to the 1975 Lease, the Revised Lease, as respondent

contends, was in essence a new lease that petitioner obtained
                               - 26 -

from the State of Louisiana.   Merely calling a new lease an

amendment to an existing lease is not dispositive.

     We turn now to petitioner's alternative argument.

Petitioner argues that irrespective of whether the Revised Lease

is construed as being an asset among those purchased from the

Mecom Group, the 1975 Lease, which was the lease petitioner

actually received from the Mecom Group, had substantial value

separate and apart from the Revised Lease, and that it is to that

value that petitioner has allocated a portion of the price it

paid to acquire the Saints.

     Respondent, on the contrary, maintains that the 1975 Lease

was without substantial value and fails to qualify as a premium

lease.   Whether a lease qualifies as a premium lease requires an

examination of the entire record.   Thomas v. Commissioner, 31

T.C. 1009, 1012 (1959).   Factors which are usually considered in

determining the value of leasehold interests are:    (1) The rental

charged under the lease compared to the fair market value rental

for the property, see KFOX, Inc. v. United States, 206 Ct. Cl.

143, 510 F.2d 1365 (1975); (2) the location of the property, see

Harris Amusement Co. v. Commissioner, 15 B.T.A. 190 (1929); (3)

the duration of the lease and any termination provision, see

Bryden v. Commissioner, T.C. Memo. 1959-184; (4) the date of the

most recent negotiations concerning the provisions of the lease,

see May v. Commissioner, a Memorandum Opinion of this Court dated

July 22, 1944; and (5) the arm's-length nature of the
                               - 27 -

negotiations, Midler Court Realty, Inc. v. Commissioner, 521 F.2d

767, 769 (3d Cir. 1975), affg. 61 T.C. 590 (1974); see Metro Auto

Auction of Kansas City, Inc. v. Commissioner, T.C. Memo. 1984-

440.    While respondent maintains that we should consider each of

these five factors, he addresses only the first factor in

meaningful detail.    His discussion of the remaining four factors

is incomplete.

       There is no question that a leasehold may have a value in

the hands of the lessee when the fair rental value exceeds the

rent established by the lease.    See KFOX, Inc. v. United States,

510 F.2d at 1373-1374; A.H. Woods Theater Co. v. Commissioner, 12

B.T.A. 827 (1928).    With respect to the first factor cited above,

we find that the record contains ample evidence that the rent

required by the 1975 Lease was considerably lower than the fair

rental value of the Superdome.    In July 1984, the Mecom Group and

LSED executed the Second Lease Amendment in response to the

alleged contractual breach that occurred when LSED executed a

Superdome lease with the Breakers.      The rent required under the

1975 Lease after the execution of the Second Lease Amendment was

50 percent less than the rent required under the lease

immediately prior to that amendment.     The Second Lease Amendment

also eliminated the team's obligation to pay day-of-game

expenses.    Petitioner's calculations determine the total annual

savings attributable to the Second Lease Amendment to be

approximately $730,000.    Evidence in the record also indicates
                              - 28 -

that the rent required by the terms of the Second Lease Amendment

was markedly less than the rent required under the lease that

LSED executed with the Breakers in February 1984, which preceded

the execution of the Second Lease Amendment by a mere 5 months.

     Respondent agrees that the terms of the 1975 Lease were more

favorable to the Mecom Group after the Second Lease Amendment

than before that amendment.   Respondent maintains, however, that

our evaluation of the fair market value of the 1975 Lease cannot

be performed properly by simply comparing values of the lease

before and after the Second Lease Amendment.   Instead, according

to respondent, a proper evaluation requires a comparison of the

value of the 1975 Lease with the value of several proposed leases

contained in bids entered by various cities interested in

attracting the Saints away from New Orleans.   Those cities

include Phoenix, Arizona; Indianapolis, Indiana; Philadelphia,

Pennsylvania; and Jacksonville, Florida.   In other words,

respondent maintains that the "market" to be considered when

determining the fair rental value of the 1975 Lease must not be

limited to the geographical boundaries of New Orleans.   Instead,

it is respondent's position that the "market" must include cities

that had expressed interest in luring the Saints away from New

Orleans.   Respondent maintains that information contained in

material that petitioner used in its lobbying effort indicates

that the cities of Jacksonville, Phoenix, and Indianapolis

offered free use of their stadiums in order to attract the Saints
                              - 29 -

to their respective cities.   Similarly, respondent explains that

the city of Philadelphia offered to defer all stadium rental

payments for a period of 10 years if the Saints agreed to

relocate to Philadelphia.   Hence, according to respondent and in

light of these proposed rental terms, the terms of the 1975 Lease

after the Second Lease Amendment were not more favorable to the

lessee than those of comparable stadium leases.

     We are not persuaded by respondent's attempt to expand our

focus with respect to the fair rental value of the 1975 Lease.

Not only are the lease values advanced by respondent merely

proposals, the record is insufficient for an analysis of the

comparability of the facilities located in other cities.

     Respondent also attempts to refute petitioner's argument by

directing our attention to the duration of the period during

which the benefits stemming from the terms of the Second Lease

Amendment were realized by the Mecom Group.   Specifically,

respondent maintains that the Mecom Group experienced little

benefit from the terms of the Second Lease Amendment because that

amendment preceded the sale of the team by 1 year.   Additionally,

respondent maintains that had the Mecom Group been unable to sell

the team, it would not have benefited from the terms of the

Second Lease Amendment for a period exceeding 1 year unless it

exercised its option to extend an otherwise unfavorable lease.

This is so, respondent explains, because the Second Lease

Amendment preceded the expiration of the primary term of the 1975
                              - 30 -

Lease by 1 year.   According to respondent, the 1975 Lease was

unfavorable because it lacked generous revenue incentives

consistent with the industry trend.

     We find respondent's argument unconvincing.    By focusing on

the duration of the benefit generated by the Second Lease

Amendment, respondent is simply attempting to broaden our focus

with respect to the evaluation of the 1975 Lease.    As previously

noted, we are not persuaded by respondent's attempt to convince

us to consider proposed lease values contained in bids made by

cities interested in attracting the Saints.

     Under the second factor, we are to consider the location of

the Superdome.   Again, respondent seeks to define the "market"

and expand the focus of our evaluation to include those cities

that had expressed an interest in hosting the Saints.

Petitioner, on the other hand, contends that we limit our focus

to Louisiana, and specifically New Orleans.   We are inclined to

agree with petitioner.   At issue here is the fair market value of

the Superdome lease, and, as previously noted, the record does

not support an analysis of the comparability of the Superdome and

facilities located in other cities.    The Superdome is located in

New Orleans, and we restrict our focus accordingly.

     Under the third factor, we consider the duration of the 1975

Lease.   We recognize that the lease was due to expire prior to

the start of the 1985 football season but note that the lease

provided for two successive 5-year renewal options.    In our view,
                               - 31 -

the presence of these renewal options favors petitioner's

argument, and we find respondent's argument to the contrary

unconvincing.   The renewal options were not without value and,

although the record does not identify the extent of their value,

we are convinced that that value was not insubstantial, as

respondent contends.   The terms of the Second Lease Amendment

reflected generous concessions made by the State, and the renewal

options made it possible for the fruit of those concessions to be

enjoyed by the Saints for up to 10 years.

     The fourth factor entails an examination of the most recent

negotiations concerning the provisions of the 1975 Lease.      Prior

to petitioner's acquisition of the team, the most recent

negotiations between the Mecom Group and LSED occurred in mid-

1984.   These negotiations were in response to LSED's lease with

the Breakers and gave rise to the Second Lease Amendment.

Respondent maintains that we should discount these negotiations

because they were the result of a contractual breach rather than

a genuine interest on behalf of the State to provide an incentive

to the team.    We decline to do so.    It is immaterial that the

lease negotiations at issue came to pass simply because LSED

desired to avoid a breach of contract claim.      LSED was conscious

of the available renewal options and was surely aware of the

potential benefit it was bestowing on the Mecom Group through the

enhanced terms of the Second Lease Amendment.
                              - 32 -

     The final factor considers the arm's-length nature of the

negotiations between the Mecom group and the State with respect

to the Second Lease Amendment.   Again, respondent attempts to

obscure matters by arguing that this factor favors his argument

because the negotiations giving rise to the Second Lease

Amendment stem from a breach of contract dispute rather than a

genuine concern on behalf of the State.   We are unpersuaded by

respondent's argument and find that the negotiations giving rise

to the Second Lease Amendment were conducted at arm's-length.

Conclusion

     Having analyzed the record in the instant case, and after

examining the facts in extensive detail, we are of the opinion

that the fair rental value of the Superdome exceeded the value of

rent established by the 1975 Lease, as amended by the Second

Lease Amendment.   See KFOX, Inc. v. United States, 510 F.2d at

1373-1374; A.H. Woods Theater Co. v. Commissioner, 12 B.T.A. 827

(1928).   We note that while petitioner has failed to establish

the precise amount by which the fair rental value of the

Superdome exceeded the value of the rent required by the amended

lease, we are convinced that petitioner has sufficiently

established that the former does in fact exceed the latter.    This

is significant because the parties have stipulated that if any

portion of the purchase price is allocable to the Superdome
                              - 33 -

leasehold, the amount so allocable will be $16 million.6    Because

we have found that the 1975 Lease, being a class III asset as

defined by section 1.1060-1T(d)(2), Temporary Income Tax Regs.,

53 Fed. Reg. 20740 (July 18, 1988), was a premium lease, it

follows that a portion of the price petitioner paid to acquire

the Saints is allocable thereto.

     The $16 million figure was the result of compromises by both

sides and was agreed to with full knowledge of the relevant

facts.   Accordingly, we shall give the stipulation binding effect

in accordance with Rule 91(e), see Louisiana Land & Exploration

Co. v. Commissioner, 90 T.C. 630, 648-649 (1988), and find that

petitioner may allocate $16 million of the price it paid to

acquire the Saints to its Superdome leasehold.

     To reflect the foregoing,

                                         Decision will be

                                    entered under Rule 155.




     6
      The specific language of the stipulation is as follows:

          If any portion of the purchase price paid by
          Petitioner for the Saints is properly
          allocable to the Superdome Lease, the amount
          so allocable is $16 million, as reported in
          Petitioner's federal income tax returns.

The stipulation defines the term "Superdome Lease" as "the 1975
Lease as amended from time to time."
