The strongest passive-investment tax shelter legal in the U.S. code, walked at practitioner depth.
Section 197 of the Internal Revenue Code lets acquirers of intangible assets amortize them straight-line over 15 years against ordinary income. That rule applies uniformly to every intangible-heavy acquisition — goodwill, customer lists, trademarks, franchise rights, media contracts. Sports franchises are the extreme case: 90%+ of purchase price routinely allocates to intangibles at close, yet the franchise itself appreciates at 15%+ per year. The result is a deduction stream that shields other ordinary income from an asset that is compounding, not depreciating. This page walks the §197 mechanic, applies it to documented franchise purchases, describes its interaction with §469 (passive activity) and §183 (hobby loss), and lays out John Arnold's public-policy reform debate evenhandedly. Every Institute Pro-Sports case study links back to this reference.
Every Pro-Sports case in the Institute library eventually touches the §197 amortization question. The buyer's tax posture at close, the pass-through structure of the ownership entity, the interaction with the buyer's other active income streams, and the reform-risk overhang on the shelter itself are all recurring underwriting questions. Rather than re-explain the mechanic in every case, we elevated it here — parallel to how the NFL stadium anatomy reference sits above every stadium-heavy case.
The motivating public-policy voice for the discussion is John Arnold — the former Centaurus Advisors principal and Arnold Ventures founder, who has repeatedly used his public platform to argue that intangible amortization on appreciating assets is a distortion the tax code should correct. His framing anchors this piece. But the Institute does not take a side on the reform debate itself; we walk both sides, describe the administrative complexity of proposed reforms, and identify where the shelter arithmetic is most exposed.
“Most intangible assets lose value over time, so IRS lets buyers amortize them over 15 yrs. Sports teams are unique in that sales price can be >90% intangibles but the franchise & brand appreciate over time. This makes teams a huge tax shield for very rich that should be reformed.”
Internal Revenue Code §197, enacted as part of the Omnibus Budget Reconciliation Act of 1993, provides a single unified rule for the tax treatment of "amortizable Section 197 intangibles." An acquirer of intangible assets in a trade-or-business acquisition amortizes the basis of those intangibles straight-line over 15 years (180 months) beginning in the month of acquisition. The deduction reduces the acquirer's ordinary taxable income each year for the full 15-year period. There is no residual value; the intangibles are amortized to zero regardless of what the underlying asset is actually worth.
The list of covered intangibles is broad and expressly includes: goodwill; going-concern value; workforce in place; information base (customer lists, subscriber lists); patents, copyrights, formulas, processes, designs, and know-how; customer-based intangibles; supplier-based intangibles; licenses, permits, and other rights granted by governmental units; covenants not to compete; and franchises, trademarks, and trade names. Sports-franchise buyers use the last category directly — the franchise right itself is a Section 197 intangible under the statute.
Congressional intent behind §197 was administrative, not economic. The pre-1993 regime forced acquirers to break out each intangible separately, assign it a useful life, and defend that useful life on audit. The result was a litigation-heavy environment where the IRS and taxpayers routinely fought over whether customer lists had 5, 7, or 12 years of value and whether goodwill was amortizable at all. Congress replaced the patchwork with a bright-line 15-year rule to reduce compliance cost and IRS-taxpayer conflict. The statute was not designed to create tax shelters, and the legislative history contains no discussion of the appreciating-intangibles case that later became the sports-franchise problem.
In a typical operating-business acquisition — a manufacturing plant, a distribution business, a professional-services firm — roughly 30–50% of the purchase price allocates to intangibles under a standard purchase-price-allocation exercise. The remainder allocates to tangible assets: real property, equipment, inventory, receivables. The intangibles themselves (customer relationships, workforce, trademarks) mostly do lose value over time as customers churn, employees leave, and the acquired brand fades relative to competitors. In that setting, a 15-year straight-line amortization roughly mirrors the economic reality that Congress was after.
Sports franchises invert the picture. The tangible assets on the balance sheet are trivial: some office furniture, some equipment, and only rarely any owned real estate (most franchises play in publicly-owned or authority-owned stadiums under long-term leases — see the stadium anatomy reference). Nearly the entire purchase price allocates to intangibles: the franchise right itself, the media-rights contract with the league, existing player contracts, the trade name and logo, the season-ticket-holder relationships, sponsor contracts, and going-concern value. Reported allocations on documented sports-franchise closings run 90%+ intangibles as a matter of course.
The economic reality the 15-year rule assumes — that intangibles lose value — is not just wrong in the sports case; it is inverted. Sportico's franchise-valuation series and Forbes's historical valuations both show pro-sports franchise values compounding at roughly 14–16% per year over multi-decade horizons across NFL, NBA, MLB, and NHL. The franchise right and the brand appreciate as the league's media rights renew at higher rates, as scarcity value compounds (no new franchises are being added), and as the buyer pool for control stakes stays deep. This is the Arnold observation in one sentence: the tax code is amortizing to zero an asset that is compounding at double digits.
Before any of the worked math below applies, the transaction has to be structured in a way that actually produces §197 basis in the buyer's hands. This is the load-bearing precondition of the entire shelter. §197 amortization is only available when the buyer has basis in the underlying intangible assets themselves. Basis in stock or equity interests is not §197 basis — it is outside basis in the entity, and it is not amortizable. The §197 shelter therefore only activates when the transaction is structured as one of three things: (a) a true asset sale in which the buyer directly acquires the intangibles; (b) a stock purchase accompanied by an IRC §338(h)(10) or §338(g) election, which treats the stock purchase as a deemed asset acquisition for federal tax purposes; or (c) an equity or partnership-interest purchase in a pass-through entity that has an IRC §754 election in effect, which triggers a §743(b) inside-basis step-up to the buyer. Without one of these three structural setups, the buyer takes carryover basis in the equity, gets no inside step-up on the intangibles, and has no §197 shield to amortize.
The buyer/seller tension around this is real and structural. Sellers generally prefer stock or equity sale treatment because it produces uniform long-term capital gain on the entire consideration and, in most cases, avoids the depreciation-recapture and ordinary-income characterization that an asset sale would trigger at the seller's level. Buyers generally prefer asset sale treatment because it gives them a fresh §197 basis in the acquired intangibles — potentially worth hundreds of millions in future federal tax savings on a large franchise deal. The two positions are structurally opposed. In sports-franchise transactions, the buyer's §197 shield value is typically large enough that the buyer will pay a premium — a "structure premium" — to compensate the seller for accepting the less-favorable tax treatment. In practice, most large-dollar franchise closings are structured as asset sales or asset-equivalent under an election, but only after the deal team has negotiated the tax structure explicitly on the LOI and closing documents.
Elected by the buyer alone. The legal form of the transaction is a stock purchase; the federal tax treatment is a deemed asset acquisition by "new Target" from "old Target." Old Target pays corporate-level tax on the deemed asset-sale gain and is then deemed to liquidate to the seller-shareholder. That produces double tax at the Target level — a corporate-level tax on the gain plus a shareholder-level tax on the liquidation — which is usually only economic if the Target has net operating losses to shelter the deemed gain, or if the buyer's §197 shield value swamps the double-tax cost. Rare in sports franchise deals for exactly that reason: the double-tax leakage is generally too expensive to justify.
A joint election made by buyer and seller together. Typically requires the Target to be either an S-corporation or a subsidiary of a consolidated group of corporations. Federal tax treatment is a deemed asset sale for the seller (recognized at the S-corp shareholder or consolidated-group parent level, not at the Target level itself), which avoids the double-tax problem of §338(g). The buyer gets §197 basis in the intangibles as if it had bought them directly. This is the more common corporate-election structure but has restrictive eligibility — the Target has to fit one of the qualifying corporate forms, which not every franchise entity does.
Applies to pass-through entities — LLCs taxed as partnerships and limited partnerships. When a partnership makes a §754 election, a purchase of partnership interests triggers a §743(b) inside-basis step-up to the buyer, giving the buyer §197 basis in the entity's intangibles as if the buyer had acquired those assets directly. Because most modern sports franchises are held through LLC or limited-partnership structures — for governance, estate-planning, and tax-election reasons unrelated to any specific transaction — §754 is in practice the mechanic used more often than §338(h)(10) in real sports franchise closings. Kroenke's Rams and Nuggets holdings, the Edens/Lasry Bucks LLC, Ballmer's Clippers holding LLC, and the Cohen/Mets holding structure are all pass-through entities and all §754-eligible.
The modern franchise-transaction pattern, taken together, looks like this: (i) the franchise is held in an LLC or limited-partnership structure for governance and estate-planning reasons that predate the transaction; (ii) the seller-side entity either has a §754 election in effect from a prior year or makes one at the time of the sale; (iii) the buyer acquires LLC or partnership interests and receives a §743(b) inside-basis step-up on the intangibles; (iv) the buyer captures §197 amortization on the stepped-up intangibles across the 15-year schedule that follows. The buyer/seller negotiation over the "structure premium" is real but is usually resolved in favor of asset-equivalent treatment because the shield value is so large relative to the incremental price concession required to secure it.
The sports-business economics literature has noted this dynamic explicitly. Andrew Zimbalist and other sports-economics scholars have argued that observed franchise sale prices reflect a "tax-benefit premium" that quietly accrues to the buyer — meaning the transaction prices actually paid for pro-sports franchises are higher than they would be in a non-§197 world, because buyers can afford to pay more knowing they will recover the §197 shield through amortization over the following 15 years. The observed franchise-price series is, in effect, partially a discounted-cash-flow reflection of the §197 shelter's value.
Assuming the transaction is structured as an asset purchase or as an equity acquisition with a §338(h)(10), §338(g), or §754 election in effect (see prior section on the structural precondition).
The following table walks a hypothetical — but arithmetically standard — $2 billion franchise purchase. Figures are illustrative; the specific intangibles allocation on any real transaction is negotiated with the seller and reviewed by the IRS. But the general shape of the calculation is the same in every real deal we have observed publicly.
| Line item | Amount | Notes |
|---|---|---|
| Purchase price | $2,000,000,000 | Enterprise value at close. |
| Intangibles allocation (90%) | $1,800,000,000 | Franchise rights, media contracts, player contracts, brand, going-concern value. |
| Tangibles allocation (10%) | $200,000,000 | Office equipment, technology, other operating assets. Depreciated on standard MACRS schedules. |
| §197 amortization per year | $120,000,000 | $1.8B intangibles ÷ 15 yrs, straight-line. |
| Buyer's other ordinary income (assumed) | $500,000,000 | Operating-business income the buyer generates from other holdings. |
| Net taxable ordinary income after §197 shield | $380,000,000 | $500M less $120M §197 deduction. |
| Federal tax at 37% top marginal rate | $140,600,000 | Applied to the reduced base. |
| Federal tax without the §197 shield | $185,000,000 | $500M × 37%. |
| Annual federal tax deferred by §197 | $44,400,000 | The delta — and this compounds over 15 years. |
| Cumulative federal tax deferred over 15 years | $666,000,000 | $44.4M × 15. Real-dollar figure; state tax adds on top. |
Illustrative arithmetic only. Actual buyer tax outcomes depend on entity structure, state residency, other passive-loss carryforwards, alternative minimum tax exposure, and the specific intangibles allocation negotiated with the seller. Effective marginal rates are typically higher than 37% once state and net investment income tax are layered in, making the actual shield value larger than the illustrative number.
While the buyer is amortizing $1.8B down to zero on the tax books, the franchise is compounding. Applying a Sportico-consistent 15% annual growth rate to the $2B purchase price:
| Year | Cumulative §197 deduction taken | Remaining tax basis in intangibles | Estimated franchise value (15% CAGR) |
|---|---|---|---|
| Year 0 (close) | $0 | $1,800,000,000 | $2,000,000,000 |
| Year 5 | $600,000,000 | $1,200,000,000 | $4,022,000,000 |
| Year 10 | $1,200,000,000 | $600,000,000 | $8,091,000,000 |
| Year 15 | $1,800,000,000 | $0 | $16,367,000,000 |
Franchise-value line applies a flat 15% CAGR to the $2B purchase price. Actual franchise appreciation varies by league, market, media-cycle timing, and franchise-specific factors. Sportico's rolling multi-year CAGRs for the four major U.S. leagues have run in a 12–18% band over the last decade.
Net result: at year 15 the buyer holds an asset that has grown from $2B to more than $16B while having taken $1.8B of ordinary-income deductions along the way — deductions that shielded roughly $666M of federal tax on other active income at the 37% federal rate. The intangibles have a tax basis of zero, so a sale at year 15 triggers roughly $16B of gain that is taxed at capital-gains rates (23.8% federal including net investment income tax, versus the 37% ordinary rate the deductions were taken against). That rate-arbitrage — ordinary deduction now, capital gain later — is the specific feature of the shelter that draws policy scrutiny.
Assuming, in each case, that the transaction was structured as an asset purchase or as an equity acquisition with a §338(h)(10), §338(g), or §754 election in effect (see the structural precondition section above). Most modern franchise transactions are held through pass-through entities and are structured to obtain §197 basis via the §754 mechanic.
The following table lists documented public transactions where the §197 mechanic applies or where the arithmetic is most visible. All purchase prices are as publicly reported at close by Sportico, Forbes, Bloomberg, ESPN, or the acquiring entity's own communications. Current valuations reflect Sportico's most recent published mark (2024 unless noted). Intangibles allocations for the specific transactions are not typically disclosed at deal level; the "intangibles allocation" column reflects industry-standard treatment for franchise closings, not an on-record allocation for the specific deal.
| Buyer | Franchise | Year | Purchase price | Current value | Intangibles allocation (est.) | Notes |
|---|---|---|---|---|---|---|
| Steve Ballmer | LA Clippers (NBA) | 2014 | $2.0B | ~$5.5B (Sportico 2024) | ~90%+ | ProPublica reporting cited §197 shield of ~$100M+/yr against Microsoft dividends. |
| Steve Cohen | NY Mets (MLB) | 2020 | $2.42B | ~$3.2B (Sportico 2024) | ~90%+ | Cohen's Point72 hedge-fund income is the shielded base. |
| Wes Edens + Marc Lasry | Milwaukee Bucks (NBA) | 2014 | $550M | ~$4.0B (Sportico 2024) | ~90%+ | Then-NBA-record price; Lasry sold his 25% to Haslam Sports Group in Apr 2023 at ~$3.5B implied EV. |
| Josh Harris group | Washington Commanders (NFL) | 2023 | $6.05B | ~$6.3B (Sportico 2024) | ~90%+ | Largest NFL franchise sale in league history; group includes Magic Johnson. |
| David Ellison / RedBird | Skydance-Paramount | 2024 | ~$8.0B | Pending close mark | Media §197 basis | Different asset class, but §197 applies fully to media rights, film library, and brand goodwill. |
Purchase-price and current-value figures are Institute aggregations from Sportico's franchise-valuation series, Forbes's franchise-value historical rankings, Bloomberg, ESPN, and acquirer press releases at close. Intangibles allocation percentages are industry-standard estimates for franchise transactions — the specific allocation for each named deal is subject to buyer/seller purchase-price agreement and IRS review and is not publicly disclosed at line-item level. The Ellison/Skydance-Paramount transaction is included because it demonstrates the §197 mechanic on a media-adjacent asset class where the same appreciation-vs-amortization dynamic is present.
The §197 deduction, standing alone, would be a simple ordinary-income shield. The specific feature that makes it powerful for franchise buyers is its interaction with IRC §469, the passive activity loss rules. §469 generally prevents taxpayers from using losses from "passive" investments (real estate held for rental, limited-partnership interests where the taxpayer does not materially participate) to offset "active" income (wages, active-business income). Losses from a passive activity can only offset passive income; excess passive losses suspend until the activity generates future passive income or is disposed of.
For a franchise-owning principal who materially participates in the franchise — and virtually all control owners do; they attend board meetings, sit on league committees, make hiring decisions, approve major contracts, and are photographed at games — the §197 amortization deduction is a nonpassive loss under §469. That means the deduction can freely offset ordinary income from other active businesses the same taxpayer owns: hedge-fund income (Cohen), tech-founder dividend income (Ballmer), private-equity fund carried interest (Edens, Lasry, Harris), or operating-business earnings (Haslams, Jerry Jones's Comstock and other holdings). This is the specific interaction that turns a §197 deduction stream into a tax shelter against unrelated active income.
A passive investor — someone taking a minority stake and not materially participating — would see the §197 loss trapped at the passive-loss layer, only usable against passive income. That is a much weaker shelter. The NFL's 2024 institutional-capital rules that admit PE and sovereign minority stakes of up to 10% treat those investors as passive under §469 as a practical matter, since 10% holders do not materially participate. That is one reason the §197 shield's value is asymmetric between control principals and minority investors.
IRC §183 disallows deductions from an activity not "engaged in for profit." The rule exists to stop taxpayers from deducting losses from a country horse-farm, a wine hobby, or a personal art collection that never realistically generates profit. To deduct losses, the activity must have an actual profit motive under a nine-factor regulatory test. Sports franchises easily clear this bar: they reliably generate operating income (media revenue alone typically covers cash costs across the four major U.S. leagues); they appreciate as an asset (any nine-factor analysis of profit motive is trivial to satisfy where the taxpayer can point to double-digit annual appreciation); and they are structured with formal management, financial reporting, and material-participation records that satisfy the "businesslike manner" factor. In practice, §183 is not a meaningful risk for franchise-owner deductions. The IRS does not pursue §183 challenges against franchise owners because the "engaged in for profit" test is not a plausible loss for the government to litigate.
The Arnold argument is straightforward: the tax-code assumption that intangibles lose value is empirically wrong for sports franchises, media companies, brand-licensing holding companies, and entertainment intellectual property. In those cases §197 gives buyers a substantial ordinary-income deduction against an asset that is compounding. Because the ultimate sale is taxed at capital-gains rates and the deductions are taken against ordinary income, the arithmetic delivers a permanent rate-arbitrage benefit on top of the time-value deferral. Arnold's argument is that this is not what Congress intended and is not what the public purse should subsidize.
The counterargument on the merits is administrative. §197 is a bright-line rule applied uniformly across all intangible-heavy acquisitions specifically to end the pre-1993 litigation over asset-by-asset useful lives. Carving out sports franchises specifically would either require a definitional line the IRS would then have to police (does a college-athletics business qualify? A minor-league team? An esports franchise?), or it would sweep in a wider category (media companies, brand-licensing holding companies, entertainment IP holders) where the "appreciation" characterization is contested. Reform advocates and reform skeptics agree that a franchise-only carve-out would create administrative complexity; they disagree about whether the complexity is worth it.
Analogous to §1245 depreciation recapture: on ultimate sale, the seller would recharacterize a portion of the gain (equal to prior §197 deductions) as ordinary income. This eliminates the rate arbitrage. It preserves the 15-year deferral value but strips out the permanent rate benefit.
If the franchise has appreciated during the amortization period, the taxpayer would recognize a "mark-to-market" gain at the end of year 15 equal to the accumulated appreciation. This is administratively cleaner than tracking recapture at sale but creates a phantom-income liability with no cash to pay it.
Some intangibles (existing player contracts) genuinely have finite lives — a 4-year rookie contract does not extend past four years. Reform proposals have suggested breaking the intangibles bucket back apart for specific identifiable classes with shorter economic lives, leaving true "franchise value" on a longer schedule.
The most aggressive proposal: eliminate §197 amortization for professional-sports franchise rights specifically. This is the cleanest arithmetic outcome and the hardest to legislate, given the definitional and lobbying pressure any such carve-out would attract.
None of these proposals has advanced meaningfully in Congress as of mid-2026. Prior legislative attention has been episodic (Sen. Sherrod Brown and others have proposed limits in prior sessions; nothing has cleared committee). The topic has drawn public attention through Arnold's platform and through ProPublica's reporting on specific buyer-level tax filings, but the political economy of the reform — a small number of high-visibility beneficiaries, a diffuse public purse loss, and a complex administrative rewrite — has kept it below the fold. The Institute takes no position on whether reform should happen; we describe the mechanic, the arithmetic, and the reform landscape so practitioners can underwrite the shelter's durability with clear eyes.
Franchise ownership is one of the last remaining pure-play passive-shelter opportunities inside the tax code where the sheltering asset is also expected to appreciate at double digits over a multi-decade hold. For a family office underwriting a control-stake franchise acquisition, the §197 shield is a real component of the total-return math — not the primary driver, but a compounding third leg alongside operating income growth and franchise-value appreciation. The Institute's guidance for practitioners:
Cross-reference: Family Office Reference Guide for the multi-generation governance frame behind sports-franchise ownership, and Passion Assets Guide for the broader trophy-asset context.
The Institute is a CPA-run finance publisher operating under the Lowe v. SEC publisher exception. We aggregate publicly reported figures — Sportico's annual franchise-value series, Forbes's historical franchise valuations, Bloomberg deal reporting, ESPN transaction coverage, ProPublica investigative reporting on specific taxpayer filings, and municipal and league public documents — and cross-check where reporting is inconsistent.
Where we cite a specific allocation percentage — e.g., "~90%+ intangibles" — we treat that as an industry-standard estimate consistent with public reporting on the mechanic. It is not an on-record deal-specific allocation. Where a figure is a range, we show the range. Where a claim depends on non-public information, we say so.
Independent editorial analysis · Not affiliated with or endorsed by the IRS, Treasury, any league, any franchise, any named owner, any investor, or any advisor.
This reference is independent editorial and educational analysis of the Internal Revenue Code and of publicly available information about pro-sports franchise transactions. The Baratelli Institute is not affiliated with, endorsed by, sponsored by, or connected to any team, league, taxpayer, or entity named. All marks are the property of their respective owners. Analysis draws exclusively on public sources: the statute and Treasury regulations, published IRS guidance, Sportico, Forbes, Bloomberg, ESPN, ProPublica, and municipal filings. No non-public taxpayer information has been used. Specific intangibles allocations on specific transactions are almost never disclosed; where we cite an allocation percentage we identify it as industry-standard. Cited John Arnold public commentary reflects his stated public-policy position and is included as context; the Institute takes no position on the reform debate. Nothing on this page constitutes tax, legal, accounting, or investment advice, or a recommendation to structure any transaction in any particular way. The Institute is not a registered investment adviser; this is a Lowe v. SEC publisher-exception publication. Consult licensed tax counsel before structuring any acquisition.
The §197 mechanic is one lever inside a larger toolkit. The Institute's Guide library covers the family-office governance, multi-generation trust design, and international tax structure that surround sports-franchise ownership.
“An ordinary deduction now, a capital gain later, on an asset that appreciates the whole time. The arithmetic writes itself. The reform debate writes itself, too.”