Professional Sports Teams Gain IRS Safe-Harbor Protection

Teams in every major (and minor) sports league throughout the country were pleased to see the IRS issue favorable guidance last week around the treatment of player trades. The Tax Cuts & Jobs Act (“TCJA”) had modified the like-kind exchange rules such that only exchanges of real estate would be tax-free. All other trades of property would be taxable transactions. Upon TCJA enactment, those in the sports industry immediately worried about how player trades and trades of draft picks would be taxed. The biggest concern was how the player contracts or draft picks would be valued.

Accountants, lawyers and valuation specialists immediately began to think about how to deal with the potential administrative burdens this was sure to create. At the same time, however, the major leagues began to lobby the IRS for some reasonable relief from this law change. Thankfully, those pleas were not ignored. The IRS has provided a safe harbor for the exchange of players and draft picks in Revenue Procedure 2019-18. If certain (easy-to-meet) requirements are met, the players or draft picks will be deemed to have a zero value.

Here are some important takeaways from the Revenue Procedure:

1. If cash is involved in future trades, there will be tax consequences.
2. If a team has tax basis in a player (e.g., from an unamortized signing bonus) a loss can be taken on the trade of that player.
3. Both parties to the transaction have to agree to use this safe harbor.
4. The financial statements of teams that are parties to the trade must not reflect assets or liabilities resulting from the trade other than cash.

This guidance was issued just days before the new law would have affected owner’s individual tax returns. This one of the many uncertainties created from the new law has now been resolved.