The Internal Revenue Service (IRS) issued Revenue Procedure 2019-18 (Revenue Procedure), which provides a safe harbor that generally allows professional sports teams to treat the value of player and staff member contracts, as well as rights to draft picks, as having a value of zero in determining gain or loss on the trade for US federal income tax purposes.

Prior to the enactment of the Tax Cuts and Jobs Act (TCJA) in December 2017, which, among other things, limited Section 10311 (relating to like-kind exchanges) solely to applicable real property transactions, professional sports teams generally treated trades of player contracts as like-kind property, and thus, as tax-deferred exchanges. After the enactment of the TCJA, professional sports teams were required to value player contracts to determine the amount of gain or loss on the trade. 

The value of a player contract can fluctuate significantly over time based on a variety of factors, including player performance, player's personal conduct, political views of the player, changing needs of the team, the changing needs of other teams, the term of the contract, a player's effect on fan attendance and jersey sales, the number of years until a player becomes a free agent and so on.

Recognizing that valuing player contracts is "highly subjective," and to avoid "complex, lengthy, and expensive disputes" with professional sports teams, the IRS issued this Revenue Procedure to set forth a safe harbor under which teams may value such contracts. In order to qualify for the safe harbor: (i) all of the parties to the trade must agree to use the safe harbor; (ii) each team that is a party to the trade must transfer and receive a personnel contract or rights to a draft pick and no team may transfer property other than personnel contracts, rights to draft picks and cash; (iii) no team attempts to amortize a player contract under Section 197; and (iv) the financial statements of the teams must not reflect assets or liabilities from the trades other than cash.

If the safe harbor applies, neither team would recognize gain or loss on a trade of personnel contracts or rights to draft picks unless a team receives cash or a team has tax basis in a contract or draft pick it relinquishes in the trade. If, in addition to a personnel contract or draft pick, a team receives cash in a trade, the amount of cash will be the amount realized, and the team will have gain or loss depending on the tax basis of the contracts relinquished. If a team provides cash in a trade, the team has a basis in the contract received equal to the cash provided; similarly, if a team provides cash and receives more than one contract (including rights to draft picks) in the trade, the team simply allocates the basis attributable to the cash proportionately among the number of contracts/rights received regardless of the value of such contracts/rights. 

The Revenue Procedure is effective for all applicable trades entered into after April 10, 2019, though teams are able to apply the Revenue Procedure for all open years. Presumably, if a team wished to apply the Revenue Procedure retroactively, to satisfy the first requirement of the safe harbor, it will need to confirm that its trading counterpart will also apply the Revenue Procedure to such trade.

Footnote

1 Section" references are to the Internal Revenue Code of 1986, as amended.

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