April 15 is quickly approaching so here’s one for all the tax nerds out there: the IRS issued new guidance today that will give professional sports teams some relief from a new twist presented by the tax law enacted in 2017.
The relevant provision related to how businesses are taxed on swapped assets, which included swaps of player contracts by professional sports teams. Under the old law, a swap of stuff of unequal value did not create a taxable event. So, if I traded a $50 piece of equipment for a $100 piece of equipment, I realized a $50 gain, but I was not taxed. Same went for me trading a contract worth $5 million for one worth $10 million. A trade of players did not create a taxable event for the Mudville Nine.
The 2017 law changed that, however. In the new law, only real estate swaps were not taxed. All other swaps of business assets are now taxed. Which is fine if you’re dealing with a printer or a metal stamper or something. It’s a little harder on a baseball player contract because how does one really value a $10 million contract? What if it’s for a player who sucks? What if it’s a sharply team-friendly contract for a much more valuable bit of control on a star player? Kind of a mess.
Now that’s all out of the way. From the IRS:
The Internal Revenue Service issued guidance today that provides a safe harbor allowing professional sports teams to treat certain player and staff-member contracts and draft picks as having a zero value for determining gain or loss to be recognized on the trade of a player or staff-member contract or a draft pick.
Historically it has been difficult for professional sports teams to assign a monetary value to contracts or draft picks due to the fluctuating nature of the performance of players and staff members, and market conditions. This guidance allows professional sports teams to avoid having to value their player contracts, staff-member contracts, and draft picks to determine the amount of any gain or loss to be recognized. A team using the safe harbor recognizes gain only if cash is received in the trade.
The IRS announced the guidance in Revenue Procedure 2019-18, posted today on IRS.gov.
There are now 30 people in baseball front offices who, presumably, have one less task to do each spring.
(Thanks to Chris Jones for the heads up)