Philadelphia of counsel David Shechtman is quoted by Tax Notes in “IRS Offers Safe Harbor on Valuing Pro Sports Trades.” American professional sport team owners had been seeking guidance since the Tax Cuts and Jobs Act of 2017 made player contract trades taxable. The April 11, 2019, IRS guidance set out in Rev. Proc. 2019-18 creates a safe harbor that allows pro sport teams to treat trades of players contracts and draft picks as having zero value for federal tax purposes.
Prior to the TCJA, Section 1031 of the Internal Revenue Code let taxpayers exchange on a tax-deferred basis like-kind property used in a trade or business or held for investment, including player contracts and certain other classes of tangible and intangible personal property. With like-kind treatment unavailable after the TCJA restricted Section 1031 to real property exchanges, team owners wondered how to assign fair market values to contracts and draft picks to determine a trade’s gain or loss. David says the “zero-value” safe harbor may have been the only practical approach for the IRS to take. “Given the large number of trades made every season, the notion of each team and the IRS having to hire sports analytics gurus to value every contract does not seem to be a good use of anyone’s resources.”
David says the paperwork for trades will likely now include boilerplate language such as: “Each of the parties agrees to report the trade for federal income tax purposes and for purposes of its financial statements in accordance with the requirements of Rev. Proc. 2019-18.”
“It turns out the repeal of section 1031 for intangibles under TCJA will be a blessing in disguise for team owners,” David says, noting that teams may now claim a taxable loss on certain trades if the team has a “tax basis” in the contract rights as a result, for example, of a signing bonus or a recent change of ownership.
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