Tricky Tax Consequences Of Pro Sports Team Trades Is No Longer Of Concern

The Internal Revenue Service has issued new guidance surrounding the tax consequences when professional sports teams trade a player, staff member or draft pick. The justification for the guidance was that the IRS wanted to avoid highly subjective, complex, lengthy and expensive disputes concerning the value of personnel contracts and draft picks in trying to determine the proper amount of gain or loss to be recognized for federal income tax purposes.

In essence, the IRS has provided professional sports teams with a safe harbor that permits them to treat the value of traded contracts and draft picks as zero as long as certain conditions are satisfied. It recognized the difficulty in trying to assign an objective monetary value to personnel contracts or draft picks, since the subjective needs of each team differs for particular players at different points throughout a league’s season and “is highly dependent on the particular needs of each team.”

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.

IRS, April 11, 2019.

Exceptions to the safe harbor include when teams themselves are traded or sold to third parties. Additionally, if a team receives a cash consideration as part of a trade, it must include in the amount realized the amount of money received.

The guidance is helpful, since it had appeared that under current tax laws teams would be forced to recognize gains in trades and pay a tax on traded individuals’ contracts. The tax consequences could have been substantial had players being traded outperformed their existing contracts.

How to value the contracts being traded for the purpose of determining the amount of gain or loss to report to the IRS was always a concern for those advising teams. Now, it is a concern that can be pushed aside in most instances.