IRS offers safe harbor for pro sports teams trading players and draft picks

The Internal Revenue Service released a revenue procedure Thursday giving professional sports teams a safe harbor when doing trades of their athletes, staff contracts or draft picks.

Revenue Procedure 2019-18 provides a safe harbor for a pro sports team to treat certain player and staff-member contracts and draft picks as having a zero value for determining gain or loss to be recognized for federal income tax purposes on the trade of player and staff-member contracts or draft picks.

The IRS noted that it has historically been difficult for pro sports teams to assign a monetary value to contracts or draft picks thanks to the fluctuating nature of the performance of players and staff members, along with 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,” said the IRS. “A team using the safe harbor recognizes gain only if cash is received in the trade.”

Philadelphia Phillies players congratulate one another after defeating the Tampa Bay Rays in game one of the World Series in 2008.
Philadelphia Phillies players congratulate one another after defeating the Tampa Bay Rays in game one of the Major League Baseball (MLB) World Series at Tropicana Field in St. Petersburg, Florida, U.S., on Wednesday, Oct. 22, 2008. The Phillies, who are seeking their first World Series title since 1980, won the game 3-2. Photographer: Ryan K. Morris/Bloomberg News

Teams generally engage players and staff members, such as managers and coaches, through employment contracts that provide compensation in return for future performance of specified services for a defined period of time, usually longer than one year, the IRS pointed out.

“During the term of a personnel contract, the value of that contract may fluctuate based on a variety of factors, including player performance, the changing needs of the team, the changing needs of other teams, a player’s effect on fan attendance, and the number of years until a player becomes a free agent and is able to sign a contract to play for any team in a league,” said the revenue procedure. “Other considerations affecting the value of a player contract include the size of the team’s market (whether a smaller city or a major urban population), the cost of player development, and the impact of injuries and slumps on player performance. Players may underperform or outperform the expectations of their teams, and the performance of other players on the team, or future prospects, may cause the team to develop a different view as to the value of the player and the contract. In addition to these unique factors, the market in which personnel contracts are traded is small and private. From time to time, teams trade one or more personnel contracts to other teams in exchange for one or more personnel contracts for the services of other personnel.”

Some trades can include the transfer of a right to draft players in the league’s player draft or a cash payment, while some trades involve only draft picks.

“In order to avoid highly subjective, complex, lengthy, and expensive disputes between professional sports teams and the IRS regarding the value of personnel contracts and draft picks for the purpose of determining the proper amount of gain or loss to be recognized for federal income tax purposes on the trade of one or more personnel contracts or draft picks, this revenue procedure provides a safe harbor permitting teams to treat the value of traded personnel contracts and draft picks as zero if certain conditions are satisfied,” said the IRS.

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