Apparently, the IRS reads our blog (just kidding … I think). A few weeks ago (April 9), we wrote a post regarding the impact of the tax law on professional sports franchises. In that post, we noted that a change enacted in connection with the 2017 tax reform, limiting the like-kind exchange exception to gain recognition under Section 1031 of the Internal Revenue Code to real estate transactions, could have a material impact on how player trades are taxed.
As we noted in our previous post, prior to the 2017 tax reform, when teams executed a trade, they could apply the like-kind exchange exception and did not have to recognize gain or loss for federal tax purposes, excepting cash. However, with the tax reform effectively limiting like-kind exchanges to real estate, teams executing player-for-player trades would now have to recognize gain and pay tax on a traded player’s contract.
Shortly after we posted our blog, the IRS issued Revenue Procedure 2019-18 addressing this issue. In the Revenue Procedure, the IRS provides professional sports teams with a safe harbor allowing them to treat certain player and staff-member contracts and draft picks as having a zero value for purposes of determining gain or loss to be recognized on the trade of a player or staff member contract or a draft pick. This safe harbor effectively allows professional sports franchises to trade players and draft picks without potentially being required to recognize gain, excepting trades that include cash consideration.
This is just another illustration of the way the tax law is constantly evolving and how a change meant to address one type of transaction (exchanges of tangible personal property) could have a much broader impact and unintentionally affect other transactions thereby necessitating further changes or guidance to undo the unintended consequences.
The US licensed lawyers and CPAs in MasAmeica’s business boutique services can provide the US tax solutions for the Israeli high-tech industry. In fact, its staff has handled tax and business matters for the Detroit Pistons (NBA) and the Tampa Bay Lightning (NHL). Contact us for a consultation.
