Safe harbor issued for valuing pro sports trades

by | Apr 14, 2019 | Uncategorized | 0 comments

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Safe harbor issued for valuing pro sports trades

Professional sports teams that trade player contracts or draft picks will not have to value the contracts or draft picks when determining their gain or loss on the trade under a safe harbor issued by the IRS on Thursday (Rev. Proc. 2019-18). The guidance allows teams to treat certain personnel contracts and rights to draft players as having a zero value for determining gain or loss to be recognized for federal income tax purposes on the trade of a personnel contract or a draft pick.

The IRS is offering this safe harbor because it recognizes that the value of the future performance of an athlete or draft pick involved in a trade is highly subjective, especially in light of each team’s circumstances at the time. To avoid controversy with the IRS over the amount of gain or loss, the safe harbor permits the parties to the trade that are subject to federal income tax in the United States to treat the value of the personnel and/or draft picks as zero if certain conditions are satisfied

To use the safe harbor, each team that is a party to the trade must treat the trade on its respective tax return consistent with the revenue procedure if the team is subject to federal income tax in the United States. All parties to the trade must transfer and receive a personnel contract or draft pick and no other property other than a personnel contract, draft pick, or cash; the exchange cannot involve any amortizable Sec. 197 intangibles. In addition, the financial statements of teams that are parties to the trade must not reflect assets or liabilities resulting from the trade other than cash.

If no cash is involved in the trade, no party recognizes a gain or loss on the trade. Teams that receive cash in the exchange must include in the amount realized the amount of the cash received. A team providing cash in the trade has a basis in the personnel contract or draft pick of the amount of the cash transferred. If a team provides no cash in a trade, the personnel contract or draft pick received has a basis of zero. A team providing cash in exchange for multiple contracts or draft picks must allocate the basis received for each contract or pick by dividing the basis by the total number of contracts or picks received.

The safe harbor applies only to trades of personnel contracts or draft picks among teams in professional sports leagues; it does not apply to trades of one team for another team.

The revenue procedure has five examples illustrating the application of the safe harbor. The procedure applies to agreements about trades of personnel contracts or draft picks entered into by professional sports teams after April 10, 2019, but can be applied to any open tax year.

— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.

Research & References of Safe harbor issued for valuing pro sports trades|A&C Accounting And Tax Services
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