Tax Reform May Impact Professional Sports Player Trades

February 23, 2018

The Seward & Kissel LLP Tax Group has been studying the Tax Cuts and Jobs Act (the “Act”) and analyzing how the Act may impact our clients. While probably not directly relevant to most of our clients, this Memorandum discusses an example of the sweeping impact of this legislation, and of (presumably) unintended consequences. In addition, we think this Memorandum provides an interesting piece of sports trivia for our many clients who are sports fans.

Among other changes, the Act limits the tax-free treatment of like-kind exchanges to certain real estate transactions. Prior to the enactment of the Act, Section 1031 of the Internal Revenue Code permitted taxpayers to exchange like-kind properties used in a trade or business or held for investment (including personal property) on a tax-deferred basis for U.S. federal income tax purposes (“1031 Exchange Treatment”). Professional sports teams often utilized 1031 Exchange Treatment to avoid the current recognition of income on trades of players. The Act may have inadvertently impacted United States professional sports.

The Internal Revenue Service (“IRS”) views two teams trading players as trading those players’ contracts. Professional athletes’ contracts are business assets for tax purposes. The IRS has taken the position that player contracts are like-kind property.1 When teams exchange contracts, 1031 Exchange Treatment applies and the trading teams do not recognize gain or loss for U.S. federal tax purposes (except to the extent of cash received).

For exchanges completed after December 31, 2017, the Act limits 1031 Exchange Treatment to like-kind real estate that is held for investment or used in a trade or business (other than the trade or business of being a dealer in real estate). Professional athletes’ contracts are not real property. Therefore, the 1031 Exchange Treatment will no longer apply to professional sports teams trading players after 2017.

Because 1031 Exchange Treatment no longer applies to player trades, teams may be required to recognize gain or loss for U.S. federal income tax purposes when a player is traded. Generally, taxable gain or loss is the difference between the fair market value of property at the time of its sale or exchange and the taxpayer’s basis in the property. A team will have tax basis in the player’s contract equal to the cost to acquire the player, possibly including amounts due to the player for future services). The value of a player rests in his or her future performance, which is difficult to predict. Teams may have to adopt or develop a method of valuing player contracts for tax purposes, such as actuarial values based on player age and the average length of a professional sports career. Teams trading players would then recognize gain or loss on a contract when a player is traded equal to the difference between the contract’s actuarial (or other) value and the team’s basis in the contract.

By imposing U.S. federal income tax on player trades, the Act may have inadvertently impacted the professional sports landscape. The impact of imposing adverse U.S. federal income tax consequence on professional sports teams when trading players may include:

  • fewer trades overall;
  • fewer player-for-player trades;
  • more cash-for-player or player-for-draft picks deals; or,
  • the develop of an alternative trading procedure that effectuates trades without triggering adverse tax consequences.

The Act contains many new tax rules and changes many others. For additional information on recent income tax changes, please contact one of the attorneys listed below.


1 See Revenue Ruling 67-380 and Revenue Ruling 71-137.


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