On behalf of Silver Tax Group posted in Tax Law on Friday, April 13, 2018.
Like a perfect change-up, the new tax code has Major League Baseball wrong-footed and looking foolish. The change did not target professional sports, specifically, but it has the potential to cause a major shift in the way teams do business. The calculus behind when or whether to make a trade could be altered, depending on how leagues, the IRS and Congress respond.
The issue involves something known as the like-kind exchange. These exchanges were designed to allow businesses and individuals to trade assets for other, similar assets. Some examples include the exchange of one piece of farmland for another, or one fleet of moving vans for another. If no other cash, debt relief or unrelated property is involved, the two assets could be exchanged without any tax consequences. In the world of sports, teams could trade players (or more accurately their contracts), without tax implications because the assets traded were considered of like-kind.
A whole new ballgame
The new tax code made a small, but intentional change designed to limit like-kind exchanges. These exchanges are now limited to swaps of real property, meaning real estate and land interests. Player contracts are not real property, under the tax code, so teams making trades could face capital gains tax liability depending on how the trades are viewed.
As is often the case, small changes in tax laws cause big problems for the people and companies who must obey them. Baseball trades are rarely equal in terms of the salary exchanged. Typical trades involve highly compensated veterans being swapped for multiple young players making minor league money. While the young players could be considered more “valuable” by the team acquiring them, they are certainly less well compensated.
Some contracts are considered nearly untradeable due to injuries or poor performance by the player. Teams taking on these contracts expect to receive other assets to compensate them for having to pay the player in question. If the team taking on such a contract would also have to pay the IRS for the extra “value” received in the trade, it would become even harder to move these veterans.
The batting eye of the beholder
In baseball, assigning value to players is an almost impossible exercise. Playing ability combines with age, salary, the quality of the team, the player’s position and countless other factors to make up that players true value. This value is obviously unique to the team. The teams in playoff contention value current contributors more than future prospects. Any method of assigning a dollar value to every transaction is bound to lead to results that don’t jibe with the assessments of the participating teams.
The IRS and Congress has so far made no mention of how sports teams will comply with the new rules. The uncertainty should factor into team thinking as the trade deadline draws near. The ripple effects of the new code will likely last for some time.
Source: The New York Times, “A Curveball From the New Tax Law: It Makes Baseball Trades Harder,” by Jim Tankersley, 19 March 2018