If you’ve read any of my previous blogs, you know that I’m a bit of a sports fan (see here, here and here). You may also have gathered that I tend to apply tax rules I know to things we read about in the news every day. For example, how does baseball All-Star Giancarlo Stanton feel now that his monster paycheck is largely taxed in New York, a high tax state, as opposed to his previous season in Florida, with no income tax. One unforeseen consequence of the new tax law (which we blogged about for much of the winter and spring) relates to contracts of players and trades between teams.
Most sports fan will agree that one of the most exciting times in any sports season is the trade deadline. Each of the four major sports leagues has a trade deadline and beyond this day, and through the remainder of the season, teams are no longer permitted to trade players. This can lead to a rush of deals being made as the good teams try to get better by adding stars for a playoff push and the not-so-good teams try to extract draft picks from the good teams to rebuild in exchange for those stars.
Under old tax law, these trades were seen as like-kind exchanges (also known as 1031 Exchanges) and were not taxable. These rules have since changed, and under new law, like-kind exchanges are only allowed for real property (real estate). Since your favorite sports star cannot claim to be a house or building, his contract being swapped by teams is now a taxable event.
Likely a consequence many Congressmen did not think about when drafting the law, it is something that teams will have to deal with as part of trades. Teams may have to factor the economics of potentially having taxable gains from contracts being traded as part of their negotiations. As we say to many of our clients, these teams should not let the tax tail wag the business dog – that is, don’t let taxes be the main driver of business decisions. Of course, I’m sure the CPAs for these large sports franchises have already warned their owners and General Managers of this, and if they haven’t – well, feel free to pass along my information. I’d love to meet with them!
Brock R. Yates, CPA, MT