A single word in the sweeping tax bill that House Republicans passed in December could lead to a host of unintended consequences for American pro sports teams when making trades, according to a report from Jim Tankersley in the New York Times.
This paragraph is boring but important: In addition to providing huge tax cuts for corporations, H.R.1 also tinkers with hundreds of more minute regulations. SEC. 13303 (a) adjusts how property trades are taxed, and while the old tax code allowed many businesses to exchange items of varying values free of the capital gains tax, the new tax bill shrinks that by more strictly defining its terms to apply the exemption only to real estate. (The bill reads: “Section 1031(a)(1) is amended by striking ‘property’ each place it appears and inserting ‘real property.’”)
This regulation applies mostly to trades made between farmers or manufacturers, but Tankersley notes that it also can also apply to trades made between sports teams. Baseball trades in particular often feature a valuable player being traded for future prospects, and while these are mutually beneficial exchanges that allow each party to sacrifice future assets for a better chance of winning in the present, the difference in value between, say, Justin Verlander and a handful of top prospects, is enough that it could be subject to capital gains taxes.
This raises the question of how precisely a player’s value could be defined at the time of a trade, and who would make that calculation. There isn’t an easy formula for tabulating value when an inherent feature of baseball trades such as the Verlander one is teams wanting to compete on different timelines. Will someone in the IRS be responsible for determining who “won” after every big trade? MLB doesn’t really know how it will work:
“There is no fair-market value of a baseball player. There isn’t,” said Daniel R. Halem, the chief legal officer of Major League Baseball. “I don’t really know what our clubs are going to do to address the issue. We haven’t fully figured it out yet. This is a change we hope was inadvertent, and we’re going to lobby hard to get it corrected.”
Certain NBA trades could also be subject to a different sort of federal scrutiny. I’ll let Tankersley explain:
Basketball could be an even trickier proposition, because it taxes teams if they exceed a certain amount of total player salary for the season. This year, the Portland Trail Blazers traded a player with a modest contract in order to get under the tax threshold, saving themselves millions. The Cleveland Cavaliers made a series of trades that pushed them over the threshold. Some N.B.A. executives — who would not speak for publication — wondered if the Trail Blazers would need to pay federal tax on the money they avoided in league taxes as a result of a trade.
There are plenty of questions unanswered here, and while Tankersley didn’t report on the NFL or NHL’s response to the tax bill’s change, those leagues would also seem to be affected. Further, the presence of Canadian teams makes everything more complicated. Republicans told the Times that they did not mean to target sports trades when they adjusted the rule, and it’s not clear whether they’ll open a loophole or if the IRS will even pursue it at all. The NBA apparently notified teams about the new tax rules this month, “telling them it was still figuring out how to respond.” Major league sports teams are not alone here, as the tax bill will have unintended consequences for all sorts of businesses.