Major League Baseball opens its 2018 season today, which means fans can start appreciating world-class athleticism, trash talking their team’s biggest rivals and debating the nuances of congressional tax reform.
If that last activity does not sound especially exciting to you, you aren’t alone; I strongly suspect MLB owners heartily agree. But unless Congress acts, tax talk will be hard to escape at the ballpark this year.
It’s unlikely that legislators were thinking of professional baseball when they changed the rules governing “like-kind” exchanges for businesses. But some tax experts, including me, think that the new rules will create tax consequences for major league teams trading players. Under the old rules, business owners could swap out certain like-kind assets, such as vehicles and machinery, without creating a taxable event by transferring the original asset’s cost basis. Sports teams could effectively do the same with players, since tax authorities had long regarded trades as an exchange of the players’ contracts, which are business assets for tax purposes. Thus, trades were generally tax-free events.
The Tax Cuts and Jobs Act of 2017 amended the rules so that swapping cost basis is now only possible with certain types of real estate transactions. This creates a nightmare for professional sports teams.
When businesses pay capital gains tax on assets, they need to establish fair market value for that asset in order to determine how much the asset – in this case a player’s contract – has appreciated compared to the business’s basis in the asset. So how do you determine a baseball player’s fair market value? Is an established star more valuable because he has already proved his talent, or less because he is older than when the team acquired him? Is an up-and-coming rookie worth less because he has not yet proven himself? If a prospect fails to realize his potential or becomes injured shortly after the trade, should that change the calculation? Complicating matters further is the fact that a certain player may be more valuable to one team than another, depending on that team’s needs and the player’s skill set.
“There is no fair-market value of a baseball player. There isn’t,” Daniel Halem, the chief legal officer of Major League Baseball, told The New York Times. But MLB, along with other professional sports leagues, must now scramble to work out a system for determining who owes tax, and how much, on player trades in 2018 and beyond. Halem said that MLB has asked the Treasury Department for guidance on how to determine valuations on players for tax purposes.
The tax consequences haven’t stopped trades so far, which means the solutions will not remain purely hypothetical for long. One trade that took place in late 2017, but serves as an excellent illustration of how messy the new rules would be, is that of Giancarlo Stanton to the New York Yankees.
In December 2017 the Yankees traded away second baseman Starlin Castro – a decent but flawed infielder – and two fringe minor league players in exchange for one of the most valuable players in baseball. In fact, Stanton was voted the National League’s Most Valuable Player last year, after he led the league in home runs, runs batted in and slugging percentage. The Marlins agreed to this lopsided trade because the team’s new ownership was committed to heavy salary cuts; due to the no-trade clause in Stanton’s contract, he essentially could choose his destination.
Since Stanton is certainly worth more than the three players the Yankees traded for him, the Yankees could owe tax on the transaction under the new rules. After all, they received much, much more value than the player contracts they gave up. One could also argue that the Marlins would owe tax on this trade, because of Stanton’s astronomical fair market value, which would certainly be higher than the Marlins’ cost basis in his contract.
If one or both teams do owe tax, the next question is how much. Baseball fans tend to enjoy statistics, but here it’s unclear how to apply them. Is Stanton’s value a direct function of his performance with the Marlins? Is his value as an asset tied to the value of his massive contract? Or should teams engage in some arcane calculation involving his anticipated future value to the Yankees, minus the lesser value of the players the Yankees gave up and possibly the amount the Yankees will have to pay Stanton going forward? Absent guidance from the Treasury, it is anyone’s guess.
Some sports commentators have said that they doubt this change will affect the frequency of trades, but I’m not so sure. This is effectively a new tax that would reduce trading’s attractiveness for teams. Accounting Today reported that some tax practices have already fielded questions about the tax impact of trades. If teams can’t find a workaround, the change could easily lead to fewer trades overall. In a worst-case scenario, this trend could increase the time it takes struggling teams to improve, reduce the quality of play, and push away potential fans and depress ticket sales. Leagues with salary caps, such as the NBA, may find themselves in an even more complicated situation.
Congress could, however, still step in. In fact, lawmakers have recently demonstrated their willingness to carve out exceptions for major league sports organizations. The $1.3 trillion spending bill that the president signed last week included a small provision called the “Save America’s Pastime Act.” The legislation supports MLB’s assertion that playing for a minor league team is more akin to an apprenticeship than a career in and of itself. Whether or not you agree with this assertion, the new law shows that Congress has been willing to offer special treatment to business owners when that business is professional sports.
And after all, changing the like-kind exchange rules is not about closing a loophole, at least in this context. Sports teams were not regularly trading players specifically to avoid capital gains taxes on appreciated player contracts, and introducing tax considerations into these transactions creates a needless valuation mess. Almost every trade could in theory lead to tax litigation, taking immense time and resources to play out.
MLB has already indicated its intention to lobby legislators to carve out an exception to the like-kind exchange rules for sports team trades; it seems likely other leagues will do the same. Lawmakers can and should use their power to fix an almost certainly unintended consequence of the 2017 tax law.
For now, sports team trades and their potential tax consequences remain a mess. While the 2017 tax law changes are a done deal, as Yogi Berra put it, “It ain’t over till it’s over.” Legislators should make a call to the bullpen (or across the aisle) and save teams, as well as the Internal Revenue Service, from a major headache.
Posted by Paul Jacobs, CFP®, EA
Giancarlo Stanton in 2017. Photo by Ian D'Andrea.
Major League Baseball opens its 2018 season today, which means fans can start appreciating world-class athleticism, trash talking their team’s biggest rivals and debating the nuances of congressional tax reform.
If that last activity does not sound especially exciting to you, you aren’t alone; I strongly suspect MLB owners heartily agree. But unless Congress acts, tax talk will be hard to escape at the ballpark this year.
It’s unlikely that legislators were thinking of professional baseball when they changed the rules governing “like-kind” exchanges for businesses. But some tax experts, including me, think that the new rules will create tax consequences for major league teams trading players. Under the old rules, business owners could swap out certain like-kind assets, such as vehicles and machinery, without creating a taxable event by transferring the original asset’s cost basis. Sports teams could effectively do the same with players, since tax authorities had long regarded trades as an exchange of the players’ contracts, which are business assets for tax purposes. Thus, trades were generally tax-free events.
The Tax Cuts and Jobs Act of 2017 amended the rules so that swapping cost basis is now only possible with certain types of real estate transactions. This creates a nightmare for professional sports teams.
When businesses pay capital gains tax on assets, they need to establish fair market value for that asset in order to determine how much the asset – in this case a player’s contract – has appreciated compared to the business’s basis in the asset. So how do you determine a baseball player’s fair market value? Is an established star more valuable because he has already proved his talent, or less because he is older than when the team acquired him? Is an up-and-coming rookie worth less because he has not yet proven himself? If a prospect fails to realize his potential or becomes injured shortly after the trade, should that change the calculation? Complicating matters further is the fact that a certain player may be more valuable to one team than another, depending on that team’s needs and the player’s skill set.
“There is no fair-market value of a baseball player. There isn’t,” Daniel Halem, the chief legal officer of Major League Baseball, told The New York Times. But MLB, along with other professional sports leagues, must now scramble to work out a system for determining who owes tax, and how much, on player trades in 2018 and beyond. Halem said that MLB has asked the Treasury Department for guidance on how to determine valuations on players for tax purposes.
The tax consequences haven’t stopped trades so far, which means the solutions will not remain purely hypothetical for long. One trade that took place in late 2017, but serves as an excellent illustration of how messy the new rules would be, is that of Giancarlo Stanton to the New York Yankees.
In December 2017 the Yankees traded away second baseman Starlin Castro – a decent but flawed infielder – and two fringe minor league players in exchange for one of the most valuable players in baseball. In fact, Stanton was voted the National League’s Most Valuable Player last year, after he led the league in home runs, runs batted in and slugging percentage. The Marlins agreed to this lopsided trade because the team’s new ownership was committed to heavy salary cuts; due to the no-trade clause in Stanton’s contract, he essentially could choose his destination.
Since Stanton is certainly worth more than the three players the Yankees traded for him, the Yankees could owe tax on the transaction under the new rules. After all, they received much, much more value than the player contracts they gave up. One could also argue that the Marlins would owe tax on this trade, because of Stanton’s astronomical fair market value, which would certainly be higher than the Marlins’ cost basis in his contract.
If one or both teams do owe tax, the next question is how much. Baseball fans tend to enjoy statistics, but here it’s unclear how to apply them. Is Stanton’s value a direct function of his performance with the Marlins? Is his value as an asset tied to the value of his massive contract? Or should teams engage in some arcane calculation involving his anticipated future value to the Yankees, minus the lesser value of the players the Yankees gave up and possibly the amount the Yankees will have to pay Stanton going forward? Absent guidance from the Treasury, it is anyone’s guess.
Some sports commentators have said that they doubt this change will affect the frequency of trades, but I’m not so sure. This is effectively a new tax that would reduce trading’s attractiveness for teams. Accounting Today reported that some tax practices have already fielded questions about the tax impact of trades. If teams can’t find a workaround, the change could easily lead to fewer trades overall. In a worst-case scenario, this trend could increase the time it takes struggling teams to improve, reduce the quality of play, and push away potential fans and depress ticket sales. Leagues with salary caps, such as the NBA, may find themselves in an even more complicated situation.
Congress could, however, still step in. In fact, lawmakers have recently demonstrated their willingness to carve out exceptions for major league sports organizations. The $1.3 trillion spending bill that the president signed last week included a small provision called the “Save America’s Pastime Act.” The legislation supports MLB’s assertion that playing for a minor league team is more akin to an apprenticeship than a career in and of itself. Whether or not you agree with this assertion, the new law shows that Congress has been willing to offer special treatment to business owners when that business is professional sports.
And after all, changing the like-kind exchange rules is not about closing a loophole, at least in this context. Sports teams were not regularly trading players specifically to avoid capital gains taxes on appreciated player contracts, and introducing tax considerations into these transactions creates a needless valuation mess. Almost every trade could in theory lead to tax litigation, taking immense time and resources to play out.
MLB has already indicated its intention to lobby legislators to carve out an exception to the like-kind exchange rules for sports team trades; it seems likely other leagues will do the same. Lawmakers can and should use their power to fix an almost certainly unintended consequence of the 2017 tax law.
For now, sports team trades and their potential tax consequences remain a mess. While the 2017 tax law changes are a done deal, as Yogi Berra put it, “It ain’t over till it’s over.” Legislators should make a call to the bullpen (or across the aisle) and save teams, as well as the Internal Revenue Service, from a major headache.
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