Thanks to a 1967 ruling from the IRS, professional sports franchises have made trades without worrying about taxes. Under the rule, player contacts were swapped as “like-kind property,” a tax-free type of transaction used by all kinds of businesses, from farmers to manufacturers. But the new tax rules limit like-kind exchanges to “real property,” or real estate. As a result, Jim Tankersley of The New York Times explains, “sports franchises could now face capital gains taxes every time they exchange or trade their highly paid players.”
The effect of the rule change on sports teams is probably unintended, but it raises all kind of issues that have yet to be addressed by lawmakers or the IRS.
Tankersley cites the trade the Houston Astros made to get Justin Verlander last year, in which the eventual World Series champs sent three minor league prospects to the Detroit Tigers in exchange for the star pitcher. Under the old taxes rules, the trade would be considered a wash in terms of taxable value. Under the new rules, the teams would have to determine the value exchanged, which would be tricky given the enormous difference in salaries between Verlander, who makes $28 million a year, and the three low-salary players. Did both teams gain something? And who would determine how much? These would be very difficult questions to answer, Tankersley says, given the wild swings in value players can see over the course of their careers and the lack of a well-developed market to provide anything like stable prices.
Daniel R. Halem, the chief legal officer of Major League Baseball, hinted that sports teams will have to turn to Washington to clear up the problem. “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,” he said.