NFL Draft Day and Federal Income Tax

Two concepts that you don’t often see together!

While only of direct interest to a few taxpayers, a Revenue Procedure addressing draft picks and player contracts issued this week does make for interesting reading.

Tax professionals know that the sale or exchange of property gives rise to taxable gain or loss if the amount received is more or less than the taxpayer’s basis in the property, absent the application of a nonrecognition provision of the Internal Revenue Code. Player contracts and draft picks are property. Therefore, when they are exchanged or traded between teams, gain or loss can result. Gain is the excess of the amount realized from the exchange over the tax basis of the property given up. Loss occurs if the amount realized is less than the basis.

In Revenue Procedure 2019-18, the IRS has provided a safe harbor for professional sports teams to avoid gain on such trades. It provides that teams can assign a zero value to player contracts and draft picks. Thus, a team receiving a contract or draft pick has an amount realized of $0 and will not recognize any gain on the transaction. They will also obtain a $0 basis in the received contract or draft pick.

A loss is possible, if the exchanging team has more than a $0 basis in the contract or draft pick that is being disposed of. Also, if there is cash being paid or received in the transaction, then those amounts WILL enter into the amount realized or the basis of an acquired asset.

To use the safe harbor, the following requirements must be met:

1. The parties to the trade that are subject to federal income tax must treat the trade on their respective federal income tax returns consistent with the Revenue Procedure;

2. Each team that is a party to the trade must transfer and receive a personnel contract or draft pick. In the trade, no team may transfer property other than a personnel contract, draft pick, or cash;

3. In the trade, no personnel contract or draft pick may be an amortizable Code Sec. 197 intangible; and

4. The financial statements of teams that are parties to the trade must not reflect assets or liabilities resulting from the trade other than cash.

Why the special treatment for the teams? Is it the special love that Treasury officials have for professional sports? Or is it because the value of player contracts and draft picks is extremely difficult to value, is subjective to the particular team,  and is subject to constant fluctuation? The IRS says it is the latter.

Who says tax law can’t be fun?

Revenue Procedure 2019-18