IRS provides safe harbor for professional sports teams trading personnel contracts and draft picks

By Timothy M. Todd, CPA/PFS, J.D.

Editor: Valrie Chambers, CPA, Ph.D.

Personnel contracts for professional sports teams are often multimillion-dollar commitments and investments. Indeed, a sports team's personnel is often its key asset; the team rises and falls with its talent. However, teams trade players — sometimes for other players, sometimes for draft picks, or for a combination of both. Not surprisingly, there are tax consequences when those contracts change hands.

In Rev. Rul. 67-379, the IRS ruled that the cost of a baseball player contract had to be capitalized and depreciated over its useful life (as these contracts are often multiyear deals or contain renewal provisions). In Rev. Rul. 67-380, the Service ruled that such contracts are Sec. 1231 assets and are subject to Sec. 1245 recapture; also, it noted that trades of player contracts would be considered exchanges of like-kind property within Sec. 1031. Relatedly, in Rev. Rul. 71-137, the Service ruled similarly for professional football player contracts (i.e., they had to be capitalized; they were Sec. 1231 assets subject to Sec. 1245 recapture; and Sec. 1031 like-kind treatment was available for contract trades).

Therefore, prior to the enactment of the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, the tax treatment of trading contracts or draft picks between teams was relatively straightforward: They qualified for like-kind exchange treatment under Sec. 1031.

However, the TCJA drastically reduced the types of assets subject to like-kind exchange treatment; now, only real property is subject to the nonrecognition treatment of Sec. 1031. Trading a contract constitutes a sale or other disposition of property, and, without the availability of Sec. 1031, requires calculating and recognizing gain (or loss) under Sec. 1001.

But all is not lost for professional sports teams. In Rev. Proc. 2019-18, the IRS provided a safe harbor for professional sports teams engaging in these types of transactions. In short, the revenue procedure allows teams that fit within the safe harbor to treat the contracts as having a zero value for determining gain or loss.

In justifying the safe harbor, the IRS noted the historically nettlesome and subjective process of valuing these contracts. For example, during the term of a personnel contract, its value can fluctuate due to, among other things, player performance, the needs of the team, the player's effect on fan attendance, and even player injuries. In addition to these factors (and others), the market for personnel contracts is also small and private. Of course, teams generally do not agree to a trade unless both teams feel as though they are receiving something of equal or greater value. Nevertheless, the IRS recognized that it is "unusually difficult to assign an objective monetary value" to a personnel contract or draft pick.

A professional sports team must satisfy four requirements to qualify for the safe harbor:

  • All parties to the trade (who are subject to federal income tax in the United States) must use the safe harbor;
  • Each party to the trade must transfer and receive a personnel contract or draft pick (cash is allowed to be transferred or received, too);
  • No personnel contract or draft pick can be an amortizable Sec. 197 intangible; and
  • The team's financial statements must not reflect assets or liabilities resulting from the trade other than cash.

If all four conditions are satisfied, the team may treat the value of the personnel contract or draft pick as zero.

Consequently, if the safe harbor is satisfied, there will be no gain or loss on the trade — as the value of each contract or draft pick is treated as zero, and the amount realized is therefore zero. Because the contracts and draft picks are treated as having a zero value, the teams also record a zero basis under Sec. 1012 for the newly acquired contracts or draft picks. If cash is received, however, the amount of the cash is included in the amount realized.

Also, if a team is providing cash, it has to compute its basis in the new contracts or draft picks under Sec. 1012; therefore, its basis in the contract or draft pick it receives is equal to the amount of cash it provides. In the case of trades of multiple contracts or draft picks, the basis is allocated evenly between each contract or draft pick by dividing the cash provided by the number of contracts or draft picks received. It is also possible for the team to recognize a loss if the team has unrecovered basis in a contract or draft pick.

Importantly, the IRS noted that this revenue procedure has limited applicability and applies only to teams in professional sports leagues. The revenue procedure also has substantiation requirements.



Valrie Chambers, CPA, Ph.D., is an associate professor of accounting at Stetson University in Celebration, Fla. Timothy M. Todd, CPA/PFS, J.D., M.S., is associate dean for academic affairs and professor of law at Liberty University School of Law in Lynchburg, Va. For more information on this article, contact


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