The IRS today released an advance version of Rev. Proc. 2019-18 to provide a safe harbor for a professional sports team to treat certain personnel contracts and rights to draft players as having a zero value for determining gain or loss to be recognized for federal income tax purposes on the trade of a personnel contract or a draft pick that is within the scope of the revenue procedure.
Rev. Proc. 2019-18 [PDF 34 KB] states that the safe harbor is being made available “to avoid highly subjective, complex, lengthy, and expensive disputes” between professional sports teams and the IRS regarding the value of personnel contracts and draft picks for the purpose of determining the proper amount of gain or loss to be recognized for federal income tax purposes on the trade of one or more personnel contracts or draft picks. The safe harbor permits teams to treat the value of traded personnel contracts and draft picks as zero if certain conditions are satisfied.
As noted in a related IRS release—IR-2019-70—it has been difficult for professional sports teams to assign a monetary value to contracts or draft picks due to the fluctuating nature of the performance of players and staff members and market conditions. Rev. Proc. 2019-18 allows professional sports teams to avoid having to value their player contracts, staff-member contracts, and draft picks to determine the amount of any gain or loss to be recognized. A team using the safe harbor recognizes gain only if cash is received in the trade.
Rev. Proc. 2019-18 applies to trades of personnel contracts and draft picks by professional sports teams (trades) that meet all of the following requirements:
The safe harbor applies for determining the amount of gain or loss to be recognized on a trade by a professional sports team of personnel contracts or draft picks. For a team making a trade of a personnel contract or draft pick, the value of the personnel contract or draft pick is treated as zero for purposes of this provision. Under the safe harbor:
Rev. Proc. 2019-18 has limited applicability and applies only to trades of personnel contracts or draft picks among teams in professional sports leagues, and does not apply to trades of a team for another team or a sale of a team.
Also, today’s revenue procedure states that it does not preclude the examination and adjustment, if appropriate, of amounts reported in income in connection with trades of personnel contracts or draft picks, and that teams making trades and using the safe harbor must retain books and records to substantiate that all requirements have been met.
Rev. Proc. 2019-18 includes examples to illustrate application of the safe harbor.
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