IRS Releases Guidance on Valuing Contracts for Professional Athletes

Chris Gaetano
Published Date:
Apr 11, 2019

The IRS has issued a new revenue procedure that provides relief for professional sports teams that, before, were bedeviled by how to value their players' contracts. The revenue procedure notes that while professional sports leagues tend to use many contracts, valuing those contracts historically has been difficult, as the value may fluctuate based on a variety of factors, including player performance, the changing needs of the team, the changing needs of other teams, a player’s effect on fan attendance, and the number of years until a player becomes a free agent and is able to sign a contract to play for any team in a league. 

The IRS revenue procedure provides 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 this revenue procedure. Entities will qualify for the safe harbor so long as all parties to a trade use the safe harbor; each team transfers and receives only a personnel contract, draft pick or cash; there are no section 197 intangibles in the trade; and the teams' financial statements do not reflect assets or liabilities resulting from the trade other than cash. 

"Historically 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," said the IRS. "This guidance 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."

Tax practitioners can learn more about what is happening at the IRS at the Foundation for Accounting Education's upcoming IRS Practice and Procedures Conference, scheduled for Dec. 6.

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