August 19, 2019

KD, AD, Kawhi, Uncle Drew and Uncle Sam: The Tax Consequences of Player Contract Trades

Philadelphia counsel David Shechtman and associate Matthew J. Meltzer have written “KD, AD, Kawhi, Uncle Drew and Uncle Sam: The Tax Consequences of Player Contract Trades,” published in Tax Management Memorandum. Recent, dizzying trading between National Basketball Association teams included superstar players Kevin (KD) Durant, Anthony (AD) Davis, Kawhi Leonard, and Kyrie (Uncle Drew) Irving. Prior to Jan. 1, 2018, such trades were tax-deferred as like-kind exchanges under section 1031 of the U.S. Internal Revenue Code. However, the Tax Cuts and Jobs Act of 2017 (TCJA) changed section 1031, limiting such tax treatment to exchanges of real property. In response to team owners’ concerns for assigning value to each trade and draft pick, the IRS’s Revenue Procedure 2019-18 introduced a “safe harbor” allowing such trades to be assigned “zero value” for determining gain or loss, except for any cash received.

David and Matt’s new article examines “that change in the law and also discusses recently issued guidance from the IRS that likely will allay the fears of team owners and fans alike that the new tax rules will inhibit player movement. Lastly, the article points out some issues raised by the IRS guidance that (to borrow a phrase from the sports world) might merit ‘further review.’ ”

Revenue Procedure 2019-18 “likely will be a boon to billionaire sports team owners.”  David and Matt also conclude that the revenue procedure “will lead to more favorable results (by way of a timing benefit) than the prior section 1031 regime, in that team owners who qualify for the safe harbor will recognize no gains but may recognize losses on player trades.”

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