Monday is tax day, and the IRS just weighed in on player valuation

For domestic readers of Field Gulls, Monday is tax day, meaning that the Russell Wilson deadline may get lost in the shuffle of standing in line at the post office or keeping ones fingers crossed that the servers don’t crash under the wave of traffic while trying to electronically file. However, on Thursday, everybody’s favorite piece of the government issued what is called a Revenue Procedure regarding the valuation of contracts and draft picks for tax purposes.

If that doesn’t make any sense, let me give a brief background. Everything that a business operation owns must be accounted for in terms of gain or loss of a value, and taxes must be paid on any assets that appreciate in value, while a depreciation write down may be taken for those assets which lose value over time. This requirement has forced professional sports teams to value draft picks and player contracts when traded in order to recognize a taxable gain or a loss.

Obviously, this doesn’t apply to all draft picks, as most picks will be used on players and then those players will either be kept on the roster or they won’t. However, what happens when a team trades a player for a draft pick, and then trades that draft pick away? That draft pick has then become an asset that the team acquired, held and then disposed of for gain at a later date. In tax terms, that makes the draft pick no different from any other asset that a company might acquire and divest, and as such must account for the difference between the value at the time of acquisition and the time of disposition on its taxes.

Until Thursday, that is. As of Thursday the IRS has simplified things greatly and eliminated the need to create valuations for every asset a team may acquire or divest via trade. Revenue Procedure 2019-18, the full text of which may be read on the IRS website, simplifies the process by allowing teams that are party to a trade to recognize the value of the draft picks or contracts as having zero value, as long as certain conditions are met. I won’t bore you with all of those conditions, I will simply paste a single paragraph that boils the subject down to its simplest form.

In order 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, this revenue procedure provides a safe harbor permitting teams to treat the value of traded personnel contracts and draft picks as zero if certain conditions are satisfied.

Now, while some may find it strange that this is even a subject of discussion, others, I’m sure, will simply shake their heads. The idea of billionaire sports franchise owners attempting to take a depreciation loss on a player their team traded away may seem ridiculous, but I’ve never met a billionaire who didn’t have a full time team of tax professionals ready to figure out any piece of the tax code they could exploit in order to keep as much money to themselves as absolutely possible.

That, of course, leads to an understanding of how when a player like Justin Coleman is traded for a seventh round pick, and then that same draft pick is traded away the very next day, there could be room for abuse. You and I both know that a seventh round draft pick doesn’t lose value overnight like it’s a new car that someone purchased overnight. However, there’s nothing to stop a team from arguing that the pick lost so much value in the twenty four hours the team held it that in order to acquire an edge rusher they’d end up cutting two months later the seventh had to be combined with a fifth, so obviously it had lost significant value, and that significant value should be recognized as a tax loss.

Likewise, if a player like Duane Brown of the Seattle Seahawks were to be traded after having held out of training camp and into the season, an owner might try to argue that the value the team obtained in trade had devalued because of the holdout, and as such it would not be unwarranted to recognize a depreciation loss for tax purposes. Basically, if there’s a way to game the system, someone will think of it and attempt to exploit it, but on Thursday the IRS eliminated one of the ways for professional sports franchises to take massive write downs after trading a player.