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Article
PANDORA’S BOX ENTERS THE BATTER’S BOX: HOW THE
TAX CUTS AND JOBS ACT’S UNINTENDED
CONSEQUENCE PLACES MLB, AND ALL
NORTH AMERICAN LEAGUES, IN
TAX CHAOS
K
ARI
S
MOKER
*, A
LAN
P
OGROSZEWSKI
**, K
YLE
S
TICH
***,
AND
K
EVIN
A
RNOLD
****
* Kari A. Smoker, J.D., M.S. Taxation, is an Associate Professor in Accounting
at the State University of New York (SUNY), The College at Brockport, and will be
joining the faculty in the School of Business at Ithaca College in August 2019. She
has received a number of awards, including the Rochester Business Journal’s Forty
Under 40 Award and the SUNY Chancellor’s Award for Excellence In Teaching.
Ms. Smoker is also a consultant for AFP Consulting LLC, specializing in tax issues
for professional athletes. She publishes regularly with co-author Alan Pogroszew-
ski and has been interviewed by various media outlets on contemporary tax issues
affecting the sports industry.
** Alan Pogroszewski, M.B.A., M.S. Taxation, is an Associate Professor in
Sport Management at St. John Fisher College and also the founder and CEO of
AFP Consulting LLC, which specializes in tax consulting and income tax prepara-
tion for professional athletes world-wide. Alan is seen as a leader in professional
athlete tax matters, having been published numerous times in national law jour-
nals and interviewed by national media outlets. Alan’s article “Is Tennessee’s Ver-
sion of the ‘Jock Tax’ Unconstitutional?” co-authored with Kari Smoker in the
Spring 2013 edition of the Marquette Sports Law Review proved to be instrumental in
Tennessee lawmakers voting to repeal this tax. Alan is also the creator of the Jock
Tax Index (JTI) which was presented at the 2015 MIT Annual Sloan Sports Analyt-
ics Conference and has been featured on “Off the Charts” by Scarlet Fu on Bloom-
berg Television’s Market Crashers. The JTI measures how a team’s location
dictates the tax burden on an athlete and allows individuals to compare the net
take-home income, after tax liabilities and credits, of any contract proposal be-
tween competing offers from different tax jurisdictions. Over the past several
years, Alan has advised several of the top free agents in sports by assisting them in
understanding the tax situation for each of the potential offers they receive.
*** Kyle Stitch, M.S. Taxation, is the Director of AFP Analytics, where he spe-
cializes in player valuation. He has assisted sport agents in negotiations to ensure
they are maximizing their clients’ earning potential. In addition, Mr. Stich is a tax
specialist and Director of Operations at AFP Consulting LLC, whose clientele in-
clude professional athletes performing services on three separate continents. Mr.
Stich earned his Master of Science in Sport Management with a Concentration in
Sport Analytics from Columbia University in 2017. He earned his undergraduate
degrees in Accounting and Sport Management from St. John Fisher College in
2015, where he has served as an adjunct professor teaching Sport Finance and
Baseball Analytics.
**** Kevin Arnold is Audit Accountant at the firm Firley, Moran, Freer &
Eassa CPA, PC, in Syracuse, NY. He received his B.S. in Accounting degree from
the State University of New York, The College at Brockport, where he also focused
his studies on business and sports management. He remained on the President’s
List for four semesters for maintaining a perfect 4.0 grade point average.
(291)
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I. I
NTRODUCTION
In the most recent collective bargaining agreement between
Major League Baseball (“MLB”) and the Major League Baseball
Players Association (“MLBPA”), the word “tax” appears 114 times.
Some of these references pertain to MLB’s competitive balance
tax.
1
First implemented in 2003 in lieu of a salary cap, the competi-
tive balance tax is a three-tiered penalty assessed annually on teams
with payroll exceeding a specified amount, or the “base tax thresh-
old.”
2
The assessment increases for each consecutive year the team
exceeds the threshold, up to a maximum penalty of fifty percent of
the excess.
3
In addition, MLB imposes a surcharge on each $20
million increment by which the team exceeds the threshold, up to
an excess of $40 million.
4
These additional surcharges can drive
the total assessment up to ninety-five percent of the excess.
5
The New York Yankees are well acquainted with the competitive
balance tax, having paid it for fifteen consecutive years since its in-
ception in 2003.
6
They finally avoided it in 2018, however, even
after acquiring the remaining term of a $325 million contract with
reigning National League Most Valuable Player Giancarlo Stanton
from the Miami Marlins on December 11, 2017.
7
In exchange for
Stanton, the Yankees traded second baseman Starlin Castro and a
1. 2017–2021 Basic Agreement, available at http://www.mlbplayers.com/
pdf9/5450407.pdf [https://perma.cc/LJ8T-U46A] (last visited Mar. 22, 2019).
2. The base tax threshold was increased under the 2017–2021 Collective Bar-
gaining Agreement to $195 million for 2017, $197 million for 2018, $206 million
for 2019, $208 million for 2020, and $210 million for 2021. See id. at 107.
3. See id. at 108.
4. See id. at 108–09.
5. See id. at 110.
6. See Yankees Set to Avoid Luxury Tax; Red Sox, Nationals Only Teams over Thresh-
old,
ESPN
(Sept. 13, 2018, 6:06 AM), https://abcnews.go.com/Sports/yankees-set-
avoid-luxury-tax-red-sox-nationals/story?id=57790844 [https://perma.cc/7KWK-
D22W?type=image]. In spite of the hefty penalties, a number of MLB teams ex-
ceeded the $195 million threshold in 2017 and paid a total of $61.15 million for
this so-called “luxury tax.” See Luxury Tax Payments* by Major League Baseball Teams
from 2003 to 2018 (in Million U.S. Dollars),
S
TATISTA
, https://www.statista.com/statis-
tics/207455/year-by-year-luxury-tax-payments-in-major-league-baseball/ [https://
perma.cc/65KP-7ZDT] (last visited Mar. 22, 2019). The Los Angeles Dodgers
alone owed $36.2 million; 2017 marked the fourth consecutive year that the team
owed the highest assessment in the league, bringing its five-year total to nearly
$150 million. See Dodgers Hit with $36.2 Million Luxury Tax, Yankees with $15.7 Mil-
lion,
NBC S
PORTS
(Dec. 19, 2017, 6:39 PM), https://mlb.nbcsports.com/2017/12/
19/dodgers-hit-with-36-2-million-luxury-tax-yankees-with-15-7-million/ [https://
perma.cc/AJA3-XL7G].
7. See id.; see also Clark Spencer, It’s Official, Stanton Is Now a Yankee,
M
IAMI
H
ERALD
(Dec. 11, 2017, 6:24 PM), http://www.miamiherald.com/sports/mlb/
miami-marlins/article189137539.html [https://perma.cc/8TNA-GJTR].
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pair of minor league players, pitcher Jorge Guzman and infielder
Jose Devers.
8
Meanwhile, Congress was fast at work enacting sweeping
changes to the federal tax laws.
9
On December 22, 2017, just
eleven days after the Yankees acquired Stanton, Congress enacted
the Tax Cuts and Jobs Act, which has been referred to as “the most
significant overhaul to the U.S. tax code in thirty years.”
10
The
changes included a permanently reduced rate of twenty-one per-
cent for corporate taxes as well as a temporary reduction of per-
sonal income tax rates.
11
Little could the Yankees have known—in
fact, little did Congress realize—that one of the changes under the
new tax law has far greater consequences for professional sports
than any league salary cap or the competitive balance tax.
12
For the
first time in over fifty years, the gains realized on professional sports
trades are no longer tax-exempt.
Recognizing that the calculation of gain and loss on these
transactions is complex and fraught with uncertainty, the IRS issued
safe harbor rules applicable to trades entered into by professional
sports teams after April 10, 2019.
13
At the team’s election, the rules
also apply to trades that were transacted in an open taxable year.
14
However, specific requirements must be met for transactions to fall
within the scope of the safe harbor rules.
15
Therefore, any trades
transacted on or before April 10, 2019 that were already reported
for federal income tax purposes are fully taxable, as are those trades
8. See id.
9. See Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054, 2054 (2017)
(codified as amended in scattered sections of the Internal Revenue Code).
10. Damian Paletta and Jeff Stein, Sweeping Tax Overhaul Clears Congress,
W
ASH
.
P
OST
(Dec. 20, 2017), https://www.washingtonpost.com/business/economy/gop-
tax-bill-passes-congress-as-trump-prepares-to-sign-it-into-law/2017/12/20/
0ba2fd98-e597-11e7-9ec2-518810e7d44d_story.html?utm_term=.904b0284b596
[https://perma.cc/SZZ4-XE7E].
11. See id.
12. The tax bill was rushed through Congress in only two months, and some
of the changes, including a potential tax on professional sports trades, were likely
unforeseen. “Republicans say they weren’t trying to hamstring sports teams: The
change in the like-kind provision, Senate staff members said, was simply an attempt
to broaden the United States tax base.” Jim Tankersley, A Curveball from the New
Tax Law: It Makes Baseball Trades Harder,
N.Y. T
IMES
(Mar. 19, 2017), https://
www.nytimes.com/2018/03/19/us/politics/baseball-tax-law-.html [https://
perma.cc/8868-DNZR].
13. See Rev. Proc., 2019-18, 2019-18 I.R.B. 1077. For a discussion of the safe
harbor rules, see infra notes 155–171 and accompanying text.
14. See id.
15. See id. at § 3. For a discussion of the specific requirements, see infra notes
162–165 and accompanying text.
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which are deemed out of scope because the safe harbor require-
ments are not satisfied.
This Article explores many of the uncertainties created by the
new federal tax framework by examining some key issues unique to
the business of sports. Section II examines the specific change to
Internal Revenue Code (“IRC”) Section 1031 that affects profes-
sional sports trades.
16
Section III looks at MLB’s unique standing
in the business world since securing a rare antitrust exemption al-
most a century ago that it has maintained, more or less, through
legislative and judicial acquiescence.
17
Section IV examines Section
1031 like-kind exchanges, why such transactions were initially tax-
exempt, the IRS’s somewhat surprising proclamation that MLB
trades qualify as 1031 exchanges,
18
and how the IRS may have
turned a blind eye to enforcing Section 1031’s technical rules and
reporting requirements for professional sports trades. Section IV
also outlines the new tax law, how it potentially impacts all major
league sports, and some of the complexities involved.
19
Section V
takes a practical look at valuation and how it poses a particular chal-
lenge in enforcing the new tax law.
20
Finally, Section VI outlines
the safe harbor rules issued by the IRS for the calculation of gain or
loss on professional sports trades.
21
II. U
NCHARTERED
W
ATERS
: A N
EW
G
AINS
T
AX ON
P
ROFESSIONAL
S
PORTS
T
RADES
Along with many other changes, the new tax law drastically
reduces the scope of IRC Section 1031 that applied largely to manu-
facturers and farmers—and, as it turns out, major league sports—
and allowed them to swap certain “like-kind” assets without recog-
nizing gain or loss.
22
Under the new law, only the exchange of cer-
16. For a discussion of the specific changes to I.R.C. § 1031 that impact pro-
fessional sports, see infra notes 22–31 and accompanying text.
17. For a discussion of MLB’s anti-trust exemption and how it has been main-
tained even through challenges in the federal judicial system, see infra notes 32–73
and accompanying text.
18. See Rev. Rul. 67-380, 1967-2 C.B. 291.
19. For a discussion of the history of I.R.C. section 1031 and its impact on
trades in the major sports leagues, including MLB, see infra notes 70–121 and
accompanying text.
20. For a practical discussion of valuation and the challenge it poses in en-
forcing the new tax law, see infra notes 126–153 and accompanying text.
21. For a discussion of the safe harbor rules, see infra notes 155-71 and ac-
companying text.
22. See Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054, 2123–2124
(2017) (amending I.R.C. § 1031 (2008)). Section 1031 applied to the exchange of
certain like-kind assets used in a trade or business or held for investment. See
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tain types of real estate remains tax exempt. This change was
projected to raise $30.5 billion in tax revenue over the next dec-
ade.
23
The unintended consequence of this change is that trades
like the one involving Giancarlo Stanton are now taxable, giving
rise to new complexities in the world of professional sports.
Specifically, unless a team can invoke the safe harbor rules pre-
scribed by the IRS, it will have to determine the fair market value of
each player’s contract at the time of the exchange before calculat-
ing the gain or loss on each of the players traded.
24
This is easier
said than done. A player’s fair market value is not necessarily the
same as the remaining cost of his current contract; one significant
factor is the player’s prior season performance.
25
For example, if a
player’s performance greatly improves from one year to the next,
his market value might exceed the value he signed for originally. In
addition, valuations can differ depending on the method used and
other various factors unique to the league in question.
26
Trading a
player who was originally acquired in a 1031 exchange adds an-
other layer of complexity.
27
In any case, a gains tax poses a potentially significant added
expense. Consider, for example, the sheer magnitude of Stanton’s
$325 million contract and the fact that every $1 million of gain
taxed at the twenty-one percent corporate rate yields an additional
$210,000 tax liability. Consider also that in 2017 alone, MLB saw
approximately 375 players traded in ninety-nine separate like-kind
I.R.C. §1031(a) (2008) (amended 2017). Under the previous version of I.R.C.
§ 1031, gain was recognized in a like-kind exchange only to the extent that “boot”
(cash and other non-like-kind property) was received in the exchange. See id.
§1031(a)–(b). This was also the rule articulated for professional sports trades. See
Rev. Rul. 67-380, 1967-2 C.B. 291.
23. See 131 Stat. at 2123–2124; see also
S
TAFF OF
J
OINT
C
OMMITTEE ON
T
AXA-
TION
, 115
TH
C
ONG
., E
STIMATED
R
EVENUE
E
FFECTS OF THE
“T
AX
C
UTS AND
J
OBS
A
CT
,”
AS
P
ASSED BY THE
S
ENATE ON
D
ECEMBER
2, 2017, F
ISCAL
Y
EARS
2018
–2027, JCX-63-17,
7 l.C(7) (2017), available at https://www.jct.gov/publications.html?func=startdown
&id=5047.
24. For a discussion of valuation of player contracts, see IRS, Sports Franchises,
Market Segment Specialization Program, Training 3123-005 (8–99), TPDS No. 839831,
at 12-1–12-5, available at http://www.unclefed.com/SurviveIRS/MSSP/sport.pdf.
[https://perma.cc/YV3U-QYXH] (providing IRS guidance on examination of
sports franchises).
25. See, e.g., id., at 12-4; see also Tankersley, supra note 12.
R
26. For further discussion of different valuation methods, see infra notes
126–153 and accompanying text.
27. For a full discussion of 1031 exchange transactions, see infra notes 74–125
and accompanying text.
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exchanges, while a total of 330 trades were transacted among the
four major North American sports leagues.
28
On the other hand, it was somewhat doubtful that teams would
adhere to the reporting requirements and that the new tax would
be fully enforced. This doubt was grounded in reality. Simply put,
MLB is adept at minimizing government regulation. The League
has maintained a rare antitrust exemption since 1922 and, quite
possibly, an implicit exemption from the technical rules and annual
reporting requirements for like-kind exchanges under Section
1031.
29
MLB is a $9.46 billion industry that has paid millions of
dollars in lobbying expenses over the years.
30
When asked about
the League’s position on the new tax, MLB’s chief legal officer
Daniel R. Halem stated: “This is a change we hope was inadvertent,
and we’re going to lobby hard to get it corrected.”
31
If the past,
beginning with baseball’s antitrust exemption almost 100 years ago,
was any indication, MLB’s chances of success were not to be
underestimated.
28. See MLBTR Transaction Tracker,
MLB T
RADE
R
UMORS
, https://www.mlb
traderumors.com/transactiontracker [https://perma.cc/3Q4E-8PEW] (last visited
Mar. 22, 2019) (allowing users to search for and display all MLB trades made in
2017); NFL Transactions,
S
PORTRAC
, https://www.spotrac.com/nfl/transactions/
2017/trade/ [https://perma.cc/5MMM-6HFR] (last visited Mar. 22, 2019) (listing
all National Football League trades in 2017); NHL Transactions,
S
PORTRAC
, https://
www.spotrac.com/nhl/transactions/2017/trade/ [https://perma.cc/Z6PA-
ZNKH] (last visited Mar. 22, 2019) (listing all National Hockey League trades in
2017); NBA Transactions,
S
PORTRAC
, https://www.spotrac.com/nba/transactions/
2017/all/trade/ [https://perma.cc/T96E-JZ37] (last visited Mar. 22, 2019) (list-
ing all National Basketball Association trades in 2017).
29. See generally Fed. Baseball Club of Balt., Inc. v. Nat’l League of Prof’l Base-
ball Clubs, 259 U.S. 200 (1922). An IRS audit guide does address gain and loss on
professional sports trades under I.R.C. § 1031, including the recognition of gain
up to the value of any cash and other non-like-kind property received in the ex-
change; Sports Franchises, Market Segment Specialization Program, supra note 24. The
audit guide is consistent with Revenue Ruling 67-380, 1967-2 C.B. 291. However, it
is unclear to what extent professional sports teams have complied with the report-
ing requirements under I.R.C. § 1031 or to what extent the IRS has enforced the
tax.
30. See Major League Baseball Total League Revenue from 2001 to 2017 (in Billion
U.S. Dollars)*,
S
TATISTA
, https://www.statista.com/statistics/193466/total-league-
revenue-of-the-mlb-since-2005/ (last visited Nov. 8, 2018). MLB paid $1.32 million
to lobbyists in 2016 and again in 2017. It paid an additional $660,000, in 2018, as
of August 28 that year. See Major League Baseball Commissioner’s Ofc: Summary,
C
TR
.
FOR
R
ESPONSIVE
P
OL
.
, https://www.opensecrets.org/lobby/clientsum.php?
id=D000022093&year=2018 [https://perma.cc/CVB2-LVS5] (last visited Nov. 8,
2018).
31. Tankersley, supra note 12.
R
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III. B
ASEBALL
’
S
R
ARE
A
NTITRUST
E
XEMPTION
: “A
MERICA
’
S
F
AVORITE
P
ASTIME
” H
ITS A
H
OMERUN
The first antitrust law was enacted in 1890 and was “aimed at
preserving free and unfettered competition as the rule of trade.”
32
Known as the Sherman Act, the act outlaws “every contract, combi-
nation, or conspiracy in restraint of trade,” and any “monopoliza-
tion, attempted monopolization, or conspiracy or combination to
monopolize.”
33
Ultimately, antitrust laws are designed to protect
consumers by preventing businesses from gaining unrestrained
market power and ensuring they compete fairly.
34
Yet, MLB—a
$9.46 billion industry with thirty teams averaging $315.3 million in
revenue and thirty-six players projected to earn over $21 million in
2017—has enjoyed a rare antitrust exemption for nearly a century.
This extraordinary feat dates back to a United States Supreme
Court decision written by Justice Oliver Wendell Holmes in 1922.
35
The exemption has since survived a series of challenges, including
two appeals that were rejected by the Court as recently as June
2018.
36
A. Federal Baseball
The Federal League of Baseball folded in 1915 after its second
season of play when five of its eight clubs joined the so-called
“Peace Agreement” with the other two major leagues.
37
Under the
agreement, club owners received cash settlements or ownership
shares in major league franchises.
38
The owners of the Baltimore
Terrapins, however, were excluded from the agreement, standing
32. Guide to Antitrust Laws,
F
ED
. T
RADE
C
OMM
’
N
(last visited Mar. 22, 2019)
(quoting N. Pac. Ry. Co. v. United States, 356 U.S. 1, 4 (1968)), https://
www.ftc.gov/tips-advice/competition-guidance/guide-antitrust-laws/antitrust-laws
[https://perma.cc/2DUC-ERDP].
33. Id.
34. See
R
ODNEY
D. F
ORT
, S
PORTS
E
CONOMICS
, 425 (2d ed. 2006).
35. See Major League Baseball Total League Revenue from 2001 to 2017 (in Billion
U.S. Dollars)*,
S
TATISTA
, https://www.statista.com/statistics/193466/total-league-
revenue-of-the-mlb-since-2005/ (last visited Nov. 8, 2018); see also The Highest-Paid
Players on Every MLB Team,
B
US
. I
NSIDER
(Sept. 4, 2017, 4:08 PM), https://
www.businessinsider.com/mlb-highest-paid-players-every-team-2017-7 [https://
perma.cc/LH9Y-CPMU]; see generally Fed. Baseball Club of Balt., Inc. v. Nat’l
League of Prof’l Baseball Clubs, 259 U.S. 200 (1922).
36. See Right Field Rooftops, LLC v. Chic. Cubs Baseball Club, LLC, 870 F.3d
682, cert. denied 138 S. Ct. 2621 (2018); Wyckoff v. Office of Comm’r of Baseball,
705 F. App’x 26, cert. denied 138 S. Ct. 2621 (2018).
37. See
B
RAD
S
NYDER
, A W
ELL
-P
AID
S
LAVE
: C
URT
F
LOOD
’
S
F
IGHT FOR
F
REE
A
GENCY IN
P
ROFESSIONAL
S
PORTS
, 20
(2007).
38. See id.
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firm in their demands for a major league club in Baltimore.
39
They
ultimately sued alleging that a reserve clause limiting free agency,
along with other monopolistic practices, was invoked to destroy the
Federal League.
40
It was then that the United States Supreme
Court began deregulating baseball.
On May 29, 1922, Justice Oliver Wendell Holmes issued a deci-
sion on behalf of a unanimous Court in favor of what was then
known as the National League of Professional Baseball Clubs.
41
He
reasoned that the owners of the Baltimore Terrapins were not enti-
tled to damages under the Sherman Act because professional base-
ball did not constitute interstate commerce and, therefore, was not
subject to federal regulation.
42
Following Holmes’s opinion, the is-
sue did not resurface for another twenty-five years.
Beginning in 1948, however, there were several challenges to
MLB’s exemption. The first was brought by Danny Gardella, a 1946
wartime replacement player for the New York Giants who turned
down the team’s contract proposal for the 1947 season.
43
MLB sub-
sequently banned him and seventeen other players for five years
after they signed with the Mexican League and played a season
there.
44
After a disappointing decision in the United States District
Court for the Southern District of New York in which Judge Henry
W. Goddard held it was outside the court’s jurisdiction to overturn
the exemption afforded to MLB by the United States Supreme
Court in Federal Baseball Club of Baltimore, Inc.,
45
Gardella filed an
39. See id.
40. See id.
41. See Fed. Baseball, 259 U.S. at 208–09.
42. Id. (providing how Holmes stated that “[t]he business is giving exhibitions
of baseball, which are purely state affairs” and that the transportation of people
across state lines to view those exhibitions was purely incidental and “not enough
to change the character of the business”).
43. See Ed Edmonds, Over Forty Years in the On-Deck Circle: Congress and
the Baseball Antitrust Exemption, 19
T. M
ARSHALL
L. R
EV
.
627, 632–34 (1994),
available at https://scholarship.law.nd.edu/law_faculty_scholarship/470/ [https:/
/perma.cc/T4CU-8RGS]; see also
L
EE
L
OWENFISH
, T
HE
I
MPERFECT
D
IAMOND
: A H
IS-
TORY OF
B
ASEBALL
’
S
L
ABOR
W
ARS
162–63 (rev. ed. 1991).
44. See id.
45. Goddard stated the following:
Notwithstanding that there seems to me to be a clear trend towards a
broader conception of what constitutes interstate commerce than for-
merly in view of the expanding and changing conditions since the deci-
sion in the Federal Baseball Club case, I feel that as the Circuit Court of
Appeals of this Circuit regards Federal Base Ball Club v. National League
as authority, this court must do so.
Gardella v. Chandler, 79 F. Supp. 260, 263 (S.D.N.Y. 1948).
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appeal in the United States Court of Appeals for the Second
Circuit.
46
On February 9, 1949, a three-judge panel ruled 2-1 that Gar-
della’s case held enough merit to warrant a trial.
47
However, on
October 8, 1949, the World Series between the Dodgers and the
Yankees eclipsed what would have otherwise been headline news:
Gardella’s case settled out of court one month before the trial was
slated to begin.
48
Gardella later admitted to receiving a cash settle-
ment of more than $60,000, which he split with his lawyer.
49
For
MLB, it was a small price to pay to avert the very real threat Gar-
della posed to the League’s antitrust exemption.
The issue at stake in the Gardella case—whether the tides had
changed and Federal Baseball should be overturned—prompted
some members of Congress to examine the issue more closely.
50
As
early as April 1949, Congressmen A.S. “Syd” Herlong of Florida and
Wilbur Mills of Arkansas introduced a bill that would create a legis-
lative exemption and legalize the reserve clause limiting free
agency.
51
At least sixty bills concerning baseball’s exemption were
introduced over the next two decades, but no legislative action was
taken.
52
In May 1951, Democratic Congressman Emanuel Celler of
Brooklyn proclaimed: “If baseball is illegal, then we must prosecute
46. See generally Gardella v. Chandler, 172 F.2d 402 (2d Cir. 1949).
47. See id. The three-judge panel included Judge Harrie Brigham Chase, who
was in the minority in considering Holmes’s Federal Baseball decision binding, and
Judges Jerome Frank and Learned Hand, both of whom voted in favor of granting
Gardella a trial. Id. In so ruling, Frank noted the following:
I reach that conclusion somewhat hesitantly. For, while the Supreme
Court has never explicitly overruled the Federal Baseball Club case, it has
overruled the precedents upon which that decision was based; and the
concept of commerce has changed enough in the last two decades so
that, if that case were before the Supreme Court de novo, it seems very
likely that the Court would decide the other way. This court cannot, of
course, tell the Supreme Court that it was once wrong. But “one should
not wait for formal retraction in the face of changes plainly foreshad-
owed;” this court’s duty is “to divine, as best it can, what would be the
event of the appeal in the case before it . . . Legal doctrines, as first enun-
ciated, often prove to be inadequate under the impact of ensuing experi-
ence in their practical application. And when a lower court perceives a
pronounced new doctrinal trend in Supreme Court decisions, it is its
duty, cautiously to be sure, to follow not to resist it.”
Id. at 409 n.1 (internal citations omitted).
48. See
L
EE
L
OWENFISH
, supra note 43, at 167.
49. See id.
50. See id. at 164.
51. See id.
52. See id.
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the owners or change the law.”
53
He opened an investigation sev-
eral months later.
54
By that time, eight separate actions had been
brought against various representatives of organized baseball seek-
ing treble damages totaling several millions of dollars, as provided
for under the Clayton Act for federal antitrust violations.
55
How-
ever, after interviewing several key members of the baseball com-
munity, the Subcommittee on the Study of Monopoly Power
recommended no legislative action, deferring to the courts.
56
B. Toolson
It would not take long for the courts to weigh in on baseball’s
antitrust exemption. This time, the case involved George Earl Tool-
son, a player who pitched only 138 games in the minors.
57
After the
Yankees demoted him in 1950 to their Class A affiliate in Bingham-
ton, New York, he refused to report for duty and was consequently
placed on the ineligible list.
58
He then sued the Yankees, alleging
that his ineligibility status was an illegal restraint of trade.
59
How-
ever, both the District Court for the Southern District of California
and the Ninth Circuit Court of Appeals ruled against him, citing
Federal Baseball.
60
The United States Supreme Court then granted
certiorari, and his case was argued in October 1953 together with two
other cases challenging the exemption.
61
53. See id. at 174.
54. See id.
55. See H
.R. R
EP
. N
O
.
82-2002 (1952); see also Clayton Antitrust Act, Pub. L.
No. 63-212, 38 Stat. 730, 730-40 (1914) (codified at 15 U.S.C. §§ 12–27, 15(a)).
56. H
.R. R
EP
. N
O
.
82-2002. Members of the baseball community who were
interviewed by the committee included MLB commissioner Ford Frick, Chicago
Cubs president Philip Wrigley, former New York Yankees owner Lehland “Larry”
MacPhail, Boston Red Sox manager Lou Boudreau, and Brooklyn Dodgers short
stop Pee Wee Reese. In addition, the committee sent questionnaires to a random
selection of baseball writers.
57. See George Toolson,
B
ASEBALL
R
EFERENCE
,
https://www.baseball-refer-
ence.com/register/player.fcgi?id=toolso001geo [https://perma.cc/5ZMU-QHA5]
(last visited Mar. 22, 2019) (providing Toolson’s career statistics, spanning seasons
from 1942 through 1950).
58. See George Toolson: Biographical Information,
B
ASEBALL
R
EFERENCE
,
https://
www.baseball-reference.com/bullpen/George_Toolson [https://perma.cc/EE48-
2FNQ]
(
last updated Oct. 28, 2010, 2:55 AM
)
(“He moved to California and sued
the Yankees . . . claiming he had been effectively banned from baseball.”).
59. See Toolson v. N.Y. Yankees, Inc., 101 F. Supp. 93 (S.D. Cal. 1951), aff’d
200 F.2d 198 (9th Cir. 1952).
60. See id.
61. See Toolson v. N.Y. Yankees, Inc., 345 U.S. 963 (1953) (“Petition for writ of
certiorari to the United States Court of Appeals for the Ninth Circuit granted and
case transferred to the summary docket.”).
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On November 9, 1953, in a 7-2 decision, the Court upheld the
lower court’s ruling.
62
However, it did not rely on Federal Baseball.
Instead, it based its decision on what amounted to Congressional
acquiescence. Although it was well within Congress’s power to over-
turn existing case law, the Court reasoned, it had not done so in
over thirty years, signaling its endorsement of MLB’s exemption.
63
Toolson’s pivotal action was thus the second case in which the
United States Supreme Court held that MLB was exempt from ex-
isting antitrust legislation.
Soon after rendering the Toolson decision, the Court muddled
the issue further. It determined, in subsequent cases, that base-
ball’s antitrust exemption did not extend to other professional
sports, meaning as long as Congress acquiesced in the MLB exemp-
tion, the Court’s current interpretation should be adhered to, but
only as it related to baseball.
64
Congress responded by proposing
an exemption for the national football, hockey, and basketball
leagues, but the proposal failed to make it past the Subcommittee
on Antitrust and Monopoly in 1958.
65
C. Flood
Curt Flood, a centerfielder who played twelve seasons for the
St. Louis Cardinals, brought yet another challenge to baseball’s an-
titrust exemption before the United States Supreme Court in
1972.
66
During his time in St. Louis, Flood won three World Series
62. See generally Toolson v. N.Y. Yankees, Inc., 346 U.S. 356 (1953).
63. See id. at 357 (“Congress has had the ruling under consideration but has
not seen fit to bring such business under these laws by legislation having prospec-
tive effect. The business has thus been left for thirty years to develop, on the un-
derstanding that it was not subject to existing antitrust legislation.”).
64. See Radovich v. Nat’l Football League, 352 U.S. 445, 452 (1957) (“It seems
that this language would have made it clear that the Court intended to isolate
these cases by limiting them to baseball, but since Toolson and Federal Baseball
are still cited as controlling authority in antitrust actions involving other fields of
business, we now specifically limit the rule there established to the facts there in-
volved, i.e., the business of organized professional baseball.”). The majority con-
ceded that, in all probability, it would deny baseball its antitrust exemption if the
issue were heard de novo, but that the Court was bound by existing case law in the
absence of legislative action.
65. See Sports Antitrust Bill,
CQ A
LMANAC
1958
, 14th ed., 10-318-10-320. Wash-
ington, DC: Congressional Quarterly (1959), available at https://library.cqpress.
com/cqalmanac/document.php?id=cqal58-1341776 [https://perma.cc/4YUJ-
47NZ] (“The House Judiciary Committee early in 1958 gave its approval to a mea-
sure making antitrust laws applicable to professional sports, but the House over-
ruled its Committee by amending the bill to exempt most activities of professional
baseball, basketball, football and hockey from such regulation. The Senate did not
act on either proposal.”).
66. See generally Flood v. Kuhn, 407 U.S. 258 (1972).
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titles and seven Gold Glove Awards and served as the team co-cap-
tain from 1965 to 1969.
67
He was traded to the Philadelphia Phil-
lies in the 1969 offseason and subsequently sued MLB and the
Commissioner’s office for invoking the reserve clause, which de-
nied him the right to contract with another major league team.
68
On June 19, 1972, the Court upheld MLB’s exemption, ruling
that the longstanding inconsistency between baseball and other
professional sports was an issue for the legislature to address rather
than the courts.
69
Yet it was another sixteen years before Congress
took action and passed the “Curt Flood Act of 1998,” extending the
same rights to baseball players under federal antitrust law that are
afforded to other professional athletes.
70
The act did not change
existing antitrust law in any other context or with respect to any
other person or entity.
71
The antitrust exemption was a surprising windfall for baseball
that has survived a series of challenges spanning an entire century.
This includes two recent petitions dismissed by the United States
Supreme Court in June 2018.
72
It is remarkable that the federal
government released its grip on such a vast and powerful empire.
However, it did so not just under federal antitrust law, but also
under federal tax law until 2017, affording MLB an exemption
under IRC Section 1031.
73
This new exemption pertains to a gains
tax on professional sports trades.
IV. S
ECTION
1031 L
IKE
-K
IND
E
XCHANGES
: A
MERICA
’
S
F
AVORITE
P
ASTIME
H
ITS
A
NOTHER
H
OMERUN
The Revenue Act of 1921
74
enacted the earliest tax-deferred
exchange provision in the United States.
75
In stark contrast to later
versions of the law, it allowed investors to defer their gains and
67. See id. at 264.
68. See id. at 265.
69. See id. at 267–68.
70. See Curt Flood Act of 1998, Pub. L. No. 105-297, 112 Stat. 2824, 2824–2826
(1998) (codified at 15 U.S.C. § 26).
71. See id. at 2824.
72. See Right Field Rooftops, LLC v. Chic. Cubs Baseball Club, LLC, 870 F.3d
682, cert. denied 138 S. Ct. 2621 (2018); Wyckoff v. Office of Comm’r of Baseball,
705 F. App’x 26, cert. denied 138 S. Ct. 2621 (2018).
73. See Rev. Rul. 67-380, 1967-2 C.B. 291.
74. Revenue Act of 1921, Pub. L. No. 67-98, 42 Stat. 227, 230 (1921) (origi-
nally codified at I.R.C. § 202(c)).
75. See History of Section 1031 of the Internal Revenue Code,
E
XETER
1031 E
X-
CHANGE
, http://www.exeter1031.com/History_Section_1031.aspx [https://perma.
cc/B2WG-BUD3] (last visited Mar. 22, 2019).
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losses on the exchange of securities and other property that did not
have a readily realizable market value.
76
It also allowed gains and
losses to be deferred on the exchange of like-kind properties held
for investment or for productive use in a trade or business.
77
One of the purposes of the original law was the administrative
convenience it afforded.
78
In order to determine gain or loss on
the disposition of property, a property must be assigned its fair mar-
ket value.
79
However, this can prove difficult when dealing with
property not having a “readily realizable or ascertainable value such
as property in a two-party swap.”
80
By deferring the gain or loss on
such exchanges, the difficult task of assigning fair market value was
eliminated. This issue is relevant to the high-profile “swaps” of
player contracts today, and it may explain the position taken by
MLB’s chief legal officer, Daniel R. Halem, who stated: “‘There is
no fair-market value of a baseball player. There isn’t[.]’”
81
Yet, just three years after the law’s enactment, Congress
amended it to remove any reference to property not having a “read-
ily realizable market value.”
82
It reasoned:
The provision is so indefinite that it cannot be applied
with accuracy or with consistency. It appears best to pro-
vide generally that gain or loss is recognized from all ex-
changes, and then except specifically and in definite terms those
cases of exchanges in which it is not desired to tax the gain or
allow the loss. This results in definiteness and accuracy and
enables a taxpayer to determine prior to the consumma-
tion of a given transaction the tax liability that will result.
83
76. See id.
77. See Legislative History of IRC Section 1031,
F
ED
.
OF
E
XCHANGE
A
CCOMMODA-
TORS
, http://www.1031taxreform.com/1031history/#references [https://perma.
cc/2XVQ-C8EP] (last visited Mar. 22, 2019).
78. See id. (discussing how original purpose of “administrative convenience”
was “designed to avoid the cost and complication of assigning value, and therefore
gain or loss, to property that did not have readily realizable or ascertainable value
such as property in a two-party swap”).
79. To calculate the gain or loss on property that is sold or exchange, the
taxpayer must determine the “amount realized” in the transaction. See I.R.C.
§ 1001(a) (2017). The “amount realized” is the amount of cash plus the fair mar-
ket value of other property the taxpayer received. See id. § 1001(b).
80. Legislative History of IRC Section 1031, supra note 77.
81. Tankersley, supra note 12.
R
82. Act of March 4, 1923, Pub. L. No. 67-546, 42 Stat. 1560, 1560–61 (1923).
83. Legislative History of IRC Section 1031, supra note 77 (emphasis added), cit-
ing H.R. Rep. No. 68-179, at 13 (1924), reprinted in 1939-1 C.B. 241, 251.
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A. Major League Baseball Trades Qualify as 1031 Exchanges
It was another forty-three years before the IRS articulated a for-
mal tax exemption for baseball trades under Section 1031.
84
In
1967, the IRS issued Revenue Ruling 67-380, stating its position that
MLB player trades qualify as like-kind exchanges.
85
This position
was later extended to other professional sports, including the Na-
tional Football League, National Hockey League, and National Bas-
ketball Association.
86
The 1967 ruling was another huge windfall
for baseball and, like the federal antitrust exemption, one MLB is
prepared to “lobby hard” for in the wake of the 2017 changes to the
federal tax laws.
87
The reason given for the exemption was that trading a player
for a player in baseball is no different from trading a bus that is
held for productive use in a trade or business for a like-kind bus.
88
However, the ruling glossed over the fact that baseball clubs do not
technically trade players as people. Rather, they trade the rights to
enforce the players’ contracts. That presents an issue. Section
1031 excluded certain property from like-kind exchange treat-
ment,
89
including “choses in action.”
90
A “chose in action” de-
scribes all of the personal rights to property that can be claimed or
enforced exclusively through legal action, as opposed to taking pos-
session.
91
Simply put, a chose in action includes the rights to en-
force a contract.
92
As such, the right to enforce a player’s contract
qualifies as a chose in action and is disqualified from Section 1031
like-kind exchange treatment.
Nevertheless, the IRS took the position more than fifty years
ago that MLB trades did, in fact, qualify as like-kind exchanges and
were thus tax-exempt under Section 1031. The IRS articulated the
same rule for baseball trades that applied to other Section 1031
84. See Rev. Rul. 67-38, 1967-1 C.B. 9. The exemption was later extended to
other professional sports. See, e.g., Rev. Rul. 71-137, 1971-1 C.B. 104.
85. See Rev. Rul. 67-380, 1967-2 C.B. 291.
86. See Rev. Rul. 71-137.
87. See Tankersley, supra note 12.
R
88. See Rev. Rul. 67-380.
89. See I.R.C. § 1031(a)(2) (2008) (amended 2017).
90. See id. at § 1031(a)(2)(F).
91. See Torkington v. Magee, [1902] 2 K.B. 427, 430 (Eng.).
92. If a party fails to perform its obligation under a contract, the injured party
can enforce his rights or seek damages only by suing the party in breach. See W.S.
Holdsworth, The History of the Treatment of “Choses” in Action by the Common Law, 33
H
ARV
.
L. R
EV
.
997, 997 (1920).
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exchanges.
93
The revenue ruling was issued at a time when player
trades were relatively simple. Clubs typically traded one player’s
contract for another, and no gain was recognized.
94
But player
trades have become much more complex, involving significant
sums of cash and other non-like-kind properties (referred to as
“boot”),
95
which only increases the potential for gain to be recog-
nized in a 1031 exchange.
96
B. The Basics of a Section 1031 Transaction
Two of the most basic tenets of tax law are: 1) gain or loss is
realized any time an asset is sold, exchanged, or otherwise disposed
of; and 2) unless specifically excluded by law, the full amount of
gain or loss is recognized immediately for tax purposes.
97
In this
context, the term “realized” means that there was an event trigger-
ing a gain or loss, while the term “recognized” means that the gain
or loss is of consequence in calculating taxes due. This is true
whether the asset is an automobile, vacant land, business equip-
ment, or—in the case of a professional sports team—a player’s
contract.
98
For example, consider the Giancarlo Stanton trade between
the Marlins and the Yankees in December 2017, which is depicted
in Exhibit 1.
93. See Rev. Rul. 67-380. Specifically, if the transaction resulted in a gain, the
taxpayer would recognize the gain only up to the value of “boot” (cash and other
non-like-kind property) received; but if the transaction resulted in a loss, the tax-
payer would recognize none of its loss. These rules were consistent with those
articulated in the I.R.C. See I.R.C. § 1031(a)–(c) (2008) (amended 2017).
94. See Rev. Rul. 67-380; see also I.R.C. § 1031(a) (2008) (amended 2017).
95. Boot also includes the excess value received by a franchise when the
amount of liability that is discharged on a player’s contract exceeds the liability it
assumes on a replacement player’s contract. See generally Sports Franchises, Market
Segment Specialization Program, supra note 24. For example, suppose Franchise A
owes $400,000 salary on Strong Player’s contract, but exchanges the contract for
Fast Player’s contract and assumes liability for the remaining $300,000 salary owed
to Fast; Franchise A receives $100,000 of boot, the net decrease in its liabilities. See
id. at 12-5. A “potential emerging issue” identified by the IRS in 1999 was future
draft picks and existing player contracts not constituting like-kind properties
under I.R.C. § 1031. See id. at 12-7.
96. See Rev. Rul. 67-380; see also I.R.C. § 1031(a)–(b) (2017).
97. See I.R.C. § 1001(a)–(c) (2017). There are notable exclusions, particu-
larly for individuals. See, e.g., id. § 165(c).
98. See Sports Franchises, Market Segment Specialization Program, supra note 24, at
12-1–12-7.
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E
XHIBIT
1: P
LAYER
C
ONTRACTS
T
RADED BETWEEN THE
M
IAMI
M
ARLINS AND THE
N
EW
Y
ORK
Y
ANKEES
99
How much gain or loss did the team realize when it traded
Stanton’s contract? And of that amount, how much should have
been recognized? The first step in making this determination is to
calculate the “amount realized,” which is the amount of cash plus
the fair market value of other assets the Marlins received in the
exchange.
100
Significantly, the amount of cash the Marlins received
is deemed to include the amount of any liability that the team was
discharged. This discharge of liability would have included the re-
maining amount it owed on Stanton’s contract at the time of the
trade that was assumed by the Yankees.
101
However, the amount is
offset, in turn, by the amount of liability the Marlins assumed when
they acquired Castro’s, Devers’s, and Guzman’s contracts.
102
The
Marlins’ “amount realized” is depicted in Exhibit 2.
99. “INF” refers to infielder; “P” refers to pitcher; “OF” refers to outfielder;
and “DH” refers to designated hitter. The Marlins decided to trade their Most
Valuable Player, Giancarlo Stanton, in a desperate move to save on payroll costs.
As a result, they agreed to trade Stanton on terms that required the Yankees to
assume only $265,000,000 of the $295,000,000 balance still owed on his contract.
That left the Marlins on the hook for the remaining $30,000,000, provided that
Stanton does not exercise his opt-out clause after 2020. See Giancarlo Stanton,
S
PORTRAC
, https://www.spotrac.com/mlb/new-york-yankees/giancarlo-stanton-
6864/ [https://perma.cc/PQ3A-NYEW] (last visited Mar. 22, 2019); see also Ben
Diamond et al., Transaction Analysis: Jeter’s First Fire Sale Gifts Stanton to Yankees,
B
ASEBALL
P
ROSPECTUS
(Dec. 11, 2017), https://www.baseballprospectus.com/
news/article/36373/transaction-analysis-jeters-first-fire-sale-gifts-stanton-yankees/
[https://perma.cc/L64W-HKMP?type=image] (discussing how Marlins should
have received much more value from Yankees in trade of Stanton than they
actually received).
100. See I.R.C. § 1001(b) (2017) (“The amount realized from the sale or
other disposition of the property shall be the sum of any money received plus the
fair market value of the property (other than money) received.”).
101. See 26 C.F.R. § 1.1001-2(a)(1) (1980) (“Except as provided in paragraph
(a)(2) and (3) of this section, the amount realized from a sale or other disposition
of property includes the amount of liabilities from which the transferor is dis-
charged as a result of the sale or disposition.”); see also Sports Franchises, Market
Segment Specialization Program, supra note 24, at 12-4.
102. See 26 C.F.R. § 1.1001-2(a)(3) (“In the case of a liability incurred by rea-
son of the acquisition of the property, this section does not apply to the extent that
such liability was not taken into account in determining the transferor’s basis for
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E
XHIBIT
2: A
MOUNT
R
EALIZED ON
S
TANTON
’
S
C
ONTRACT
The next step in determining the gain or loss realized by the
Marlins is to calculate the difference between: 1) the amount real-
ized; and 2) the adjusted basis in Stanton’s contract at the time of
the trade.
103
The adjusted basis is the original cost of the contract
less the deductions allowed for amortization and/or
depreciation.
104
A potential gain or loss on Stanton’s contract is depicted in
Exhibit 3:
such property.”); see also Sports Franchises, Market Segment Specialization Program, supra
note 24, at 12-4.
103. See I.R.C. § 1001(a) (1993). The result is a gain when the amount real-
ized is larger than adjusted basis. Otherwise, it is a loss.
104. See I.R.C. §§ 1011 (1969), 1012 (2014), and 1016 (2018). I.R.C. § 1011
defines “adjusted basis” as the basis determined under § 1012 (which is cost) or
other applicable provision, adjusted under § 1016. Had the Marlins originally ac-
quired Stanton in a §1031 exchange, the basis in his contract would have been
determined under § 1031(d) as opposed to § 1012. See I.R.C. § 1031(d) (2008)
(amended 2017).
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E
XHIBIT
3: D
ETERMINING THE
M
ARLINS
T
AXABLE
G
AIN
If the above transaction results in a gain, it is generally recog-
nized and is thus taxable.
105
A loss, on the other hand, is generally
deductible.
106
Section 1031 provides an exception to these rules by
deferring the recognition of gain or loss on certain assets that are
disposed of in a qualifying like-kind exchange.
107
Under prior law, Section 1031 applied generally to the ex-
change of like-kind properties held for investment or productive
use in a trade or business.
108
Thus, the exchange of a truck for a
truck or a machine for a machine, so long as they were of like-kind
or like-class, could qualify under Section 1031.
109
The regulations
allowed real estate exchanges to qualify more broadly so that real
estate held for productive use in a trade or business, such as land
and a warehouse, could be swapped for investment property, such
as vacant land.
110
In a 1031 exchange, the taxpayer normally recognizes gain
only up to the amount of cash (which is deemed to include the net
liabilities the taxpayer is discharged) plus the fair market value of
105. See I.R.C. § 1001(c).
106. See id. There are notable exclusions and limitations, however, particu-
larly for individuals. See, e.g., id. § 165(c).
107. See id. § 1031(a)–(c) (2017).
108. See I.R.C. § 1031(a) (2008) (amended 2017).
109. See 26 C.F.R. §§1.1031(a)-1(c) (1991), 1.031(a)-2 (2005). Little to no
guidance is provided for determining what qualifies as like-kind or like-class.
110. See §1.1031(a)-1(c).
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any non-like-kind property received, as illustrated in Exhibit 3.
111
In addition, loss is not recognized in a 1031 exchange.
112
While the IRC refers to Section 1031 as a tax “non-recognition”
provision (i.e. a non-taxable event), it is actually a tax deferral pro-
vision. If and when the like-kind replacement property is disposed
of in a subsequent sale or non-like-kind exchange, the taxpayer rec-
ognizes the gain or loss realized but not recognized in the original
1031 transaction.
113
This is accomplished through Section
1031(d), which provides a special rule for determining the tax-
payer’s basis in the replacement property.
114
Applying this rule to
the Giancarlo Stanton trade, the Marlins’ total basis in its replace-
ment property—its contracts with Jorge Guzman, Jose Devers, and
Starlin Castro—is the same as its adjusted basis in Stanton’s con-
tract: 1) decreased by any cash the franchise received and any liabil-
ities it was discharged; and 2) increased by any liabilities it assumed
and any gain it recognized. The rule then provides a method for
allocating basis when the taxpayer receives multiple replacement
properties, including property that is non-like-kind.
115
In that case,
the basis is allocated first to the non-like-kind property received, up
to its fair market value.
116
Any excess is then allocated to the like-
kind properties.
117
Because the Marlins received only like-kind
properties in the Giancarlo Stanton trade, its total basis in the re-
placement property would be allocated pro-rata to each of the
newly acquired contracts with Guzman, Devers, and Castro.
Normally, there are strict reporting requirements for Section
1031 exchanges. The taxpayer must complete Form 8824 and file it
with the income tax return for the year during which the exchange
took place.
118
The form requires the taxpayer to provide the date
111. See I.R.C. § 1031(a)–(b) (2017); see also 26 C.F.R § 1.1001-2(a)(1); 26
C.F.R. §1.1031(a)-1(c); Sports Franchises, Market Segment Specialization Program, supra
note 24, at 12-4.
112. See I.R.C. § 1031(c) (2017). Loss is deferred until the property is dis-
posed of in a subsequent non-1031 exchange.
113. This is true, provided no other exclusions apply.
114. See I.R.C. §1031(d) (2017); see also Sports Franchises, Market Segment Special-
ization Program, supra note 24, at 12-5.
115. See I.R.C. § 1031(d) (2017) (providing rules for determining basis).
116. See id.
117. See id.
118. See generally IRS
F
ORM
8824: L
IKE
-K
IND
E
XCHANGES
(2018), available at
https://www.irs.gov/pub/irs-pdf/f8824.pdf [https://perma.cc/KMZ5-NBWJ];
I
N-
STRUCTIONS FOR
F
ORM
8824 (
2018), available at https://www.irs.gov/instructions/
i8824 [https://perma.cc/G4Y9-98ME].
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of transfer.
119
It also requires the taxpayer to provide the dates the
replacement property was: 1) identified by written notice to an-
other party; and 2) actually received by the taxpayer.
120
Finally, the
taxpayer is required to show its calculations for the gain or loss real-
ized, the amount of gain recognized, and the basis in the replace-
ment property received.
121
C. The 2017 Tax Law Changes: Changing the Landscape of
Section 1031—and Opening Pandora’s Box on
Professional Sports Trades
On July 31, 2017, thirty-nine MLB players were swapped on the
day of the trade deadline. In three of those exchanges, the Los
Angeles Dodgers’ front office acquired Yu Darvish and two other
pitchers to bolster its pitching staff prior to the playoffs, all in hopes
of ending a twenty-nine-year championship drought.
122
Mean-
while, front office officials from other teams across the league eval-
uated nearly every aspect of their ball clubs to make what was, in
their estimation, the right move. No matter how much analysis was
undertaken, however, one thing was certain: teams gave little
thought to the potential tax consequences of these like-kind ex-
changes. The sweeping tax law changes that Congress enacted in
just the last few days of 2017, however, could have profoundly af-
fected the way teams thought about these deadline deals.
The question that becomes even more apparent since passage
of the Tax Cuts and Jobs Act is the extent to which various sports
franchises have been reporting their Section 1031 exchanges and
the basis in the contracts they have acquired.
123
This is important
for tracking purposes. If this information was not reported, or was
reported inaccurately, it would prove difficult, if not impossible, to
accurately determine basis when the contract was later traded.
However, this question has been eclipsed by yet another complexity
that quickly became apparent under the new tax laws: the IRS
needed to provide guidance on an appropriate valuation method
119. See IRS
F
ORM
8824: L
IKE
-K
IND
E
XCHANGES
, supra note 118, at Part I, line
4.
120. See id. at Part I, lines 5–6. This is due to strict timing requirements within
which the transaction must be completed in order to qualify for like-kind ex-
change treatment. See I.R.C. §1031(a)(3) (2017).
121. See IRS
F
ORM
8824: L
IKE
-K
IND
E
XCHANGES
, supra note 118 at Part III.
122. See Ken Gurnick, Dodgers Get Yu, Relief, Dazzle at Deadline,
MLB.
COM
(July
31, 2017), https://www.mlb.com/news/dodgers-trade-for-yu-darvish-bolster-bull
pen/c-245570576 [https://perma.cc/53D6-9BP3?type=image].
123. See IRS
F
ORM
8824: L
IKE
-K
IND
E
XCHANGES
, supra 118; see also
I
NSTRUC-
R
TIONS FOR
F
ORM
8824
, supra note 114.
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for determining the amount realized in a professional sports trade
and thus the gain or loss realized.
124
The method would have to
reflect current market conditions and be applied across the various
leagues.
125
Although important, issuing such guidance would have
been a massive undertaking for the IRS, especially given the little
time it had to implement all the changes under the new tax law.
Ultimately, valuation was too complex an issue for the agency to
tackle without clear confirmation from Congress that a tax on pro-
fessional sports trades would be fully enforced.
V. T
HE
C
OMPLEXITIES OF
V
ALUATION
: P
LAYER
C
ONTRACTS
In his book, Diamond Dollars: The Economics of Winning in Base-
ball, author Vince Gennaro observes, “At a time when sabermetric
tools can diagnose a player’s performance better than an MRI can
detect a rotator cuff tear, measuring the dollar value of a player
seems to have lagged far behind on the analytical priority list.”
126
He goes on to describe two fundamentally different ap-
proaches in determining the value of a professional athlete: 1) the
cost or market-based valuation approach; and 2) the marginal reve-
nue approach.
127
A. Cost or Market-Based Valuations
The cost approach calculates the going rate for a certain level
of performance by comparing players’ salary levels and their per-
formance levels.
128
When applied exclusively to a free agent mar-
ket, in which player movement is unrestricted and salaries are not
suppressed by MLB’s reserve clause, this approach lends itself to a
market-based valuation.
129
For example, the Philadelphia Phillies announced in Decem-
ber 2017 that the club agreed to a three-year, $60 million contract
with free agent Carlos Santana.
130
This provides a market-based val-
124. See I.R.C. § 1001(a)–(b) (2017).
125. This includes, for instance, a player’s prior season performance. See
Sports Franchises, Market Segment Specialization Program, supra note 24, at 12-4.
R
126.
V
INCE
G
ENNARO
, D
IAMOND
D
OLLARS
: T
HE
E
CONOMICS OF
W
INNING IN
B
ASEBALL
,
69 (2013).
127. See id.
128. See id.
129. See id. at 70. The reserve clause is set forth in the Collective Bargaining
Agreement with MLB Players Association. See 2017–2021
B
ASIC
A
GREEMENT
, supra
note 1, at art. XX.
R
130. See Steve Adams, Phillies Sign Carlos Santana,
MLB T
RADE
R
UMORS
(Dec.
20, 2017, 8:03 AM), https://www.mlbtraderumors.com/2017/12/phillies-agree-to-
terms-with-carlos-santana.html [https://perma.cc/FK3T-HR77].
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uation for talent of his magnitude.
131
Like a bond, however, it is
only natural that Santana’s value will fluctuate over time given
changes in his performance level and the price he will command in
an open market. It is critically important, then, to recalculate his
market value annually over the term of his contract. This approach
yields an up-to-date market-based valuation.
This method may seem the simplest approach to valuing player
contracts, but it raises a litany of issues. For example, there could
be a wide salary range for different players who are currently at the
same performance level. This may be the case because players
signed multi-year contracts at different times and at dramatically
different compensation levels.
132
It is also potentially difficult to
determine, with some accuracy, an athlete’s expected future per-
formance level and thus his value to the team and what the open
market would pay for that value.
1. Expected Future Performance Levels
In nearly every other type of exchange, the assets that are
traded lose value over time. With baseball players, however, their
performance level, and thus their market value, will wax and then
wane over the course of their careers. Take Kevin Youkilis, for ex-
ample, who played eleven seasons in MLB. Exhibit 5 illustrates his
performance in terms of wins above replacement (“WAR”) in rela-
tion to his age. WAR is a common performance metric used in
baseball that estimates the number of additional wins a player con-
tributes to his team.
133
131. It would be fair to assess Santana’s fair market value as equal to the
amount of his contract, which was based on the current market of free agent base-
ball players at that time.
132. See
V
INCE
G
ENNARO
, supra note 126, at 70.
133. See Kevin Youkilis,
B
ASEBALL
R
EFERENCE
, https://www.baseball-refer-
ence.com/players/y/youklke01.shtml [https://perma.cc/EA7T-JTNF] (last visited
Mar. 22, 2019). Specifically, WAR indicates the number of additional wins attribu-
table to a player that his team would not have achieved had he been replaced with
a player expected to win only a baseline minimum number of games. See Wins
Above Replacement (WAR),
MLB.
COM
, http://m.mlb.com/glossary/advanced-stats/
wins-above-replacement [https://perma.cc/QD4A-RTU7] (last visited Mar. 22,
2019).
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E
XHIBIT
5: K
EVIN
Y
OUKILIS
P
ERFORMANCE
V
ERSUS
A
GE
It is evident in Exhibit 5 that Youkilis’s performance generally
improved until age twenty-nine and then steadily declined after age
thirty. Although not every player’s career follows as nearly a perfect
trajectory as Youkilis’s, most are relatively close. Rather than lose
value over time, athletes can be expected to yield increasing levels
of performance, and thus value, during the first half of their
careers.
An important issue, then, is determining, with some accuracy,
a player’s expected future performance. This can be accomplished
by developing an aging curve, or function, based on a set of histori-
cally comparable players. There are many different methods to
construct the curve, ranging from simple to complex, which gener-
ally result in a quadratic-like graph, similar to the one shown in
Exhibit 5.
134
134. The standard form of a quadratic equation is y = ax
2
+ bx + c, where a is
not 0. Two of the simpler methods for determining future performance levels are
Tom Tango’s Marcel the Monkey model and the delta method. See Marcel 2012,
T
ANGOTIGER
, http://www.tangotiger.net/marcel/ [https://perma.cc/W2N7-
5RH7] (last visited Mar, 22, 2019); see also Neil Weinberg, The Beginner’s Guide to
Aging Curves,
F
AN
G
RAPHS
(Dec. 10, 2015), https://www.fangraphs.com/library/
the-beginners-guide-to-aging-curves/ [https://perma.cc/ZES4-NAWX] (“Simply
put, the aging curve represents the average improvement or decline expected
based on the player’s age.”). The Steamer projection model is widely considered
the most accurate projection model for the subsequent season. See Steamer,
MLB.
COM
, http://m.mlb.com/glossary/projection-systems/steamer [https://
perma.cc/P4Q4-T2FL] (last visited Mar. 22, 2019); see also Jared Cross et al., About,
S
TEAMER
P
ROJECTIONS
, http://steamerprojections.com/blog/about-2/ [https://
perma.cc/6SH7-SLA6] (last visited Mar. 22, 2019). The authors’ preferred
method is an adjusted second-degree polynomial regression constructed using his-
torical comparable players. With the increase in technology and computing
power, more complex projection models have become prevalent. Projection mod-
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Because there is a wide range of methods available for con-
structing an aging function, there is a wide range of projections of a
player’s future performance levels. Thus, the function used by
clubs across the league would have to be standardized to yield relia-
ble and consistent results. Once a player’s future performance
levels are projected, the next issue is determining what the open
market would pay.
2. What Would the Open Market Pay?
Although cost and market-based valuations stem from similar
philosophies, they usually yield different results. To illustrate the
potential differences, Exhibit 6 compares the cost and market-
based valuations for Kevin Youkilis over the span of his eleven-sea-
son career:
E
XHIBIT
6: K
EVIN
Y
OUKILIS
: C
OST VS
. M
ARKET
-B
ASED
V
ALUATIONS
$0.00
$5,000,000.00
$10,000,000.00
$15,000,000.00
$20,000,000.00
$25,000,000.00
$30,000,000.00
25 26 27 28 29 30 31 32 33 34
Market Value Salary
In Exhibit 6, Youkilis’s market value is plotted against his age.
His market value each year was determined by calculating the aver-
age cost per WAR for a third baseman and then multiplying that
cost by his own level of performance. Exhibit 6 also shows his an-
nual salary, or cost valuation, over that same span of time. Except
for his very last season in MLB, Youkilis’s high productivity yielded
surplus value to his team. In other words, his market-based valua-
tion exceeded his cost valuation by a very wide margin for nearly
ten years. Simply put, his salary represented a very deep discount.
els relying heavily on machine learning techniques are likely to increase the accu-
racy of projection models in the near future.
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In fact, baseball’s reserve clause has a significant impact on
cost valuation.
135
In enacting this clause, MLB created a system that
restricts player movement and deliberately suppresses contract val-
ues. For this reason, cost valuation for players who are subject to
the reserve clause will generally yield a lower result than market-
based valuation, which reflects what the open market would pay in
the absence of such restrictions. Notably, in examining the validity
of MLB’s reserve clause under federal antitrust law in Flood, the
United States Supreme Court did not expound on the effect of the
reserve clause on contract costs. Instead, upon an extensive review
of prior case law and after noting that various Congressional bills
relating to the reserve clause and MLB’s antitrust exemption had
stopped short of enactment, the Court concluded,
We repeat for this case what was said in Toolson:
“Without re-examination of the underlying issues, the
[judgment] below [is] affirmed on the authority of Fed-
eral Baseball Club of Baltimore v. National League of Pro-
fessional Baseball Clubs, supra, so far as that decision
determines that Congress had no intention of including
the business of baseball within the scope of the federal an-
titrust laws.”
And what the Court said in Federal Baseball in 1922 and
what it said in Toolson in 1953, we say again here in 1972:
the remedy, if any is indicated, is for congressional, and
not judicial, action.
136
Four years after the ruling in Flood, however, the MLBPA and
MLB negotiated the 1976 Collective Bargaining Agreement and, for
the first time, limited the application of the reserve clause to a
player’s first six years of service.
137
During these first six years, play-
ers are unable to negotiate with any teams other than their own.
138
In other words, players have no way of obtaining a salary that re-
flects their true market value. This is a critically important issue. If
a tax is to be assessed on the net gain realized by a team in a profes-
135. See generally Flood v. Kuhn, 407 U.S. 258 (1972).
136. Id. at 285 (internal citations omitted).
137. See id.; see also 2017–2021
B
ASIC
A
GREEMENT
, supra note 1, at art. XX.
R
Under a new pact reached on July 12, 1976, players could also demand trade after
five years. See MLBPA History: The 1970’s, MLBPA (Aug. 31, 2016), http://
www.mlbplayers.com/ViewArticle.dbml?DB_OEM_ID=34000&ATCLID
=211157624 [https://perma.cc/37AR-XMVU].
138. See 2017–2021
B
ASIC
A
GREEMENT
, supra note 1, at art. XX.
R
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sional sports trade, it is the fair market value of the incoming player
(i.e. in the absence of such restrictions, what the open market
would pay for the player’s services at the time of the trade) that is
relevant.
139
Therefore, the potential effects of the reserve clause
must be taken into account in arriving at a proper valuation. Oth-
erwise, teams would be sorely underestimating the value of player
contracts when negotiating trades and when determining the re-
sulting tax consequences, including the amount realized, the gain
or loss realized and recognized, and the basis of the incoming play-
ers’ contracts. The term of the contract and a standardized rate of
inflation are also critically important in determining the contract’s
present value.
B. The Marginal Revenue Approach
The marginal revenue approach is yet another valuation
method and is based on the principle that teams should pay players
for the value they provide.
140
This can be translated into value
based on the team’s overall performance. A “Win-Curve” model,
which shows the relationships between wins and attendance and be-
tween attendance and revenue, can be used to derive the player’s
impact on attendance and, ultimately, his monetary worth.
141
The
model’s creator emphasizes, however, that a player’s value does not
end with performance; one must also consider a player’s “marquee
value,” which refers to his off-field star power, or “gate appeal.”
142
By evaluating a player’s economic impact, it reflects more closely
what a team would pay in an open market for the value he
contributes.
143
The marginal revenue approach solves some of the issues asso-
ciated with the cost or market-based approaches.
144
For instance, it
is not tied to cost and therefore avoids the problem of salary com-
pression under MLB’s reserve clause.
145
However, there are still
139. To calculate the gain or loss on a player trade, the taxpayer must deter-
mine the “amount realized” in the transaction. See I.R.C. § 1001(a) (1993). The
“amount realized” is the amount of cash (including net liabilities discharged) plus
the fair market value of other property that the taxpayer received in the trade. See
I.R.C. § 1001(b); and 26 C.F.R. § 1.1001-2(a)(1), (3) (1980). This includes the
value of replacement player contracts. See Sports Franchises, Market Segment Speciali-
zation Program, supra note 24, at 12-4.
140. See
V
INCE
G
ENNARO
, supra note 126, at 72–87.
141. See id.
142. See id. at 93.
143. See id.
144. See id. at 72–87.
145. See id.
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too many issues that render it impractical as a valuation method for
professional sports trades.
146
Determining a player’s gate appeal,
impact on attendance, and associated “marquee value” are just
some of the complexities.
147
It also raises some of the same issues
as the cost or market-based approaches, such as having to project
the players’ expected future performance levels. The prospective
team’s future performance expectations must also be projected to
determine the player’s potential value to the team.
148
In addition, a player’s value under the marginal revenue ap-
proach will depend largely on whether the player is going to a team
in a small or large market. A star player headed to the Yankees will
likely generate more revenue and thus yield a higher value than he
would for the Cincinnati Reds, based on the relative size of those
markets. It is interesting to note that MLB implemented the com-
petitive balance tax as a financial disincentive for teams that gener-
ate higher revenues in the major markets and can thus afford to
sign all the best players at higher salaries from actually doing so.
149
There is tension, then, between the marginal revenue approach, in
which a player’s value generally increases when he signs on to play
in one of the larger markets, and MLB’s philosophy that the best
talent should not be limited to large-market teams.
Because the player’s value is tied to team revenue, adopting
this method means that standardizing valuation and financial met-
rics across teams becomes critically important. One possible solu-
tion is to standardize valuation and financial metrics across each of
the various leagues. However, this adds additional layers of com-
plexity. For starters, financial information pertaining to individual
franchises is not publicly available. With the exception of the
Green Bay Packers, sports teams are not publicly traded companies
and are subject only to their league’s standards, not those set by the
Federal Trade Commission or the Securities and Exchange Com-
mission. In addition, franchises are not subject to separate audits
ensuring league compliance. To develop standardized metrics,
rules would have to be implemented to ensure access to the appro-
priate information and compliance among the various sports
leagues. This would be a huge undertaking for the IRS.
146. See id.
147. See id.
148. See id.
149. See Luis Delgado, Explaining the Luxury Tax in Major League Baseball,
S
PORTING
C
HARTS
(Mar. 3, 2015), https://www.sportingcharts.com/articles/mlb/
explaining-the-luxury-tax-in-major-league-baseball.aspx.
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C. Assessing FMV of Player Contracts: The Stark Reality
Cost, market-based, and marginal revenue valuations are gen-
eral approaches to assessing the fair market value of player con-
tracts. In adopting any one of these approaches, practitioners have
developed numerous methods and proprietary models. They factor
in a number of different variables and rely heavily on the multitude
of data available to project the value of a player based on quality as
well as both past and future performance.
The IRS has, at times, glossed over the complexity of assessing
these values. The IRS provides an example in an examination train-
ing manual for the calculation of gain or loss on the exchange of
player contracts, and it presupposes that the sport franchises simply
“agree” as to the fair market values of the contracts they are trad-
ing.
150
But is it standard practice for both teams to state an explicit,
agreed-upon value? A number of accountants have been recom-
mending this practice in the last year to avoid IRS scrutiny, sug-
gesting that disparate values raise obvious questions and thus the
possibility of an audit.
151
However, the parties must essentially
agree to use the same valuation methods, variables, models, and
data. This is not as simple as it sounds.
In addition, it is unreasonable to assume that teams will agree
to place the very same monetary values on players’ contracts. While
teams may agree to trade two players, the contract values that are
being exchanged are not necessarily of equal dollar value to both
teams, which may be operating under wholly different circum-
stances and in different sized markets, and may have different
needs motivating the trade. Take, for instance, the Giancarlo Stan-
ton trade. Although he was the National League’s Most Valuable
Player, the Marlins agreed to trade him to the Yankees for cash,
second baseman Starlin Castro, and two minor league players in a
desperate move to save on payroll costs.
152
The Marlins’ motivation
to unload his contract was certainly different from that of the
Yankees’ to secure it, and thus the monetary value of the trade to
the Marlins may be very different from its value to the Yankees.
In fact, in a memorandum concerning the examination of
sports franchise acquisitions, the IRS acknowledged that “disagree-
150. See Sports Franchises, Market Segment Specialization Program, supra note 24, at
12-4.
151. See, e.g., Harvey Bezozi, Tax Reform’s Impact on Professional Sports,
W
EALTH
M
ANAGEMENT
.
COM
(Apr. 30, 2018), https://www.wealthmanagement.com/
high-net-worth/tax-reform-s-impact-professional-sports [https://perma.cc/5Z5U-
VG2N].
152. See supra note 99 and accompanying text.
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ment exists concerning an appropriate methodology for the valua-
tion of player contracts” and that significant time and resources are
incurred by the agency to retain experts and to resolve significant
disputes.
153
The memorandum serves as a “directive” that “reflects
a management decision to balance resources and workload priori-
ties” in the conduct of these examinations.
154
There is no reason to
believe that the valuation of player contracts to determine gain or
loss in a professional sports trade would be any less contentious,
and the need for further guidance and a simplified method for de-
termining gain or loss was clear.
VI. R
EVENUE
P
ROCEDURE
2019-18: S
AFE
H
ARBOR
R
ULES
Before launching into the safe harbor rules for calculating gain
or loss on a professional sports trade, Revenue Procedure 2019-18
acknowledges the many factors that contribute to the complexity of
valuing player contracts.
155
These factors include not only player
performance, the cost of player development, the number of years
before the player becomes a free agent, and the impact of any inju-
ries, but also the changing needs of the team and other teams, the
player’s effect on fan attendance, and the size of the team’s mar-
ket.
156
These factors, it acknowledges, can cause wide fluctuations
in the value of a player’s contract not only during the term of the
contract but also over the course of a single season.
157
Finally, un-
like other assets traded in an open market, player contracts are
traded within a specific league and thus in a market that is small
and private.
158
The Revenue Procedure further acknowledges that
the exact value that a team may place on a player’s contract is
highly subjective.
159
Specifically, the Revenue Procedure states:
As a result, although each team may believe it is receiving
something of equal or greater value to what it is giving up
in a trade . . . in light of its particular circumstances and
priorities at the time, it is unusually difficult to assign an
153. See Examination of Sports Franchise Acquisitions, IRS, https://www.irs.gov/
businesses/examination-of-sports-franchise-acquisitions [https://perma.cc/4JBQ-
2VR5] (last updated Nov. 29, 2018).
154. See id.
155. See Rev. Proc. 2019-18, 2019-18 I.R.B. 1077 § 2.02.
156. See id. at § 2.02(1).
157. See id.
158. See id.
159. See id.
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objective monetary value to. . . personnel contracts or
drafts picks.
160
It is for this reason, and “to avoid highly subjective, complex,
lengthy, and expensive disputes between professional sports teams
and the IRS,” that the safe harbor rules were issued.
161
Revenue Procedure 2019-18 goes on to establish that trades of
player contracts and draft picks fall within the scope of the safe har-
bor provisions if specific requirements are met.
162
First, all parties
to a trade that are subject to United States federal income tax must
follow the safe harbor rules for purposes of reporting the trade on
their federal income tax returns.
163
In addition, each party must
transfer and receive a player’s contract or a draft pick, and the
trade cannot include any other asset except for cash.
164
Finally, the
specific player contract or draft pick must not qualify as an amortiz-
able section 197 intangible, and the parties’ financial statements
cannot reflect any assets or liabilities resulting from the trade other
than cash.
165
For qualifying transactions, the safe harbor provisions simplify
the rules for purposes of calculating gain and loss.
166
The contract
value of a player’s contract or draft pick is treated as $0, and thus
the amount realized by a team in a qualifying trade is limited to the
amount of cash it receives.
167
If a team receives no cash, its amount
realized is zero.
168
For any team paying cash as part of a trade, its
basis in the player contract or draft pick it receives is limited to the
amount of such cash paid out.
169
If a team pays no cash, its basis in
its newly acquired player contract or draft pick is zero also.
170
Fi-
nally, gain or loss on a player’s contract or a draft pick is calculated
as the team’s amount realized less its unrecovered basis in such con-
tract or draft pick.
171
By eliminating the fair market value of play-
ers’ contracts from the determination of amount realized and basis,
160. Id. at § 2.02(2).
161. Id. at § 2.02(3).
162. See id. at § 3.
163. See id. at § 3.01.
164. See id. at § 3.02.
165. See id. at § 3.03–.04.
166. See id. at § 4.
167. See id. at §§ 4.01, 4.02(2).
168. See id. at § 4.02(2).
169. See id. at § 4.02(3).
170. See id.
171. See id. at § 4.02(1), (5).
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the rules simplify the process significantly for calculating gains and
losses on player trades.
VII. C
ONCLUSION
The 2017 tax law changes
172
drastically limited the scope of
IRC Section 1031.
173
In doing so, it opened Pandora’s Box for the
professional sports industry: for the first time in over fifty years,
sports trades became fully-taxable exchanges. However, well over a
year passed and there were still no answers to some critically impor-
tant questions. Would Congress enact a legislative exemption for
professional sports trades? If not, would the IRS enforce the new
law? How would the law be enforced? What guidance would the
agency issue? Or would professional sports escape enforcement as
a result of government inaction—the same means by which MLB
has successfully maintained a rare federal antitrust exemption for
the past century?
Ultimately, Congress kept silent on the issue (publicly at least)
and deferred to the Treasury Department to issue appropriate gui-
dance as to how the law would be interpreted and administered.
Such guidance was necessary to properly assess the value of player
contracts in a consistent manner and to determine gain or loss on
professional sports trades. This, however, was a monumental task,
and the IRS took the middle road, issuing safe harbor rules that
allow player contracts in qualifying trades to be assessed a fair mar-
ket value of zero. The rules also provide a simplified method for
determining gain and loss.
In the midst of all of the uncertainty in the past year, one thing
was certain: professional sports trades are unique from other busi-
ness transactions. They have grown increasingly complex over the
decades, and there is no single method that will resolve all of the
issues arising with valuation. In addition, major league athletes
make up only a small portion of the assets that are traded in profes-
sional sports. It is very common to see major league player con-
tracts traded for prospects (players who have not yet reached the
major leagues and thus have no known value) or draft picks (ena-
bling the team to exercise the right to draft a player, whose value
might be estimated but is still very speculative). What valuation
method, or methods, should be used for these assets? These issues
had to be addressed if a gains tax was to be fully enforced on profes-
172. See Tax Cuts and Jobs Act, Pub. L. No. 115-97, 131 Stat. 2054, 2054
(2017) (codified as amended in scattered sections of the Internal Revenue Code).
173. See id. at 2123–24.
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sional sports trades, and the safe harbor rules are a valiant attempt
to simplify the process in a way that is not only consistent, but also
transparent. For those trades that do not fall within the scope of
the safe harbor provisions, valuation and the calculation of gain or
loss may still prove highly contentious, but at least the volume of
such trades should be significantly reduced. In any case, the gains
tax and the safe harbor provisions may largely influence the way
teams think about these trades and how they ultimately structure
the deals.
