Safe harbor for professional sports teams trading certain personnel contracts and draft picks


    The IRS has provided a safe harbor in Revenue Procedure 2019-18, whereby professional sports teams may qualify to treat the value of a contract as zero for federal tax purposes in certain personnel contracts and in draft picks received in trades with other professional sports teams. The safe harbor comes in response to the difficulties inherent in determining fair market value for personnel contracts and draft picks and simplifies the gain or loss analysis on these trades. The safe harbor is available for agreements entered into after April 10, 2019, but may be applied for any open taxable year.


    United States tax law provides rules for determining when parties must recognize gain or loss from certain transactions. Section 1001 of the Internal Revenue Code (IRC) provides that gain is recognized when the amount a party realizes on the transaction is greater than that party’s adjusted basis in money or property given up. The amount a party realizes includes money and the fair market value of the property it receives in the transaction. The basis of property is generally the cost of the property, with certain exceptions, per IRC Section 1012.

    These tax rules apply to trades made between professional sports teams for personnel contracts and draft picks. It is common in the professional sports world for teams to trade personnel contracts and draft picks to accommodate the shifting needs of their organizations and team objectives. The IRS recognized the need for accurate fair market values of personnel contracts and draft picks to calculate gains and losses for the sports teams making these trades.

    However, determining fair market value for these contracts and draft picks can be difficult. Their values often fluctuate based on 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 can sign a contract with any team in the league. Considering this, the IRS has offered a safe harbor for teams making these trades, simplifying the gain or loss analysis.

    Safe harbor requirements

    The safe harbor allows teams to treat certain personnel contracts and rights to draft players as having a zero value for determining gain or loss for federal income tax purposes.

    To come within the safe harbor and get the zero-value treatment, trades of personnel contracts and draft picks by professional sports teams must meet all of the following criteria:

    1. All parties to the trade must use the safe harbor and treat the trade as such on their federal income tax returns

    2. Only personnel contracts, draft picks, and cash may be transferred in the trade

    3. No personnel contract or draft pick may be an amortizable Section 197 intangible asset

    4. Cash is the only item resultant from the trade that is permitted to be reflected on the financial statements of the trading teams

    Teams should be sure to retain books and records to substantiate that all requirements have been met to qualify for the safe harbor.

    Zero value

    Gain results when the amount realized is greater than the basis of the contract or draft pick. Loss results when the basis in the contract or draft pick is greater than the amount realized. Giving each team a zero value in the trade under the safe harbor simplifies, and at times eliminates, the gain or loss recognized for federal income tax purposes.

    For example, Team A trades a player contract to Team B for a draft pick. If both teams qualify for the safe harbor, then each team is deemed to have received zero value in the trade. Neither team recognizes gain or loss on the trade and each team would take a basis of zero in the property received.

    Cash paid in the trade

    Trades of personnel contracts and draft picks sometimes include cash. A team that receives cash in a trade includes the cash in its amount realized. For example, Team C trades a player contract and $10 to Team D for a draft pick. Both Team C and Team D qualify for the safe harbor which deems the value of both the player contract and the draft pick to each be zero. However, Team D is considered to have received $10 cash for a draft pick it gave up of zero value. Therefore, Team D would recognize $10 of gain. Team C would not recognize any gain.

    A team that pays cash in a trade takes a basis in the contract or draft pick received equal to the amount of cash it paid. In the above example, Team C would take a basis in the draft pick of $10 because Team C paid $10, along with the contract that was valued at zero, to get the draft pick. Team C may then depreciate the draft pick over its useful life and get $10 of depreciation deductions. Alternatively, Team C’s basis in the contract could reduce the gain recognized by C on a subsequent sale of the contract.

    If a team paid cash in a trade and received multiple personnel contracts or draft picks, then the team must allocate the cash paid to the basis of all the contracts or draft picks received. The basis must be allocated equally to each contract or draft pick received. For example, if Team E pays $30 for three different draft picks, Team E would allocate $10 to the basis of each draft pick received.

    What does CohnReznick think?

    The IRS has provided a safe harbor for professional teams involved in trades for personnel contracts and draft picks after recognizing the difficulty in assessing their fair market values. The safe harbor is effective as of April 10, 2019, or for any open taxable year. It enables teams to avoid the difficulties of a fair market value analysis and simplifies the gain or loss treatment by adjusting, when necessary, the trading team’s basis in the personnel contract or draft pick received. Books and records should be kept to substantiate compliance with the safe harbor. Taxpayers should consult their tax advisors for implications of the safe harbor on their tax positions.


    Stephen Gregory, Director, National Tax


    Michael Billet, National Tax


    Subject matter expertise

    • Brian Newman
      Contact Brian Brian+Newman
      Brian Newman

      CPA, Partner, Practice Leader, Federal Tax Services

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    Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.