Changes in the rules for like-kind exchanges under the Tax Cuts and Jobs Act may lead professional sports teams to trade fewer players, according to some tax experts.

Under the new tax law, sports teams that trade players are seen as effectively trading those players’ contracts, which are regarded as assets for tax purposes. That means teams would have to pay taxes every time they traded players and could not use the old rules under Section 1031 of the tax code for like-kind exchanges to make the trades on a tax-free basis.

“It’s been long established that player contracts are business assets,” said Brett Cotler, an associate at the New York law firm Seward & Kissel LLP. “There were some revenue rulings back in the ’60s and ’70s, at a time when leagues were expanding and franchises were changing hands, and there were some other issues going on as well. But in those rulings it came out that player exchanges were going to be 1031 exchanges, which are tax-free exchanges of like-kind property. Assuming there was no cash involved in the trade, teams would recognize no gain or loss when they traded players. They were just trading the business asset that was their contract. The Tax Cuts and Jobs Act that was passed in December amends 1031 to only certain real estate deals now, so you can’t apply 1031 to player trades anymore.”

For exchanges completed after the end of last year, the new tax law limits 1031 exchange treatment to like-kind real estate that is held for investment or used in a trade or business (other than the trade or business of being a dealer in real estate), according to Seward & Kissel’s tax group. Since professional athletes’ contracts aren’t considered real property, 1031 exchange treatment will no longer apply to professional sports teams trading players after 2017. Starting this year, sports teams might need to begin recognizing a taxable gain when they trade players, though so far that hasn’t slowed the pace.

“There have already been a lot of blockbuster trades this year,” said Cotler. “The Yankees acquired Giancarlo Stanton. [Last] week alone there was a flurry of hockey trades. I don’t think taxes are going to drive business decisions, but they might.”

Taxes often do have an effect on people’s business decisions, though, noted Cotler’s colleague, Jon Brose, a partner at Seward & Kissel. The firm doesn’t specialize in sports law, but as tax experts, its attorneys have already heard the new law is prompting some concern in the pro sports world.

“We actually have gotten some calls about it,” said Brose. “We do know some people who have some contacts inside of Major League Baseball that have confirmed for us this is a real issue that the league is thinking about because if every time they trade a player it’s a taxable event, that obviously affects the economics of the trade.”

That could prompt several reactions from pro sports teams, the firm’s tax group pointed out. Team owners might do fewer overall trades, fewer player-for-player trades, more cash-for-player or player-for-draft picks deals, or they could develop an alternative trading procedure that allows trades without triggering adverse tax consequences.

“One of the things we had thought was that a team might just pay cash for a player rather than trading one of their own, but that’s determined by a lot of different factors,” said Cotler. “Do they have the cash available? Do they have the [salary] cap space, depending on the team and the league that we’re talking about? There are a lot of factors that would probably go into it, and now tax may be a factor.”

“I don’t want to predict what they’re going to do,” said Brose. “We’re not sports lawyers. We don’t know much about the sports business, but we do know tax law. All we’re saying is the tax law on which sports teams previously have relied to make tax-free trades of players is no longer applicable for these kinds of trades.”

Besides Major League Baseball, other pro sports organizations are likely taking stock of the impact of the new tax law, and perhaps could push lawmakers to make changes. “Whether that means they will try to come up with some other theory, whether they’ll try to lobby to get this changed with respect to sports teams, we don’t know what they’re going to do,” said Brose.

The professional sports world certainly isn’t the only industry dealing with the potential benefits and drawbacks of the overall tax reform law.

“This is probably one of more than a handful of unintended consequences,” said Cotler.

Michael Cohn

Michael Cohn

Michael Cohn, editor-in-chief of AccountingToday.com, has been covering business and technology for a variety of publications since 1985.