2018-03-19 12:29:05
A Curveball From the New Tax Law: It Makes Baseball Trades Harder

12:29, March 19 90 0

WASHINGTON — As President Trump congratulated the Houston Astros for winning the World Series at a White House ceremony this week, he also heaped praise on himself and congressional Republicans for passing a sweeping tax cut last year. He hailed Representative Kevin Brady of Texas, the House’s chief tax writer and an Astros superfan, as “the king of those tax cuts.”

What he did not mention is that the new tax law Mr. Brady helped draft, and which Mr. Trump signed, levies a large new tax on the Astros, and similar franchises across professional sports.

The law changed a corner of the tax code that mostly applies to farmers, manufacturers and other businesses that until recently could swap certain assets like trucks and machinery tax-free. But by adding a single word to the newly written tax code — “real” — the law now only allows real estate swaps to qualify for that special treatment.

That change is meant to capture more federal revenue, in order to partially offset reductions in business and personal income tax rates. It forces manufacturers, farmers and others to pay more in capital gains taxes, if they trade an asset for something more valuable. The Joint Committee on Taxation estimates the change will raise $31 billion over the next decade.

It also means that the Astros and other sports franchises could now face capital gains taxes every time they exchange or trade their highly paid players.

The provision is raising concerns and questions across Major League Baseball and the National Basketball Association, starting with: How do you value a player?

“There is no fair-market value of a baseball player. There isn’t,” said Daniel R. Halem, the chief legal officer of Major League Baseball. “I don’t really know what our clubs are going to do to address the issue. We haven’t fully figured it out yet. This is a change we hope was inadvertent, and we’re going to lobby hard to get it corrected.”

The N.B.A. is similarly perplexed. It sent teams an email earlier this month detailing the disruption of the trading system under the new law, but told executives it was still figuring out how to respond.

The confusion is only one of many side effects of the new tax law, which sped through the House and Senate in less than two months at the end of last year, resulting in a series of changes that were both intentional and inadvertent. 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.

But that is little consolation to the teams who now join restaurateurs, independent agriculture businesses and multinational corporations on a long list of entities affected by the law in ways they did not see coming, and who now face long odds to secure changes or clarifications.

Major League Baseball and N.B.A. officials expressed hope that Congress would revisit the provision, which is one of many parts of the law that could raise their taxes or hurt their revenues.

It is unclear how aggressively the Internal Revenue Service would enforce the provision with sports teams. Mr. Halem, of Major League Baseball, said the league was asking the Treasury Department for guidance on how to come up with valuations for tax purposes. If such a system was the intended result of the law, he said, “then write some regulations, tell us what you mean.”

I.R.S. officials declined to comment on whether the agency would issue future rulings on the tax treatment of sports trades. Treasury officials did not respond to a request for comment on Friday.

Like many franchises, the Astros have aggressively worked the baseball trade market to improve their roster. Last year, on their way to their first World Series championship, they engineered a last-minute deal ahead of the league’s trade deadline to acquire Justin Verlander, a veteran starting pitcher midway through a 6-year, $162 million contract, from the Detroit Tigers in exchange for three up-and-coming young players. Last month, the Astros acquired the veteran pitcher Gerrit Cole from the Pittsburgh Pirates in a similar trade.

For decades, teams have not paid taxes on such trades, and thus have not had to account for the value of the assets they are exchanging, for tax purposes. A 1967 ruling from the Internal Revenue Service allowed baseball owners to depreciate the cost of player contracts over several years, thus reducing the team’s taxable income. It declared that “trades of player contracts owned by major league baseball clubs will be considered exchanges of like-kind property” under a section of the tax code.

That distinction was crucial. Until this year, the “like-kind” provision allowed owners of similar types of property, such as machinery or fleet vehicles, to swap their assets without paying taxes on either party’s gains until the asset was sold. In a baseball or basketball trade, the assets aren’t players, they are the players’ contracts — and the I.R.S. was allowing them to be exchanged without fear of taxation.

The new law breaks that peace, by limiting like-kind exchanges to “real property,” which is shorthand for land or other real estate.

“I don’t think that they thought about baseball when they thought about this change,” said Kari Smoker, an accounting professor at SUNY Brockport who has consulted for the N.B.A. and National Hockey League players’ associations in legislative disputes over sports taxation. “It raises all kinds of issues, which I think were easier to ignore, probably, when we had a simple rule that it was a like-kind exchange.”

Mr. Verlander, for example, was clearly a more immediately valuable asset to the Astros than the three prospects they traded to get him. He gave up only four runs in his five regular-season starts for the team, then won four straight starts to begin the playoffs. In very simple terms, he brought value to the Astros in a trade, and had the new law been in place last year, the team would have owed taxes on that added value.

But what, exactly, was that value? Was it the size of his contract? Mr. Verlander earned $28 million last year, while the players traded for him drew minor-league salaries. Was it the additional wins he brought to the team? Statisticians estimate Mr. Verlander gave the Astros nearly two more wins last season, a value that, depending on the statistician, could reach $20 million. Or was some calculation of the total future value Mr. Verlander will bring to the team, minus the total future value it gave up in the prospects it traded away — and possibly adjusted for the amount the team will have to pay Mr. Verlander?

Complicating matters further is that teams value players differently, and one player might help a certain team far more than another team. A struggling club with a surplus of starting pitchers might trade one to a playoff contender in desperate need of one, in exchange for position players who could improve a struggling lineup. In that case, both teams could, reasonably, be considered to have gained value in the trade, and thus would owe taxes on it.

That is exactly how Adam Guttridge views the trade of Mr. Verlander — as a win-win for both the Astros and Tigers, which would have resulted in a capital-gains tax bill for each of them. Mr. Guttridge is a former manager of baseball research and development for the Milwaukee Brewers and the co-founder of NEIFI, a consultancy that has developed software to attach a dollar value to every professional ballplayer and his expected future performance.

How to calculate such value for tax purposes “is the question that somebody has to answer, that nobody in the baseball space has,” Mr. Guttridge said. “There’s certainly no consensus among the 30 teams.”

Several baseball executives declined to comment on the change and how it could affect their willingness to trade players in the future, including the general manager of the Astros, Jeff Luhnow.

Basketball could be an even trickier proposition, because it taxes teams if they exceed a certain amount of total player salary for the season. This year, the Portland Trail Blazers traded a player with a modest contract in order to get under the tax threshold, saving themselves millions. The Cleveland Cavaliers made a series of trades that pushed them over the threshold. Some N.B.A. executives — who would not speak for publication — wondered if the Trail Blazers would need to pay federal tax on the money they avoided in league taxes as a result of a trade.

The chairman of the Senate Finance Committee, Orrin G. Hatch of Utah, did not return a request for comment on whether he would be inclined to support a bill to change the law for sports teams. Neither did Mr. Brady, the House Ways and Means Committee chairman, who reveled in the Astros championship run last year.

“At my desk,” he posted on Twitter, alongside a picture of himself, on Nov. 1, the day of Game 7 of the World Series, “wearing my #Astros tie, putting final touches on the first bold #TaxReform in 31 years.”