NEWSLETTER
Like many of you, I have thoughts about the tax overhaul that was passed by Congress last year, but most of those are neither here nor there as far as baseball goes.
The one part, however, that is probably a little touchy to say, but does apply to baseball, is the slapdash nature by which the final bill was thrown together. The kind of care you’d want to see going into a massive plan like that was pretty clearly absent at the time, and the rotten fruits of that process are going to be popping up throughout the year as taxpayers and businesses are confronted by the unintended wording and unintended consequences of our new tax world.
As the New York Times reports, that includes Major League Baseball, which was caught in the middle of a minor wording change to the part of the tax code that governs the swap of assets. By tweaking the section to ostensibly now tax the swap of any assets that aren’t real property, the federal government – I guarantee unintentionally – may have just made the trade of baseball players a taxable event.
Imagine the nightmare scenario of teams having to try to ascertain capital gains – for example – from the trade of a couple prospects for a veteran on a long-term contract. I mean, on what planet do you even begin to start calculating that? I’m sure it can be done, but the process would not only introduce a ton of additional friction into the calculus of making a trade or not making a trade, it would also impose an additional literal tax on the trade.
The scariest part of the report? Quotes from MLB’s Chief Legal Officer, Dan Halem, whom you would hope would say things like, “eh, no biggy, this isn’t what Congress intended, so we’ll just ignore it and proceed as usual.” Instead, his words read as borderline panicked: “There is no fair-market value of a baseball player. There isn’t. 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.”
Halem said MLB has sought guidance from the Treasury Department on what exactly the change in the law was supposed to mean for sports leagues, and if something, then to please write some regulations to lay it all out.
You should read the New York Times piece for a more detailed look at how baseball trades have been treated for decades as tax-free “like-kind” exchanges. A classification that makes sense, by the way. Generally speaking, teams aren’t appreciating their player assets, and then trading them off for other player assets in order to not pay capital gains on the appreciation in player value (which is the reason swaps are otherwise treated as taxable events – it’s so you can’t “sell” your Apple stock to someone in exchange for a car you were going to buy and avoid paying capital gains on the stock sale). I’m struggling to keep a straight face here because it’s just so plainly absurd to try to extend these tax laws to baseball trades.
Hopefully the league and its teams gets guidance soon enough. There have been trades this calendar year, when the new tax laws went into effect, but it’s not clear to me that the teams were aware of this potential tax impact when making those trades (i.e., I don’t know for sure that you can view the existence of those trades as proof that teams will be all “business as usual.”).
This is now extremely on my radar, as teams will especially need to know what’s what before the July trade season rolls around.
