When President Trump signed the Tax Cuts and Jobs Act (the “Tax Reform Act”) on December 22, 2017, he may have inadvertently changed the landscape of player trades in sports.

The Tax Reform Act made several high-profile changes to the sports industry. One of the most publicized changes came in the world of collegiate sports, where many schools required boosters to make donations for the right to purchase season tickets. Those donations were previously considered deductible from income for tax purposes equal to 80 percent of the amount paid for the right to purchase season tickets. The Tax Reform Act repealed this deduction, however, meaning that no deduction can be taken for charitable deductions pertaining to those transactions.

Schools responded to the repeal of that charitable deductions by alerting donors to the changes and by changing the structure of the donations. Some schools, including SMU, Florida State and Oklahoma, gave their boosters the chance to pay for the donations multiple years in advance in order to retain their tax deductible status. Oklahoma, in particular, named its plan “Pay it Forward,” allowing donors to pay for up to three years of donations in the 2017 calendar year.

With most major changes in sports caused by the Tax Reform Act, we typically see the organizations affected respond. But we have yet to see if the Act truly affected how player trades are calculated in terms of income and how teams will respond.

Previously, professional sports teams typically utilized Section 1031 of the Internal Revenue Code to avoid recognition of income on trades of players. Section 1031 permitted deferred taxes on exchanges in like-kind properties used in trade or business and held for investment. The IRS considered the trade of players’ contracts as like-kind property, making such exchanges eligible under Section 1031.

However, the Tax Reform Act limits the application of Section 1031 to real property. Because player trades do not involve real property, it appears that Section 1031 will no longer allow for deferred tax status.

It appears that professional sports teams will have to find a new way to avoid recognizing income when they are involved in player trades. The practical difficulties of valuing players based on production, longevity and the income they can generate should be reason enough to find a new exception. But it remains to be seen if such an exception exists (especially in light of the flurry of trades recently seen in the NBA and NFL).

In the coming months and years, expect professional sports teams to find new ways to exempt player trades from the recognition of income. But if the teams fail in this endeavor, it has already been speculated that the Tax Reform Act could result in fewer trades overall, fewer player-for-player trades, more player-for-draft-pick trades, and more.

–Josh Schoch

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