Major League Baseball's Opening Day is the one day of the year when hope springs eternal for even the most downtrodden franchises. But while fans' minds wander to their delicious tailgate party spreads and their teams' lofty World Series aspirations, a line in the new tax code may have changed an integral component of the game.
As The New York Times reported last week, in an effort to broaden the tax base, one word was added to a section of the tax code. As a result, it may have unintentionally changed the way all businesses can exchange assets.
"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 allows only real estate swaps to qualify for that special treatment," the Times' Jim Tankersley explained. "That change is meant to capture more federal revenue, in order to partly 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."
So let's say my favorite team, the New York Mets, wants to trade for a relief pitcher this summer to bolster bullpen and try to get into the playoffs. The Tampa Bay Rays' Alex Colome is a player that should be available. He will make $5.3 million this season. If the two teams were able to work out a deal, presumably for a minor league player who is not as "valuable" as Colome, would the Mets have to pay a tax?
The answer, quite simply, is that teams don't know. In 1967, the IRS ruled that "trades of player contracts owned by Major League Baseball clubs will be considered exchanges of like-kind property," but the new law changes all that. As any tax professional will tell you, "real property" means real estate. There is certainly no case to be made that player contracts are real estate, so that means a specific exemption would need to be carved out once again.
A large chunk of the issue comes down to value, and how it is defined. Even if this law applied to MLB teams, the definition of value is extremely complicated. In sports, value is often in the eye of the beholder. A rebuilding team, like the Rays, may not see Colome as valuable as an asset as young prospects, who could surpass his production within a year or two at a fraction of the price. While the Mets, who are built largely of veteran players and hope to contend this season, may have a completely different definition of value, knowing a strong bullpen arm to add to the mix would be exceedingly valuable to help their playoff odds.
Some are skeptical that the IRS would enforce a tax on a baseball team simply for making a trade, but without the proper regulatory guidelines, MLB teams are taking a wait-and-see approach. And with the first pitch of the season just hours away from being thrown, time is of the essence to get some concrete guidance on the matter.