Tax Talks

The Proskauer Tax Blog

Upper Tribunal Rules in Favour of Taxpayer in Tax Residence Case

Development Securities plc and others v HMRC [2019] UKUT 169 (TCC)

The Original Judgment

As we reported in our August 2017 UK Tax Round-Up [], the UK’s First Tier Tribunal (“FTT”) found against the taxpayer in the Development Securities case, and ruled that certain Jersey-incorporated companies were, in fact, UK tax resident through central management and control.

By way of reminder, Development Securities plc (“DS”) – a UK company – had incorporated a number of Jersey subsidiaries intended to be Jersey tax resident as part of its implementation of a scheme which was intended to increase available capital losses on UK real estate. The facts showed that all the board of directors had a Jersey-resident majority of directors (three were Jersey-resident and one was UK-resident), the board meetings all took place in Jersey and decisions were actually taken at those board meetings.

However, the FTT pointed to the uncommercial nature of the transactions from the perspective of the Jersey subsidiaries themselves (which could only be justified in the context of the tax benefit to the DS group as a whole) and that Jersey corporate law meant that the Jersey subsidiaries could only enter into the uncommercial transactions with the approval of their UK-resident parent company.

Consequently, the FTT had held that central management and control of the Jersey companies had been undertaken by the UK DS parent and, in taking on their director appointments, the Jersey directors were simply agreeing to implement what the UK DS parent company had already decided to do.

The Upper Tribunal Decision

The Upper Tribunal (“UT”) has overturned that decision in a judgment published this month. The UT ruled that central management and control was exercised in Jersey and not the UK.

The UT found that the relevant assets were indeed acquired at an overvalue, but the overpayment by the Jersey companies was not funded by them. So the FTT’s decision that the transactions were “uncommercial” for the Jersey companies was doubtful.

The UT analyzed Jersey company law in some depth, looking at how the directors were obliged to act in the best interests of the (Jersey) company. Jersey company law requires the company to consider the interests of shareholders, employees and creditors. In this case, given that the Jersey Companies had no employees and the transactions that the Jersey Companies were to enter into, pursuant to the scheme, did not prejudice creditors, the UT decided that the primary consideration can only have been the interest of the shareholder (DS). The UT reported that the directors gave detailed consideration to the appropriateness of the scheme – including the apparently uncommercial nature of the options and the acquisition by the Jersey companies of the relevant assets – and concluded that the transactions were in the best interests of the shareholder and therefore in the best interests of the Jersey companies.

It is very clear from the judgment that, just because the transactions were uncommercial, they were not automatically to be treated as contrary to the best interests of the Jersey companies

Although the UT agreed that the UK resident director had acted as a puppet or “rubber stamp”, the FTT had not made a similar finding regarding the Jersey directors. The evidence pointed strongly to the Jersey directors properly applying their minds to the transactions. The UT noted that one board meeting lasted five hours; and that the Jersey directors sough clarification on a number of points including the potential stamp duty liability arising; and also noticed and raised with advisers an inconsistency between the terms of the option and the drafting of the option notice.

HMRC tried to argue that the FTT had excluded from consideration material factor(s) going to the question of central management and control because they had occurred outside a board meeting. The UT rejected that argument and said that the FTT had, correctly, focused on the board meetings, but clearly also took account of matters occurring outside these meetings: for example, actions by the group more generally and events pre-dating the incorporation of the Jersey companies.


This is a welcome decision in favour of the taxpayer. It demonstrates again the importance of running offshore companies properly. The evidence as to what happened in the Jersey board meetings proved critical here. The board minutes showed that the three Jersey-based directors had met in Jersey, and had spent some considerable time analyzing and discussing the terms of the deals over several board meetings. It was important to the UT’s decision that the board minutes demonstrated that the directors had asked meaningful questions about the transaction and had called for explanations where necessary. Well-prepared contemporaneous minutes of such meetings are vital.

UK Tax Round Up

UK General Tax Developments

HMRC updates guidance on what constitutes “ordinary share capital”

Following the decision by the First-tier Tribunal (FTT) in Warshaw V HMRC, reported in our UK tax blog earlier this month, HMRC has updated its guidance on what constitutes “ordinary share capital” for the purposes of most tax provisions using that term.

As well as providing further guidance in relation to certain non-UK entities, the guidance has updated HMRC’s view on certain categories of shares with particular rights. Following Warshaw, HMRC has included in its guidance reference to fixed rate preference shares where the dividend compounds over time or where a rate of interest is added if a dividend is unpaid. HMRC states that such shares would be “borderline” in respect of whether or not they are ordinary share capital. This update is in response to the Warshaw decision, in which the FTT held that cumulative, compounding fixed rate preference shares were ordinary share capital for the purposes of section 989 ITA 2007. This could be seen to contrast with HMRC’s previous guidance that stated that cumulative fixed rate shares (with no reference to whether there was compounding on any unpaid dividend) are not ordinary shares. HMRC describes the decision in Warshaw as of “persuasive rather than precedent authority” in its updated guidance.

Although this update to HMRC’s guidance is welcome in order to address the lack of detail in HMRC’s previous guidance on the point highlighted by the decision in Warshaw, it is unfortunate that there is no clarity for taxpayers on the potentially significant tax consequences for them which may arise depending on the specific terms of their shares, such as for entrepreneurs’ relief purposes. Taxpayers holding shares with fixed rate, cumulative, compounding dividends who expect the shares to be ordinary shares (or not) should seek advice on the possible consequences for them of this updated position from HMRC.

Anti-avoidance: two latest GAAR Advisory Panel opinions released

Two GAAR Advisory Panel opinions (Opinion 11 and Opinion 12) have been released, both agreeing with HMRC’s assertion that the schemes in question were not reasonable courses of action in the circumstances and so the general anti-abuse rule (GAAR) applied to them.

Under both schemes, the company and the shareholder(s) acquired a bond from the scheme promoter for consideration comprising, broadly, the company assuming debt guaranteed by the shareholder. Various swaps were entered into with third parties, immediately novated to the bond manager as additional contributions to the bond (i.e., the debt) and the bond manager then entered into mirror swaps. The whole process was reversed during the respective “cooling off” periods. The effect of such transactions was that the same amount payable by the company to the shareholder(s) was created in the company loan accounts of that shareholder.

In Opinion 11, the GAAR Advisory Panel determined that the credits were equivalent to remuneration as a cash bonus. In Opinion 12, it determined that the credits were equivalent to distributions to the shareholders. The Panel stated that the steps undertaken in both situations, although not unlawful, lacked any commercial purpose and were contrived and abnormal. The Panel further commented that any correspondence relating to, or disclosure under, the disclosure of tax avoidance schemes (DOTAS) rules did not preclude the scheme falling within the GAAR given the different requirements applicable for such rules compared with the GAAR.

The two opinions highlight both HMRC’s willingness to attack what they consider to be abusive schemes to avoid employment taxes and the GAAR Advisory Panel’s willingness to agree with HMRC in these cases.

Anti-avoidance: HMRC’s Spotlight 51 and Spotlight 52

HMRC has released new anti-avoidance spotlight guidance in relation to transactions using loans or fiduciary receipts (Spotlight 51) and using offshore trusts (Spotlight 52).

In Spotlight 51, HMRC confirms its awareness of tax avoidance schemes that, whilst marketed as wealth management strategies, attempt to disguise employment income and other profits as loans or fiduciary receipts. In Spotlight 52, HMRC highlights two recent FTT cases involving disclosure of schemes that utilised offshore trust structures to disguise income on which employment tax and NI contributions would otherwise be due. In both cases, the FTT agreed with HMRC that the schemes were notifiable under the DOTAS rules.

These Spotlights further highlight HMRC’s willingness to challenge artificial and contrived avoidance schemes aiming to avoid employment taxes and the support that HMRC expects to get, and is getting, in doing so at tribunal level (and from the GAAR Advisory Panel as discussed above).

UK Case Law Developments

Section 75A Finance Act 2003 – Stamp duty land tax and the general anti-avoidance rule

The case of Hannover Leasing Wachstumswerte Europa Beteiligungsgesellschaft mbH and another v HMRC concerned arrangements for the sale of a property which were found by the FTT to fall within the scope of the stamp duty land tax (SDLT) anti-avoidance rule in section 75A of Finance Act 2003 (section 75A) even though the arrangements were not tax avoidance arrangements.

The property in question was held by an English limited partnership which itself was owned by a Guernsey unit trust in a form of tax planning generally considered acceptable. The buyer requested that the seller move the property out of the English limited partnership, due to its concerns relating to historic liabilities within the partnership, and into the Guernsey unit trust and then move the partnership itself out of the unit trust prior to completion of the sale. £55,540 of SDLT was paid in respect of the various transfers and steps giving effect to the sale.

HMRC argued that SDLT was payable on the full value of the property (approximately £140 million) as section 75A applied in respect of any reduction in tax liability, regardless of whether one of the main purposes of the transactions was avoidance of tax. The taxpayers argued that there were no scheme transactions for the purpose of section 75A and that the right amount of SDLT had been paid in respect of the transaction. The taxpayers also drew the FTT’s attention to HMRC’s own guidance on section 75A which states that it is an anti-avoidance provision and that HMRC will not apply it where transactions have been taxed appropriately.

The FTT, agreeing with HMRC, held that section 75A did apply and that SDLT was chargeable on the full cost of the property despite the lack of a tax avoidance motive. The FTT considered HMRC’s guidance on section 75A either wrong or irrelevant. Interestingly, the FTT indicated that if the sale had proceeded with the partnership as the seller of the property, or if the steps had been undertaken in a different order, section 75A would not have applied. The taxpayer is expected to appeal.

Following this decision, there is more uncertainty on the application of section 75A to property transactions with corporate holding structures, especially where there is no tax avoidance motive. Those undertaking, and advising on, such property transactions should carefully consider the structures involved and whether they could be caught be the seemingly ever-widening scope of section 75A.

Redemption of QCBs crystallised a gain rolled over from earlier conversation of non-QCBs

In Hancock and another v HMRC, the Supreme Court dismissed the taxpayers’ appeal and held that the redemption of qualifying corporate bonds (QCBs) crystallised a gain previously rolled into the QCBs by the prior conversion of non-QCBs (and other QCBs).

The Supreme Court dismissed the taxpayers’ argument that because the previous conversion “included” QCBs as well as non-QCBs the crystallisation of a held over gain did not occur as the QCBs were outside of the scope of section 116 of the Taxation of Chargeable Gains Act 1992. The Supreme Court acknowledged that the taxpayers had a strong argument on a literal reading of the relevant provision but concluded that such interpretation would be contrary to the policy behind the legislation and create opportunities for abuse. The Supreme Court did not, however, follow the Court of Appeal and apply what might be considered to be a “strained” interpretation of the provisions. Instead, it placed weight on the fact that the relevant provisions had to be applied on their terms with “necessary adaptations” in respect of conversions of securities as part of a reorganisation. Accordingly, the Supreme Court felt able to rely on the wording of the legislation to determine that the prior conversion of the loan notes was two separate conversions, one of the QCBs and the other of the non-QCBs.

Given the focus on the wording of the legislation in the Supreme Court’s decision, it did not provide much further detail for taxpayers and their advisers on the approach the courts may take in situations where apparent clear statutory language could be set aside in favour of an approach requiring a strained interpretation of the relevant statutory language. The Court simply commented that the instances where such an approach can be applied must be limited.

Single composite supply for VAT purposes where two separate items acquired in one package

The case of HMRC v The Ice Rink Company concerned whether the supply of access to an ice rink and the hire of ice skates were together one composite supply or two separate supplies for VAT purposes.

The taxpayer offered various ice skating packages to customers, including access to an ice skating rink with or without skate hire as well as skate hire without access to the ice rink. If the supplies were separate supplies, the hiring of children’s ice skates was zero-rated whilst the access to the ice rink was standard-rated. If the ice skates were part of the access to the ice rink, the whole supply was standard-rated.

The Upper Tribunal (UT), overturning the decision of the FTT, held that there was one composite standard-rated supply as, considering only those customers purchasing the combined access to ice rink and skate hire package, the two aspects were acquired as a single supply.

The UT stated that the FTT had been wrong to consider not only the customers who purchased the combined package but also those customers who purchased other products and that the FTT should not have considered supplies made to persons other than the “typical customer” of the combined package as being relevant to the nature of the supply to a typical customer. Taking that approach, the UT held that it was not possible to extract the skate hire as a separate zero-rated supply and so the whole composite supply was standard-rated.

This case highlights that the nature of the supply for the actual customers involved is important in determining the nature of such supply for VAT purposes and that, where there is a supply comprising multiple elements, a particular element of the supply could not be extracted simply because it could be acquired on its own.

Overpayment of car parking charges was consideration for VAT purposes

In National Car Parks Ltd v HMRC, the Court of Appeal held that “overpayment” by customers in respect of car parking charges as result of not having the correct change to put in the machine was consideration for VAT purposes.

In reaching its decision, the Court stated that the meaning of “consideration” was autonomous across the EU and could differ from a domestic contract law interpretation. The VAT meaning was a subjective, not objective, value based on the amounts actually paid for the service. Therefore, it was the actual price paid for the services, including any overpayment, which was the relevant consideration for VAT purposes. Looked at another way, the customers had made their entire payment for the parking services notwithstanding that they could have paid less had they had the correct change.

The case illustrates that the key consideration in ascertaining consideration for VAT purposes is whether there is a direct link between the service provided and the payment made in respect of that service. In this instance, the fact that the payment made exceeded the market value and the original contractual offer price did not prevent this higher payment being the consideration.

International Developments

Guidance on new substance requirements in the Isle of Man, Guernsey and Jersey

Guidance has been released by the Crown Dependency (CD) governments of Guernsey, Jersey and the Isle of Man in relation to legislation outlining economic substance requirements.

Under pressure from the EU of being blacklisted as “uncooperative tax jurisdictions”, the governments have collaborated on the guidance following the introduction of new legislation at the end of 2018 by all three jurisdictions. The guidance confirms that companies that fall within the scope of the new legislation must perform their core income-generating activities in any relevant sector within the relevant jurisdiction. To fall within the scope of the legislation, companies must perform real commercial activities such as the sale or exchange of goods or provision of services for profit.

The guidance confirms that pure equity-holding companies that passively hold equity investments, broadly, will not be considered as carrying on an economic activity and so will not fall within the scope of the new substance requirements.

CD resident corporate managers (such as corporate general partners to fund partnerships) will fall within the scope of the new legislation and so whether the manager performs “core income generating-activity” within the relevant CD will be key in determining whether it meets the substance requirements. It will also be a requirement that the manager is directed and managed in the CD and the guidance provides a list of what is expected to satisfy this.

The guidance does not provide details as to the process that tax officials will use to determine if an entity has met the substance requirements and further guidance is expected in relation to particular sectors, as well as outlining the reduced requirements for pure equity-holding companies.

Funds and companies operating in any of the CD jurisdictions should consider their existing activities and substance status in response to the new legislative requirements.

Final IRS Regulations Sync Section 956 with TCJA Participation Exemption – Limits “Deemed Dividends” for U.S. Corporate Shareholders of CFCs

Implements 2018 Proposed Regulations, ending most limitations on investments in U.S. property, as well as pledges and guarantees by CFCs wholly-owned by U.S. corporations – also provides PTI guidance for CFC shareholders.


In anticipated and important guidance, the U.S. tax authorities have issued final regulations under I.R.C. Section 956 (the “New 956 Regulations”).[1] The New 956 Regulations are intended to eliminate, in most situations, the “deemed-dividend” issue with respect to controlled foreign corporations (“CFCs”) that are subsidiaries of U.S. corporations, including where the U.S. domestic corporation is a partner in a partnership.

The New 956 Regulations achieve this result by generally giving a U.S. corporation’s income inclusions under Section 956 the same benefit of the U.S.’s limited participation exemption[2] that is otherwise available to actual dividends received from a CFC. The impact of Section 956 on noncorporate U.S. entities (which generally do not benefit from the participation exemption), including where the noncorporate entity is a partner in a partnership, is generally unchanged by the New 956 Regulations. The New 956 Regulations finalize, with limited but important changes, proposed regulations from November 2018.

An immediate impact of the New 956 Regulations will be on the use of non-U.S. subsidiaries to secure borrowings by U.S. corporations. A U.S. borrower generally should now be able to grant lenders complete pledges of stock of CFCs and provide full security interests in the assets of CFCs (and so-called CFC Holdcos — i.e. borrower subsidiaries that hold CFC stock) as long as the CFCs are directly or ultimately owned, in whole, by U.S. domestic corporations and partnerships where all of the direct and indirect partners are either U.S. domestic corporations or entities not subject to U.S. income tax (e.g., tax-exempts, foreign investors) without negative U.S. federal income tax consequences. Under existing Section 956 regulations, the effective limit to avoid phantom dividend income was a pledge of 65% of the voting stock in the CFC, with no guarantee by the CFC. The New 956 Regulations should end the position that new loan agreements must include the old, limited 65% voting stock pledge to protect U.S. corporate borrowers – which was an arguable residual concern while the regulations were still proposed.

The New 956 Regulations also provide a welcome change for multinationals with substantial previously taxed income (“PTI”) under the CFC rules relating to certain hypothetical distributions under the ordering rules for PTI.

These final regulations were issued and became effective on May 23, 2019 (with lookback effectiveness to taxable years beginning after December 31, 2017 in certain circumstances).

Please contact any Proskauer tax lawyer, or your usual Proskauer contact, for further information about the New 956 Regulations and their effect on shareholders of CFCs, as well as lenders and borrowers in structures with non-U.S. subsidiaries or operations. A detailed description of the New 956 Regulations, along with background, a description of the U.S. tax authorities’ explanation of the provisions and discussion of differences from the proposed regulations, continues below.

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Section 1446(f) Proposed Regulations: Key Guidance on Partnership Interest Transfers by Non-U.S. Persons

On May 13, 2019, the U.S. Internal Revenue Service (“IRS”) and Treasury Department published proposed regulations providing guidance on the rules imposing withholding and reporting requirements under the Code[1] on dispositions of certain partnership interests by non-U.S. persons (the “Proposed Regulations”). The Proposed Regulations expand and in important ways modify earlier Notice 2018-29[2] on dispositions of non-publicly traded partnership interests.[3] Unless otherwise specified, this post focuses on the aspects of the Proposed Regulations affecting transfers of interests in non-publicly traded partnerships.

Enacted as part of the “Tax Cuts and Jobs Act”, Section 1446(f) generally requires a transferee, in connection with a disposition of a partnership interest by a non-U.S. person, to withhold and remit 10 percent of the “amount realized” by the transferor, if any portion of any gain realized by the transferor would be treated as effectively connected with the conduct of a trade or business in the United States under the substantive sourcing rule of Section 864(c)(8).[4]

Prior to issuing the Proposed Regulations, the IRS issued Notice 2018-08 and Notice 2018-29 to provide interim guidance with respect to these withholding and information reporting requirements. On December 27, 2018, the IRS issued proposed regulations under Section 864(c)(8), providing rules determining the amount of gain or loss treated as effectively connected gain or loss with a U.S. trade or business. Continue Reading

Are fixed rate preference shares “ordinary share capital” for entrepreneurs’ relief – more or less certainty?

There has been another development on the tricky but important subject of whether the rights attaching to preference shares mean that they are or are not ordinary shares for entrepreneurs’ relief (and other tax) purposes.

Recent cases have shown that share with no right to a dividend are ordinary shares. HMRC has published its view that cumulative fixed rate share are not ordinary shares but that non-cumulative fixed rate shares are.

In Warshaw v HMRC, the First-Tier Tribunal (FTT) has now held that cumulative fixed rate preference shares under which the fixed rate was also applied to the unpaid dividend (so the fixed rate dividend compounded) were ordinary share capital for entrepreneurs’ relief purposes (so the taxpayer was entitled to entrepreneurs’ relief).

The taxpayer held shares in a company that carried the right to a fixed rate of interest (10%) calculated on a compound basis (on the sum of the subscription price and the aggregate of any unpaid dividends from previous years). Therefore, if profits were not available in a certain year, the fixed rate of 10% would be calculated on an increased amount in subsequent years.

The definition of “ordinary share capital” in section 989 ITA 2007 provides that, broadly, all of a company’s issued share capital constitutes ordinary share capital except for those shares which give a right to “a dividend at a fixed rate” with “no other right to share in the company’s profits”.

In this case, HMRC, in line with its published view, argued that the shares were not ordinary share capital as the rate of the dividend remained fixed. However, the FTT accepted the taxpayer’s argument that the fixed rate looked at not only the rate but also the amount that it applied to (here an indeterminate amount depending on whether dividends were or were not paid in a particular year).

The decision can be taken to align with HMRC’s published view if HMRC’s position on cumulative fixed rate dividends is read to apply only to non-compounding cumulative shares. This and other decisions means that only such non-compounding cumulative fixed rate shares would not be ordinary share capital.

The decision does, however, highlight the very different (and very important) outcome that can result from seemingly minor differences in the terms of fixed rate dividend shares. Taxpayers expecting to rely on the terms of their shares to give particular tax results should check the position given this new decision.

The full transcript can be found here.

The Second Set of Proposed Opportunity Zone Regulations


On April 17, 2019, the Internal Revenue Service (the “IRS”) and the U.S. Department of the Treasury (the “Treasury”) issued a second set of proposed regulations (the “Proposed Regulations”) under section 1400Z-2 of the Internal Revenue Code (the “Code”) regarding the qualified opportunity zone program, which was enacted as part of the law commonly referred to as the “Tax Cuts and Jobs Act” (“TCJA”).[1]

The Proposed Regulations are very taxpayer friendly, and address some, but not all, of the questions that were left unanswered by the first set of proposed regulations issued in October 2018 (the “Initial Proposed Regulations”). The Initial Proposed Regulations were discussed here.

The Proposed Regulations generally are proposed to be effective on or after the date of the publication of final regulations. Nevertheless, taxpayers and qualified opportunity funds (“QOFs”) may generally rely on the Proposed Regulations, so long as the taxpayer and/or the QOF applies the Proposed Regulations consistently and in their entirety. However, taxpayers may not rely on the rules that permit a QOF partnership, S corporation, or REIT whose owners have held their QOF interests for at least 10 years to sell assets without its owners recognizing capital gains on the sale, until the Proposed Regulations are finalized.

Some states conform to federal tax law with respect to QOFs (and grant equivalent tax benefits); others do not and tax gains that would otherwise be deferred, reduced or eliminated under the opportunity zone program.

This blog summarizes some of the important aspects of the Proposed Regulations. It assumes familiarity with the opportunity zone program. For background, see our prior blog post.

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Players, Staff and Draft Picks May be Traded Tax-Free Under New Safe Harbor

On April 11, 2019, the Internal Revenue Service (the “IRS”) issued Revenue Procedure 2019-18, creating a safe harbor that allows professional sports teams to treat trades of personnel contracts (including contracts for players, coaches and managers) and draft picks as having a zero value for determining gain or loss recognized for federal income tax purposes if certain requirements are met.[1]  While the safe harbor applies to trades entered into after April 10, 2019, teams can choose to apply it to any open taxable year.

Like-Kind Exchange Treatment Prior to the 2017 Tax Reform

By way of background, prior to P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act, (the “2017 Tax Reform”), trades were treated as exchanges of like-kind property used in a trade or business under Section 1031.[2]  Accordingly, teams were generally able to avoid current recognition of income on a trade to the extent no cash (or other property) was received.

Aftermath of the Legislation Prior to IRS Relief

The 2017 Tax Reform limited like-kind exchange treatment under Section 1031 to real property (i.e., land and buildings).  As a result, absent the safe harbor, teams generally would have to recognize gain or loss based on the difference between the fair market value of the personnel contract or draft pick received and the tax basis of the personnel contract or draft pick given up.  A team’s basis in a personnel contract or draft pick is generally equal to the team’s cost to acquire it, including certain payments for future services (such as a signing bonus), less depreciation.  However, the value of a personnel contract or draft pick at any given time is difficult to measure.

IRS Grants Relief in Revenue Procedure 2019-18

Applying a “real world view,” the IRS recognized in Revenue Procedure 2019-18 that assigning an objective monetary value to a personnel contract or draft pick would result in “highly subjective, complex, lengthy, and expensive disputes between professional sports teams and the IRS.”  By assigning zero value to these assets, teams are allowed to conduct trades similarly to the way in which they did prior to the 2017 Tax Reform.  Other rules regarding the tax treatment of sales and exchanges continue to apply, including Section 1231 (rules for determining whether gain or loss is capital or ordinary) and Section 1245(a)(1) (depreciation recapture rule).

Requirements to the Safe Harbor’s Application

Under the safe harbor, professional sports teams may treat the value of personnel contracts and draft picks as zero in a trade if certain conditions are satisfied:

  • First, all parties to the trade that are subject to U.S. federal income tax must use the safe harbor.
  • Second, each party to the trade must transfer and receive a personnel contract or draft pick.  In addition, no team may transfer any other property (other than cash) as part of the trade.
  • Third, no personnel contract or draft pick on any side of the trade may be an amortizable Section 197 intangible.  Given the number of teams that have been sold in recent years, this limitation could be problematic and seems to raise all of the issues the IRS sought to avoid by issuing the revenue procedure.
  • Fourth, the financial statements of all teams that are party to the trade may not reflect assets or liabilities resulting from the trade other than cash.

Tax Consequences of the Safe Harbor’s Application

The tax consequences under the safe harbor to the teams that are a party to a trade are as follows:

  • Because the value of each personnel contract or draft pick is zero, no gain or loss will be recognized by a team if it does not receive cash and does not have a tax basis in the personnel contract or draft pick given up.
  • Any cash received by a team as a part of a trade will be included in the team’s amount realized and will be recognized as gain to the extent it exceeds any unrecovered tax basis in the personnel contract or draft pick transferred in the trade.
  • A team will generally recognize a loss if it has unrecovered tax basis in the personnel contract or draft pick it transferred (e.g., if the traded player was paid a signing bonus that the team had not yet fully depreciated) that exceeds the amount of any cash the team received in the trade.
  • A team that provides cash as part of a trade will acquire a tax basis in the personnel contract or draft pick it receives equal to the amount of such cash.  This tax basis may be depreciated over the life of the asset acquired.  If more than one personnel contract or draft pick is received, the basis must be allocated to each personnel contract or draft pick equally, regardless of the subjective value the team may place on each.
  • A team that does not provide cash as part of a trade will have a tax basis of zero in all personnel contracts or draft picks received.

The safe harbor only applies to trades of personnel contracts or draft picks among teams in professional sports leagues.  It does not apply to any other transaction, including to trades of a team for another team or a sale of a team.  We expect that a standard set of representations and warranties and covenants will develop in response to the revenue procedure.

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Taxpayers should consider the effects of the safe harbor and plan accordingly.  Please contact your usual Proskauer lawyer, or any member of Proskauer’s Tax Department, to discuss the impact of this revenue procedure further.


[1] For purposes of this discussion, any references to “team” or “teams” are references to teams in a professional sports league, and any references to “trade” or “trades” are references to trades of personnel contracts and rights to draft picks by teams in a professional sports league.

[2] All references to “Section” are references to the Internal Revenue Code of 1986, as amended.