IRS Audit Technique Guides

The IRS publishes guides that help auditors audit certain industry segments. These are known as ATGs. The people over at Uncle Fed Tax Board have all the old ones which are no longer available. These are a great resource.

You can find these here.

My favorite one is the Sports Franchise ATG. One of the little known facts about sports franchises is that when they trade a player, it is actually a tax free like kind exchange under IRC 1031.

From the ATG: "Player contracts constitute intangible personal property. As addressed in Chapter 9, if the player contract has a useful life of more than a year, it must be capitalized and amortized over the life of the player contract under IRC section 167.

Gains and losses on the sale or exchange of player contracts held by the sports franchise for more than a year constitute IRC section 1231 gains and losses. However, to the extent of amortization claimed under IRC section 167, player contract gains are subject to IRC section 1245 ordinary income recapture.

In general, player contract trades qualify for IRC section 1031 nonrecognition treatment for like kind exchanges. Gains recognized on player contract trades are limited to the amount of boot and, if applicable, non-qualifying property received by the transferor.

Rev. Rul. 67-380, 1967-2 C.B. 291 and Rev. Rul. 71-137, 1971-1 C.B. 104, specifically address these general provisions for sports franchise player contracts.

IRC section 1031(a) provides that no gain or loss is recognized if property used in a trade or business is exchanged solely for like kind property. Under IRC section 1031(b), any realized gain is recognized to the extent money or property that is not like kind is received in the exchange. Treas. Reg. section 1.1031(b)-1(c) provides:

Consideration received in the form of an assumption of liabilities (or a transfer subject to a liability) is to be treated as "other property or money" for the purposes of section 1031(b). Where, on an exchange described in section 1031(b), each party to the exchange either assumes a liability of the other party or acquires property subject to a liability; then, in determining the amount of "other property or money" for purposes of section 1031(b), consideration given in the form of an assumption of liabilities (or a receipt of property subject to a liability) shall be offset against consideration received in the form of an assumption of liabilities (or a transfer subject to a liability). See section 1.1031(d)-2, examples (1) and (2).

To the extent of IRC section 1245 recapture, gains recognized on player trades are ordinary gains. The IRC section 1245(a)(4) amalgamation rule for player contracts (addressed in chapter 10) only applies to player contracts transferred in connection with the purchase/sale of an entire sports franchise. Accordingly, the IRC section 1245(a)(4) amalgamation rule does not apply to the sale or trade of two or more player contracts by a sports franchise to another sports franchise. This means the IRC section 1245 recapture provisions are applied on an individual player contract basis versus an aggregate player contract basis.

Accordingly, the tax treatment to the transferor on the sale or exchange of a player contract is the same as the tax treatment given the sale or exchange of tangible personal property, such as machinery, used in any trade or business.

In the sports franchise’s tax year in which a player is cut, the sports franchise is entitled to an ordinary deduction under IRC section 165 for its adjusted basis in the player contract.

Generally, a sports franchise does not have an ascertainable tax basis in future draft picks given up in a player trade (treated as an inseparable part of the franchise intangible asset). Accordingly, in determining the sports franchise’s basis in player contracts acquired in trades, a zero adjusted basis should be used for future draft picks given up in the trade. To the extent a gain on a future draft pick given up in a trade is recognized under IRC section 1031, the gain is an IRC section 1231 gain."

As you can see, they go into really great detail about transactions.  The Sports Franchise ATG is available here.