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Tuesday, January 29, 2008

Selling Shares in Tax Profs?

Interesting article in Slate: Bullpen Market: A Minor-League Pitcher Named Randy Newsom Is Selling Shares of His Future Earnings, by Josh Levin:

Yesterday, I bought a professional baseball player. It only took a minute. I surfed over to Real Sports Investments, clicked the "Buy Now" button, and purchased six shares of Randy Newsom. Along with my Slate colleagues John Swansburg and Dan Engber, I am now the proud owner of 0.0096 percent of a minor-league pitcher's future major-league earnings. Mr. Newsom, I wish you a long and prosperous career—emphasis on prosperous. If Newsom makes $1,000,000 over the course of his major-league career, the Slate investment group will take a loss, earning a piddling $96 on an initial investment of $143.82. If he makes $10 million, we'll get $960. And if he makes Barry Zito money? I won't be retiring early, but I'll be able to watch my baseball-playing property on some nice plasma TVs.

The idea of buying shares in athletes isn't new. Football Players Funds Management, a Portugal-based hedge fund, helps pro soccer teams buy the contracts of promising youngsters in exchange for a percentage of the players' future transfer fees. Top poker pros are often staked for tournaments by investors, and a golfer might get his start on tour with backing from a consortium of investors. There's already a popular fantasy site, ProTrade, where fans can buy and sell virtual shares in their favorite players. And last May, Michael Lewis wrote a convincing piece for Portfolio arguing that it won't be long before Americans will be able to invest in their favorite athletes. ...

Shareholders will be paid from after-tax earnings but before agent fees and other expenses. ...

Newsom ... see[s] his $50,000 windfall as a way to level the playing field against guys who don't have to worry about finances. He told me that he wants to invest the money he gets from investors back into his career by enrolling at Athletes' Performance, a training facility in Arizona.

For further details, see Cincinnati Enquirer and Freakonomics.

The tax consquences of the structure are explained on the RSI website:

Real Sports Investments LLC, is engaged in contracts with all of the professional athletes you will see on the websites: realsportscards.com or realsportsinvestments.com. RSI athletes will pay RSI an agreed upon amount equating to a percentage of the athlete’s future net major league earnings. When the athlete receives payment, RSI will receive payment. At that point, RSI will then pay the owners of that particular athlete’s shares. The owners will receive payment in the form of an increase to their RSI member’s account, or in the form of a check. Members agree and understand that this payment is considered taxable income, and will be taxed at the appropriate level for each individual owner. Owners understand and agree that they will receive gross payment in the form of gross dollars. Taxes will be taken out through federal tax withholdings, and it is up to the owner to understand their own tax situation as it applies to them. Owners also understand that capital gains taxes will apply to any shares that they sell for a higher price than they paid. Owners are responsible for documenting and paying their own capital gains tax.

Comments are open for a further discussion of the tax issues of this structure.  (Hat Tip: Samuel Hans & Robert Nassau.)

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