News broke on Friday that the New Orleans Saints employed a “bounty” system during the the past three NFL seasons.
I can’t say I’m surprised by this. After all, one of the NFL’s biggest draws is its high level of competitiveness throughout the league. Unfortunately, some teams are taking it way too far.
The NFL.com story reports that 22 to 27 defensive players were involved, including linebacker Jonathan Vilma. Allegedly, before the 2009 NFC Championship game against Brett Favre and the Minnesota Vikings, Vilma offered $10,000 cash to any defensive teammate who knocked Favre out of the game. According to the NFL’s report, the team’s then defensive coordinator Gregg Williams administered the bounties.
How will the NFL punish those implicated? Some speculate the penalties will be worse than those imposed on the New England Patriots for the 2007 Spygate scandal: Coach Bill Belichick was personally fined $500,000, and the franchise was fined $250,000 and lost a first round draft pick.
Taxgirl tells us what the imminent suspensions or fines may mean for tax purposes:
You can’t generally claim lost wages as a deduction. This is especially true if the wages were payable based on specific performance of a task. So if I were paid by the hour and I expected to work 20 hours, and I only worked 10 hours, I can’t claim the difference as a deduction. Similarly, if a player’s contract pays by the game, and he is banned from six games without pay, then his paycheck is simply lower. He reports a lesser amount of income than expected and takes no deduction.
If, however, there were an actually penalty or a fine, the result could be different. In that case, assuming that the payment of the fine or penalty could be considered an “ordinary and necessary” expense, the affected player might be able to take a tax deduction.
She opines that a fine for participating in the bounty system may be both ordinary and necessary. It’s arguably ordinary because some claim the practice is “commonplace” throughout the league. And it’s arguably necessary because the incentives created by the bounty system were both helpful and appropriate towards accomplishing the goal of winning football games.
There may be not only NFL sanctions, but also criminal charges brought by federal or state prosecutors. Sports Law professor Michael McCann walks through the gamut of possible legal claims, including tax evasion:
Players who received bounty payments should have reported them as taxable income; even if the payments arose because of criminal activity, such “ill gotten gains” are taxable. Failure to pay one’s full share of taxes constitutes tax evasion. The IRS and Louisiana Department of Revenue are likely following the bounty system scandal with a watchful eye.
As readers of this blog are well aware, Mr. McCann is absolutely correct: Illegal income is taxable income.
We don’t know exactly how much in bounty payments were made. And it’s possible that bounty recipients claimed the income. But suppose they didn’t. Even if the total amount of tax owed is not more than, say, $50,000, I wouldn’t be surprised if the tax authorities consider pursuing tax fraud charges.
“But the small amount at stake isn’t worth investing the resources required to build and try the case,” you say. There’s more to be gained than monetary restitution.
As I learned during my first year in law school, one of the primary purposes of criminal punishment is for general deterrence. Punishing public figures for tax evasion may deter others from doing the same sometime in the future. The reality is that the story of tax evasion charges brought against an NFL player is far more likely to be picked up by major news outlets than a story of the same charges brought against a John Doe.
The burden of proof is on the prosecution to show the taxpayer had the intent to evade paying tax. Federal prosecutors failed to meet this burden after they charged former NBA referee Steve Javie with failing to report income he received by downgrading airline tickets provided to him by the league.
We’ll see if prosecutors feel enough evidence is present to indict bounty recipients for tax evasion.