Archive for the ‘Sports’ Category

Lance Armstrong’s Race for Deductibility

October 29th, 2012 No comments

One week ago, the International Cycling Union took away Lance Armstrong’s seven Tour de France titles he had earned in successive years from 1999 to 2005. In addition, the ICU is requiring Armstrong to return up to $16 million he had received for winning the Tour de France over those years.

Armstrong is a U.S. citizen and thus was required to report and pay U.S. income tax on his winnings. Upon returning the winnings, is he entitled to any relief for the taxes already paid?

The answer is probably, but not necessarily entirely.

Samuel D. Brunson, Assistant Professor of Law at Loyola University Chicago School of Law, explains in this paper titled Lance Armstrong and the Race for Deductibility.

Usain Bolt Serves the UK an Olympic Hangover

August 16th, 2012 No comments

Usain Bolt sprinted out of the United Kingdom as quickly as he sprinted in the sovereign state.

Today the Wall Street Journal is reporting that the Jamaican sprinter will forego future races in the UK in order to avoid a large tax bite on potential future winnings there.

The UK is unappealing to foreign athletes because of its tax base. Not only does the base include any winnings earned by nonresident athletes on UK soil, it also includes their worldwide endorsement earnings. Multiply the tax base by the proportion of days spent in the UK to days spent elsewhere, and that’s the tax bill.

Considering Bolt currently has a $9 million annual endorsement deal with Puma, I can’t say I blame him.

The UK tax base is not standard. Here in the States, the tax base includes endorsement earnings paid by American sponsors only. Endorsement monies paid by non-American sponsors aren’t included. France’s base mirrors that of the U.S.

This isn’t the first time we’ve seen an athlete limit appearances in the UK because of taxes. Rafael Nadal, for example, had said he would not play at the 2012 Aegon Championship at Queen’s because of its tax base formula.

I suspect Nadal had little to no reservations with his decision, as there’s an abundant number of other major opportunities to participate in each year. Not quite sure whether we can say the same about track and field. But if Bolt will continue to ink major endorsement deals without having to set foot in the UK going forward, it’s the UK’s loss in the end.

(Hat tip: TaxProf Blog)

Rory McIlroy Dominates in South Carolina

August 12th, 2012 1 comment

Northern Ireland native Rory McIlroy dominated the field this weekend to capture the 2012 PGA Championship, held at Kiawah Island, South Carolina.

McIlroy became the first player to win the Championship by at least eight strokes, breaking Jack Nickalus’ previous record of seven set in 1980.

Finishing first, McIlroy collects a cool $1,445,000. Before taxes, of course.

McIlroy may be considered a U.S. resident and thus subject to U.S. income tax on his worldwide income if he meets the substantial presence test. To have substantial presence, he must (i) spend at least 31 days in the U.S. during 2012 and (ii) have a weighted average of 183 days spent in the U.S. over 2012 and the prior two years. But, if he spends fewer than 122 days in the U.S. during 2012, then he is exempt from substantial presence.

If McIlroy is not a U.S. resident for 2012, he still must pay U.S. tax on income that is “sourced” (earned) in the United States, unless there is treaty relief.

Section 1 of Article 17 of the United States-United Kingdom Income Tax Treaty reads:

Notwithstanding the provisions of Articles 14 (Independent Personal Services) and 15 (Dependent Personal Services), income derived by entertainers, such as theatre, motion picture, radio or television artistes, and musicians, and by athletes, from their personal activities as such may be taxed in the Contracting State in which these activities are exercised, except where the amount of the gross receipts derived by an entertainer or athlete, including expenses reimbursed to him or borne on his behalf, from such activities do not exceed 15,000 United States dollars or its equivalent in pounds sterling in the tax year concerned.

(Emphasis added.)

No treaty relief for the champion. McIlroy’s $1.44 million prize is subject to U.S. income tax.

At 23 years young, McIlroy has a very promising career ahead of him. It’s not far-fetched to speculate he will receive more attention than any other professional golfer from prospective endorsers over the next five to ten years.

The taxation of endorsement winnings of nonresident golfers in the U.S. has been a heavily litigated issue. Retief Goosen took his case to tax court last year, and the parties stipulated to dismiss the appeal of that case this past February.

Another significant case regarding the endorsement earnings of a professional golfer is still pending, however. Sergio Garcia is the taxpayer. I’ll write about that decision after we learn of it.

Olympic Winnings Subject to our Worldwide Tax System

August 9th, 2012 No comments

People ask me all the time, “Why is the tax code so complicated?”

My one sentence answer: “It’s riddled with countless exceptions and exemptions.”

Sen. Marco Rubio (R-FL) has proposed the winnings earned from medals by Olympians should be exempt from federal income tax.

We often see politicians spending far too much time advocating for measures that would ultimately have at most a marginal impact on a select few. Rubio’s suggestion is a perfect example.

I’m not looking to take away from the spectacle that is the Olympics. But millions of Americans work hard for their paychecks despite knowing a large cut is going to Uncle Sam.

Standing against the proposal, the Tax Foundation points out a far more significant policy issue with the current tax code:

[W]hy is the U.S. taxing this foreign earned personal income in the first place? The United States and Eritrea stand as the only countries to enforce a world-wide taxation system for personal income.

America’s worldwide income tax system combined with increasing foreign interest reporting is why we are seeing the expatriation rate significantly increase.

Expatriation is a very involved process. So involved that this 5,000+ word blog “Why people expatriate” is merely a starting point for those considering.

And yet, more and more of those considering are actually following through.

But Senator Rubio won’t spend time addressing the issues raised by our worldwide tax system. Those are too important too think about how to tackle.

Does the Jock Tax Impact Athletes’ Decisions?

July 15th, 2012 3 comments

Free agency periods in professional sports often elicit discussions about the jock tax. The jock tax is imposed by state and local governments on income earned by athletes when they perform in cities with such taxes.

States and cities have different tax rates. The more games played in a higher tax jurisdiction should result in more total tax paid. I covered the topic after Albert Pujols decided to sign with the Los Angeles Angels of Anaheim this past offseason.

So, do state and local tax rates impact the decisions of free agents?

California State Assemblyman Martin Garrick believes so. In a piece for the San Diego Union-Tribune, he claims the State’s jock tax creates a disincentive for professional athletes who consider whether to join a California team. He then states that the state legislature should take action to reduce or eliminate the disincentive.

I believe his analysis comes up short. There are a few key points Mr. Garrick does not mention.

via Wikipedia

First, he uses the example of baseball slugger Carlos Lee vetoing a trade to the Los Angeles Dodgers. He simply assumes a higher tax burden was the reason of the veto.

How come Albert Pujols decided to sign with the Angels when he could have re-signed with the Cardinals? Pujols is paying more taxes as a result of the decision.

Second, Garrick does not describe the difference in the effective tax rates by playing for different teams. Merely saying that one state’s income tax rate exceeds another’s is an oversimplification.

Sure, Garrick is correct to say that in general professional athletes on Californian teams pay more taxes than athletes on teams in most other states. Asserting that the increased tax burden is the primary reason players turn down the opportunity without offering a quantiative analysis, however, seems unconvincing.

Furthermore, it is at least arguable that moving to a team in a larger market provides athletes more oportunities for endorsement deals, possibly offsetting to an extent the increased tax burden.

Taxes may play a role in athletes’ decisions. It just appears some politicians may be exaggerating the significance of that role.

Former Giant, Eagle Fails to File Tax Returns

May 23rd, 2012 1 comment

William James Peterson, Jr. was drafted by the New York Giants in the third round of the 2001 NFL draft to play cornerback. Upon joining the Philadelphia Eagles in 2006, James dropped “Peterson Jr.” from his name.

Around the same time, James apparently thought he could also drop the requirement to file his tax returns. The Associated Press is reporting James has pleaded guilty to willfully failing to file tax returns from 2005 to 2009.

James also played for the Buffalo Bills and the Jacksonville Jaguars during those years. Prosecutors say he earned over $9 million throughout the five years in question.

James faces up to a year in prison and a $100,000 fine. His sentencing is scheduled for September 21. If he didn’t pay any federal income tax on $9 million, a one year maximum seems like a fairly lenient punishment.

Categories: Sports, Tax Fraud Tags:

Falling Incomplete with the Tax Law

March 6th, 2012 No comments

Freddie Mitchell has his place in NFL history. He was on the receiving end of a throw by Philadelphia Eagles quarterback Donovan McNabb on a 4th and 26 play during the final two minutes of the divisional round of the 2003-2004 playoffs. Had the pass fallen incomplete, the Green Bay Packers would have won and advanced. Instead, the Eagles forced the game into overtime and eventually won the game.

Mitchell was a first round draft pick and played in his last NFL game at the age of 26. Some former players go into coaching, some take up charity work. Others, unfortunately, get into trouble with the law.

6ABC is reporting Freddie Mitchell was indicted by a federal grand jury for conspiracy and income tax fraud. Read the indictment here.

Allegedly, Mitchell used his connections with professional athletes in order to defraud the government.

Mitchell introduced at least one athlete, “A.G.,” to a tax preparer who claimed she could obtain for the athlete a large federal tax refund. A.G. made a $100,000 down payment to Mitchell for the services. Using bogus information, the preparer filed A.G.’s 2008 tax return which reflected a $1,968,288 refund. Form 8888 was attached to the return in order to allocate portions of the refund to both Mitchell and the preparer.

This time, Mitchell’s play may put him behind bars.

I hope this story serves as a wake up call to professional athletes who are inexperienced with handling their finances. If it seems too good to be true, it probably is.

Categories: Sports, Tax Fraud Tags: ,

The NFL Won’t Be Alone in Pursuing Bounty Participants

March 4th, 2012 No comments

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.

via Wikipedia

The 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.

Categories: Sports Tags:

Green Bay Packers Sell $67 Million of Stock Worth $0

March 1st, 2012 No comments

Sports Illustrated is reporting that the Green Bay Packers have raised $67 million over the past six weeks by selling shares for $250 each. That’s 268,000 shares sold.

What does a shareholder get? No dividends. No benefits from earnings. No bump up on the season ticket waiting list. The stock isn’t tradeable. Hmmmmm…

via Wikipedia

Perhaps there’s a sense of pride in owning a piece of a team in a small market. I wouldn’t know, living in New York.

Some take the position that the stock is tax deductible immediately after its purchase because it’s worthless. The counterpoint is that it isn’t worthless because people are actually buying it.

This Wall Street Journal story tells more.

Categories: Sports Tags:

Not So Amazin’

February 21st, 2012 1 comment

Bad news all around for the New York Mets organization today. For better or for worse, the items are off the field matters.

Kathy Kmonicek/AP

The first piece relates to the suit brought against Mets owners Saul Katz and Fred Wilpon by Irving Picard, the court-appointed trustee of assets seized from Bernie Madoff. (If you don’t know who Bernie Madoff is, read this.) The New York Times reports that Picard is asserting Katz and Wilpon depended on ten to fourteen percent returns in “profit” from their investments with Madoff.

Depended on how, you ask? The expected returns were budgeted into the business plan for the team, apparently. Katz and Wilpon allegedly invested revenue from ticket sales, concessions, and other sources with Madoff to generate the returns. In addition, the team structured some player salary payouts well into the future so the team could first re-invest the money. For example, Bobby Bonilla, who played for the Mets from 1992 to 1995 and in 1999, is currently collecting an annual salary of $1,193,248.20 from the Mets until 2035.

Irving Picard, representing the victims of the Madoff ponzi scheme, filed a $1 billion lawsuit against Katz and Wilpon, claiming that the owners fraudulently earned profits through their investments with Madoff. Nine of the eleven charges were dismissed last September, and the trial for the remaining two is expected to begin March 19 in federal court in Manhattan.

Now to the second piece. Charlie Samuels served the Mets organization for more than thirty years, and was the team’s clubhouse manager for many of them. Last May, he was arrested on charges alleging he stole nearly $2.3 million worth of team equipment and memorabilia. The indictment included twenty-one charges in all.

Earlier today, Mr. Samuels pleaded guilty to criminal possession of stolen property in Queens County Supreme Court as part of a plea agreement. He also pleaded guilty to criminal tax fraud charges relating to his failure to pay New York State income tax on the items he stole. Samuels is expected to receive five years probation when sentenced on April 16.

Put together, these stories paint a picture of deceit from various angles. Not the best way to motivate a team that finished 77-85 last year.

In sports, winning is the ultimate remedy for a team’s problems. A typical cynical Mets fan, I don’t expect the team to mitigate these damaging off the field issues with on the field play this upcoming season. Since Linsanity is possible, though, I’ll believe in the Metropolitans while we inch closer towards 2012 Opening Day.

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