Thursday, June 13, 2013

James Harrison Spends A Fortune To Play In The NFL

In the 2002 NFL draft, he was considered too short (6’ - 0”) to play linebacker and too light (240 lbs) to play defensive line. The Pittsburgh Steelers put him on their practice squad. He was released three times before finally finding a home with Pittsburgh in 2004. In the 2009 Super Bowl, he intercepted Kurt Warner, returning the ball for a 100-yard touchdown. It stood for a while as the longest play in  Super Bowl history.

His on-field behavior has not harmonized with the NFL’s recent penchant for mitigating on-field collisions. He is a ferocious player, drawing fines for a helmet-to-helmet hit on a quarterback (Colt McCoy) and knocking-out two wide receivers on the same team (Mohammed Massaquoi and Josh Cribbs of Cleveland).  His estimated NFL fines for 2010 alone are estimated at $120,000.

He has now come to Cincinnati and will play with the Bengals. His name is James Harrison, and he is our strong-side linebacker on Sundays.

He has also been in the news recently talking about his training and conditioning regimen:

My body is what helps me to make money. Whatever there is that I need to do to try and make myself better or get myself healthy, I’m going to do it. It wouldn’t be unreasonable to say that I spend anywhere between $400,000-$600,000 on body work, as far as taking care of my body, year-in and year-out.

As far as training, I have a hyperbaric chamber. I rent a hyperbaric chamber when I’m in Arizona. I have massages and I bring people in from New York, Arizona to where I’m at…I have a homeopathic doctor and I do a lot of homeopathic things. It’s just a lot, supplements, so on and so forth.”

Can you imagine? This man spends the equivalent of an upper-income bracket on being able to go on game day. It would go along way to easing the pain if some (or all) of the cost could be tax –deductible. 

Let’s walk through it. 

  • Is any of this deductible as medical expense?
The tax rule here is that the expense be for the “diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.” How do we apply this to an NFL linebacker, whose job is to participate in the equivalent of 50 to 60 car crashes a game, 16 games per year?
There is little question that some expenses will qualify. For example, a massage prescribed by a doctor pursuant to a treatment regimen will qualify as a medical expense. It is the nature of the treatment, not its practitioner, that determines deductibility.
Another requirement is that the treatment would not have been incurred for nonmedical reasons.
The last part gives us pause: can one persuasively argue that a hyperbaric chamber or acupuncture were not incurred for nonmedical reasons? Playing football is not an AMA-recognized medical disorder. We may lose many of Harrison’s expenses through this net.

  •  Is any of this deductible as an employee business deduction? 

An important point to remember is that Harrison is an employee of the Bengals, the same way I am an employee of my firm. There is a requirement that employee business expenses be “ordinary and necessary.” I cannot deduct my gym fees, for example, but can he?

Harrison is in the trade or business of playing football. “Ordinary and necessary” should be defined in relation to his playing football. He has a much closer nexus to gyms and dieticians than I do, for example. I would be hard-pressed to argue that a trainer is “ordinary and necessary” to my trade or business of being a tax CPA. Put me on a pro sports team, however, and one has a completely different argument.

Think about it this way: Harrison signed a $4.4 million dollar deal with the Bengals. NFL contracts are different from NBA and MLB contracts, as those are guaranteed. Only $1.2 million of Harrison’s contract is guaranteed. The balance is contingent on his making the team and reaching certain performance incentives.  Stating this another way, $ 3.2 million of his contract is not guaranteed, which is a lot of motivation to spend $400,000 to $600,000 to stay in shape. Would you spend it? I would, without hesitation. 

This not to say that the IRS may not challenge him.

Do you know Lamar Odom? He is an NBA player for the Los Angeles Clippers,  although many may know him as husband to Khloe Kardashian. The IRS disallowed $172,000 in fitness fees and $12,000 in NBA fines on his 2007 tax return. Odom was then living on a modest $9.3 million salary, so he did what any other financially-pressed American would do – he contested the IRS adjustment.

He argued the following:

(1)  As an NBA player he is obligated to stay fit, healthy and in NBA-level condition. This is not the same as you or me playing weekend pick- up ball. Odom was expected to perform as a professional basketball player throughout the basketball season.

(2)  IRC Section 162(f) disallows deductions for fines and penalties. Odom’s fines were not of the type described in that Code section, because his fines were league-imposed and not government-imposed.  NBA Commissioner David Stern may think of himself as the law, but his authority is not same as a policeman writing a speeding ticket. Odom further argued that league fines are becoming common for professional athletes. Because of this, they have become “ordinary and necessary” expenses.

The case was settled before being decided, and the IRS was prohibited from talking about the matter. There was no written opinion or ruling. We nonetheless learned that the IRS threw in the towel on the fitness fees and fines and contented themselves by assessing some small tax on game tickets that Odom had distributed.

In 1965 Sugar Ray Robinson found himself in a fight with the IRS. There were several items on the docket, three of which attract our interest as we discuss professional athlete expenses. The IRS tried to disallow a deduction for fight tickets which Leonard had given away. The Tax Court disagreed, finding that some number of the tickets could be reasonably connected with Sugar Ray’s trade or business as a professional boxer. The IRS tried to disallow deductions for Ray’s manager, as well as training facilities preparatory to a fight. Once again, the Court decided that the expenses were reasonably connected. The Court would allow the deductions as long as other requirements – such as substantiation – were met.

The Court decided that Leonard had substantiated the expenses for the training facilities and allowed the deduction. Sugar Ray could not substantiate his manager expenses, so the Court disallowed that deduction.

NOTE: I admit that I am curious how Sugar Ray could not document the amount he paid his manager. I suspect there was another entire sub-story buried in there.

The Court’s reasoning in the Sugar Ray case is still tax law, and hopefully Harrison’s tax advisor has apprised him of it. Harrison needs to be meticulous in documenting his expenses. He does not need to give the IRS an easy way to disallow his business deductions simply because he cannot produce the paperwork.

There is another tax technique that comes to mind: incorporating “James Harrison Inc” as a brand. Don’t laugh. The PGA golfers do it. The idea here is to place off-field income, such as endorsements, within the corporation. The corporation now has an income stream, and with it the corporation will issue a W-2 to Harrison. It will also adopt a medical reimbursement plan. To the extent that Harrison incurs medical expenses, he will submit his expenses to the corporation for reimbursement. The corporation will get a deduction and Harrison will get reimbursed. This sidesteps the nasty 7.5%-of-AGI limitation on the individual income tax return. By the way, that limitation goes to 10% next year, as part of the ObamaCare tax increases. Good thing Congress stepped-in there to close that abusive tax shelter of deducting doctor and medical bills.

What are the odds that Harrison will generate enough endorsement income to fund this technique? Do you remember his famous quote about Roger Goodell, the NFL Commissioner who kept fining him for excessive on-field hits?
If that man was on fire and I had to pxxx to put him out, I wouldn’t do it.”

I’m not sure what quotes like that do to Harrison’s endorsement value. Among some of my friends, I suspect they would increase it.

Good luck, James, and welcome to Cincinnati.

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