Pay Me In Bitcoin

 

He plays right guard for the Carolina Panthers and had a great quote about cryptocurrency:

         "Pay me in Bitcoin.”

We are talking about Russell Okung.

I believe he earned about $13 million for the 2020/2021 season, so he can move a lot of Bitcoin.

And Bitcoin had quite the run in 2020, moving from approximately $7,200 in January to $30,000 by year-end. The payment platform company Square added Bitcoin as an investment, and PayPal started a new service allowing its users to buy, hold and sell Bitcoin through their PayPal account.

Then there is, as always, the near inexplicable behavior of some people. In October, John McAfee (yes, John of McAfee computer security products) was arraigned for tax fraud. He was charged with, among other things, not reporting income for his work promoting cryptocurrencies.

The IRS is paying more attention.

We have existing guidance that the IRS views cryptos – which include Bitcoin and Ethereum – as property and not currency. While this might sound like an arcane topic for a business school seminar, it does have day-day-day consequences. If you buy something for $11 and pay with a $20 bill, there is likely no tax consequence.  A crypto is not currency, however. Pay for that $11 purchase using your Bitcoin and the IRS sees the trading of property.

What does that mean?

Taxwise you sold crypto for $11. You next have to determine your cost (that is, “basis”) in the crypto. If less than $11, you have a capital gain. If more than $11, you have a capital loss. The gain or loss could be long-term if you held the crypto for more than one year; otherwise, it would be a short-term gain or loss.

Assume that you have frequent transactions in crypto. How are you to determine your basis and holding period every time you pay with crypto?

You had better buy software to do this, or use a wallet that tracks it for you. Otherwise you could have a tax mess on your hands at the end of the year.

You can, by the way, also have ordinary taxable income (rather than capital gain) from cryptos. How? Say that you do consulting work for someone and they pay you in crypto.  You have gig income; gig income is ordinary income; that crypto is ordinary income to you.

By the way, mining Bitcoin is also ordinary income.

The IRS had a question about cryptos on a schedule in prior years, but for 2020 it is moving the following question to the top of Form 1040 page 1:

At any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”

The IRS moved the question to make it prominent, of course, but there is another reason. Remember that you are signing that tax return “to the best of your knowledge and belief” and “under penalties of perjury.” The IRS is raising the stakes for not reporting.

Expect more computer matching. Expect more notices.   

Even Treasury is upping its game.

There is a form that one files with the Treasury if one owns or has authority over $10,000 or more in a foreign bank or other financial account. We tax veterans remember it as the FBAR (Foreign Bank and Financial Accounts) report, but the name has since been revised to FinCen 114 (Financial Crimes Enforcement Network). Here is Treasury telling us that we will soon be reporting cryptos on their form:

Currently, the Report of Foreign Bank and Financial Accounts (FBAR) regulations do not define a foreign account holding virtual currency as a type of reportable account. (See 31 CFR 1010.350(c)).  For that reason, at this time, a foreign account holding virtual currency is not reportable on the FBAR (unless it is a reportable account under 31 C.F.R. 1010.350 because it holds reportable assets besides virtual currency).    However, FinCEN intends to propose to amend the regulations implementing the Bank Secrecy Act (BSA) regarding reports of foreign financial accounts (FBAR) to include virtual currency as a type of reportable account under 31 CFR 1010.350.

This area is moving in one direction – more reporting. There is currently some inconsistency in how cryptocurrency exchanges report to the IRS (Form 1099-B versus 1099-K versus 1099-MISC). I expect the IRS to lean harder – and soon - on standardizing this reporting. This genie is out of the bottle.

The Freak Tackles The IRS

Let’s go hard procedural on this post.

He played defensive end in the NFL with the Tennessee Titans and Philadelphia Eagles from 1999 to 2010. At 6’4”, 260 pounds, 86-inch wingspan and 4.43 forty, NFL fans remember him as “The Freak.”

Jevon Kearse is in the tax literature.

It looks like a business deal went bad, because in 2010 he claimed a $1,359,000 bad debt deduction.

The IRS bounced it. The IRS now wanted over $430 thousand in tax. They issued a Notice of Deficiency (NOD) on May 11, 2012.

COMMENT: Procedurally, the IRS issues a NOD (also known as a SNOD) before it can officially assess the additional tax. Once assessed, the IRS can bring all its collection powers to bear.

Problem: Kearse says he never received the NOD.

Let us start our walk through IRS procedure.

Once assessed, the IRS sent Kearse a Notice of Federal Tax Lien.

COMMENT: One has the right to request a hearing (called a Collection Due Process hearing) in response.

Kearse requested a CDP hearing, at which he asserted that he never received the NOD and presented an offer in compromise (liability – for the home gamers) for $1.

COMMENT: There are three flavors of offer in compromise. The one we are talking about is when there is substantial doubt that the assessed tax is correct. At $1, that is exactly the point Kearse was making.

IRS Appeals tuned him down, and off to Tax Court they went.

A taxpayer has the right to challenge the underlying tax liability in a CDP hearing IF he/she never received the NOD or otherwise never had a chance to dispute the proposed assessment. This is a procedural requirement, and the Court can bring it up even if the taxpayer fails to.

Responsibility now shifted to the IRS. The Appeals officer had to prove that the IRS properly mailed the NOD. There are two general ways to do this:

(1) Reviewing an internal IRS document management system

(2) Reviewing a postal Form 3877 or an equivalent mailing list with date stamps and/or initials.

The IRS said they did the first option: they reviewed the internal system.

Kearse’s tax attorneys also got the Appeals officer to stipulate that she could not produce a Form 3877 or otherwise prove the mailing of the NOD.

NOTE: We will come back to the importance of a “stipulation” in a moment.

There is a second procedural issue here: the IRS can rely on its internal system unless the taxpayer alleges that the NOD was not properly mailed.

Which is what Jevon Kearse had done. The IRS could not rely on option (1).

Incredibly, the IRS finally found the Form 3877, explaining that the eventual success had resulted from an update to their systems.

The Court bounced the Form 3877.

What ….?

It has to do with the stipulation. You see, a stipulated fact is treated as conclusive evidence. It cannot be changed, barring extraordinary circumstances.

The IRS had to argue extraordinary circumstances.

And we have the third procedural issue: the IRS failed to do so.

Meaning the IRS was bound by its stipulation that it could not prove the mailing of the NOD.  

The IRS attorney flubbed.

Jevon Kearse won.

What a freak case.

RERI-ng Its Ugly Head - Part Two

Let’s continue our story of Stephen Ross, the billionaire owner of the Miami Dolphins and of his indirect contribution of an (unusual) partnership interest to the University of Michigan.

What made the partnership interest unusual was that it represented a future ownership interest in a partnership owning real estate. The real estate was quite valuable because of a sweet lease. When that ship came in, the future interest was going to be worth crazy money.

That ship was a “successor member interest” or “SMI.”

We talked about the first case, which went before the Tax Court in 2014 and involved legal motions. The case then proceeded, with a final decision in July, 2017.

COMMENT: Yes, it can take that long to get a complex case through Tax Court. Go after Apple, for example, and your kid will likely be finishing high school before that tax case is finally resolved.

The SMI was purchased for $2.95 million.

Then donated to the University of Michigan for approximately $33 million.

COMMENT: This is better than FaceBook stock.

After two years, the University of Michigan sold the SMI (to someone related to the person who started this whole story) for around $2 million.

OBSERVATION: Nah, FaceBook stock would have been better.

Now RERI was in Court and explaining how something that was and will be worth either $2 or $3 million is generating a tax deduction of $33 million.

And it has to do with the SMI being “part of” of something but not “all of” something.  SMI is the “future” part in “all of” a partnership owning valuable leased real estate in California.

The concept is that someone has to value the “all of” something. Once that is done, one can use IRS tables to value the “part of” something. Granted, there are hoops and hurdles to get into those tables, but that is little obstacle to a shrewd tax attorney.

Ross found a shrewd tax attorney.

Virtually all the heavy lifting is done when valuing the “all of” part. One then dumps that number into the IRS tables, selects a number of years and an interest rate and – voila! The entrée round, my fellow tax gastronomes, featuring a $33 million tasty secret ingredient.

The pressure is on the first number: the “all of.”

This will require a valuation.

There are experts who do these things, of course.

Their valuation report will go with your tax return.  No surprise. We should be thankful they do not also have to do a slide presentation at the IRS. 

And there will be a (yet another) tax form to highlight the donation. That is Form 8283, and – in general – you can anticipate seeing this form when you donate more than $5,000 in property.

There are questions to be answered on Form 8283. We have spoken about noncash donations in the past, and how this area has become a tax minefield. Certain things have to be done a certain way, and there is little room for inattention. Sometimes the results are cruel.

Form 8283 wants, for example:

·      A description of the property

·      If a partial interest, whether there is a restriction on the property

·      Date acquired

·      How acquired

·      Appraised fair market value

·      Cost

I suspect the Court was already a bit leery with a $3 million property generating a $33 million donation.

And the Court noticed something …

The Form 8283 left out the cost.

Yep, the $3 million.

Remember: there is little room for inattention with this form.

Question is: does the number mean anything in this instance?

Rest assured that RERI was bailing water like a madman, arguing that it “substantially complied” with the reporting requirements. It relied heavily on the Bond decision, where the Court stated that the reporting requirements were:

“… directory and not mandatory”

The counterpunch to Bond was Smith:

“ the standard for determining substantial compliance under which we ‘consider whether … provided sufficient information to permit … to evaluate the reported contributions, as intended by Congress.’”

To boil this down to normal-speak: could RERI’s omission have influenced a reasonable person (read: IRS) to question or not question the deduction. After all, the very purpose of Form 8283 was to provide the IRS enough information to sniff-out stuff like this.

Here is the Court:

“The significant disparity between the claimed fair market value and the price RERI paid to acquire the SMI just 17 months before it assigned the SMI to the University, had it been disclosed, would have alerted respondent to a potential overvaluation of the SMI”

Oh oh.

“Because RERI failed to provide sufficient information on its Form 8283 to permit respondent to evaluate its purported contribution, …we cannot excuse on substantial compliance grounds RERI’s omission from the form of its basis in the SMI.”

All that tax planning, all the meetings and paperwork and yada-yada was for naught, because someone did not fill-out the tax form correctly and completely.

I wonder if the malpractice lawsuit has already started.

The Court did not have to climb onto a high-wire and juggle dizzying code sections or tax doctrines to deny RERI’s donation deduction. It could just gaze upon that Form 8283 and point-out that it was incomplete, and that its incompleteness prejudiced the interests of the government. It was an easy way out.

And that is precisely what the Court did.

Michael Jordan, The Grizzlies And The Jock Tax

I have been reading recently that the jock tax may be affecting where athletes decide to play. For example, Ndamukong Suh, an NFL defensive tackle formerly with the Detroit Lions, was wooed by the Oakland Raiders but opted instead to sign with the Miami Dolphins. I can understand a top-tier athlete not wanting to play for a team as dysfunctional as the Raiders, but one has to wonder whether that 13.3% top California tax rate was part of the decision. Florida of course has no income tax.

Let’s not feel sorry for Suh, however. His contract is worth approximately $114 million, with $60 million guaranteed.

So what is the jock tax?

Let’s say that you work in another state for a few days. You may ask whether that state will want to tax you for the days you work there. Some states tell you upfront that there is no tax unless you work there for a minimum number of days (say 10, for example). Other states say the same thing obliquely by not requiring withholding if you would not have a tax liability, requiring you (or your accountant) to reverse-engineer a tax return to figure out what that magic number is. And then there are … “those states,” the ones that will try to tax you just for landing at one of their airports.

Take the same concept, introduce a professional athlete, a stadium and a game and you have the jock tax.

It started in California. Travel back to 1991 when Michael Jordan led the Bulls to the NBA Finals. After the net was cut and the celebrations finished, Los Angeles contacted Jordan and informed him that he would have to pay taxes for the days that he spent there.

Illinois did not like the way California was treating their favorite son, so they in turn passed a law imposing income tax on athletes from other states if their state imposed a tax on an Illinois athlete. This law became known as “Michael Jordan’s Revenge.”

How do you allocate an athlete’s income to a given city or state? That is the essence of the jock tax and what makes it different from you or me working away from home for a week or so.

If we work a week in Illinois, our employer can carve-out 1/52 of our salary and tax it to Illinois. Granted, there may be issues with bonuses and so on, but the concept is workable.

But an athlete does not work that way. What are his/her work days: game days? Game and travel days? Game, travel, and practice days?

Let’s take football. There are the Sunday games, of course, but there are also team meetings, practice sessions, film study, promotional events, as well as minicamps and OTAs and so on. Let’s say that this works out to be 160 days. You are with Bengals and travel to Philadelphia for an away game. You spend two days there. Philadelphia would likely be eying 2/160 of your compensation.

This method is referred to as the “duty days” method.

Cleveland separated from the pack and wanted to tax players based on the number of games in the season. For example, the city tried to tax Chicago Bears linebacker Hunter Hillenmeyer based on the number of season games, which would be 20 (16 regular season and 4 preseason). Reducing the denominator makes Cleveland’s share larger (hence why Cleveland liked this method), but it ignores the fact that Hillenmeyer had duty days other than Sunday. What Cleveland wanted was a “games played” method, and it was shot down by the Ohio Supreme Court.

Cleveland also had an interesting twist on the “games played” method. It wanted to tax Indianapolis Colts center Jeff Saturday for a game in 2008.  However, Saturday was injured and did not play in that game, making Cleveland’s stance hard to understand. In fact, Saturday was injured enough that he stayed in Indianapolis and did not travel with the team, now making Cleveland’s position impossible to understand. Sometimes bad law surfaces when pushed to its logical absurdity, and the Ohio Supreme Court told Cleveland to stop its nonsense.

Tennessee wrote its jock tax a bit differently. Since the state does not have an income tax (more accurately, it has an income tax on dividends and interest only) it could not do what California, Illinois and Ohio had done before. Tennessee instead charged a visiting athlete a flat rate, irrespective of his/her income. For example, if you were a visiting NBA player, it would cost $2,500 to play against the Memphis Grizzlies.

Tennessee also taxed NHL players (think Nashville Predators) but not NFL players (think Tennessee Titans).

I guess the NFL bargains better than the NHL or NBA.

One can understand the need to fund stadiums, but this tax is arbitrary and capricious. What about a non-athlete traveling with the team? That $2,500 may be more than he/she earned for the game.

Tennessee has since abolished this tax for NHL players but has delayed abolishment until June 1, 2016 for NBA players.

In other news, NFL players remain untaxed.

We have talked about the denominator of the fraction to be multiplied against an athlete’s compensation. Are you curious what goes into that compensation bucket?

Let’s answer this with a question: why do so many athletes chose to live in Texas or Florida? The athlete may have an apartment in the city where he/she plays, but his/her main home (and family) is in Dallas, Nashville or Miami.

Let’s say the athlete receives a signing bonus. There is an extremely good argument that the bonus is not subject to the jock tax, as it is not contingent upon future performance by the athlete. The bonus is earned upon signing; hence its situs for state taxation should be tested at the moment of signing. Tax practitioners refer to this as “non-apportionable” income, and it generally defaults to taxation by the state of residence. Take residence in a state with no income tax (hello Florida), and the signing bonus escapes state tax.

Consider Suh and the Miami Dolphins. California’s cut of his $60 million signing bonus would have been almost $8 million. Florida’s cut is zero.

What would you do for $8 million?

The NFL Is Giving Up Its (c)(6) Tax Status

So the NFL is going to relinquish its 501(c)(6) status, meaning that it will start filing as a regular, tax-paying corporation.

And I doubt it means much, unless someone simply has simply lost the plot when it comes to the NFL.

Let’s talk about it.

The gold-plate among tax-exempts is a 501(c)(3), which would include the March of Dimes, Doctors Without Borders and organizations of that type. The (c)(3) offers two key benefits:

(1)  Donations made are deductible, which is especially important to individuals.

(2)  Donations received are not taxable.

Point (1) is important because individuals are allowed only a limited plate of deductions, unless the individual is conducting a business activity. Point (1) is probably less important to a business, as the business could consider the donation to also be advertising, marketing, promotion or some other category of allowable deduction. An individual unfortunately does not have that liberty.

Point (2) represents the promised land. We would all like our income to be nontaxable.

The NFL is a (c)(6), which means that it does not receive benefit (1). It does not need benefit (1), however, as no one is trying to claim a donation.

Here is how the tax Code describes a (c)(6):

Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

By the way, are you curious how the words “professional football leagues” got in there?

The NFL had been a nonprofit going back into the 1940s. During the 1960s it faced a challenge from the Al Davis and American Football League. An easy way to defuse an enemy is to recruit the enemy, and the NFL was talking to the AFL about merging. There was an issue, however, and that issue was antitrust. There were two leagues playing professional football, and there was a proposal on the table to combine them.

This made the proposed merger political.

It also meant that one had to go through Senator Russell Long, an extremely powerful senator from Louisiana.

Pete Rozelle, the then NFL commissioner, had an idea. What if the NFL “expanded” the league to include a team in Louisiana? Senator Long was quite interested in that turn of events.

And that is how we got the New Orleans Saints.

And, around that time, Congress amended the Code to include the words “professional football leagues.”

Back to our story.

So the NFL does not care about benefit (1). The reason is that the NFL does not receive monies from individuals like you and me. It receives money from its business members, which are the 32 NFL teams. Each team is a corporation, and payments by them to the NFL may be deducted a hundred ways, but none of those ways can be called a “donation.”

Notice that the “NFL” that is giving up its tax exempt status is NOT the individual teams. The “NFL” under discussion is the league office, the same office that organizes the draft, reviews and revises game rules, hires referees, and negotiates labor agreements with the players union. Each individual team in turn is a separate corporation and pays tax on its separate profits.

So is the league office a money-making machine, committing banditry by being tax-exempt?

Here I believe is the real reason for the NFL’s decision to relinquish its (c)(6): the NFL is tired of explaining itself. The NFL is an easy target, and the issue brings bad press when the NFL is trying to create good press, especially after recent issues with domestic violence and player concussions.  

But to give up the promised land of taxation…?!

Why would they do that?

What if there was no profit left once the league paid everything? You have to have a profit before there can be a tax.

That is, by the way, (c)(6)’s are supposed to work. They are not a piggybank. They are intended to promote the interests of their members, whatever that means in context. Years ago, for example, I worked on the tax filings for the Cincinnati Board of Realtors, a classic (c)(6). You can readily presume that its interests are to promote the recognition, status and earning power of realtors in the Cincinnati real estate market.

The same way the NFL promotes its teams in a sports universe including Major League Baseball, the NHL, NBA, NCAA sports, MMA and so on.

How about the $44 million salary to Commissioner Roger Goodell? Is it outrageous for a tax-exempt to pay a salary of this amount?

Outrage is a tricky thing. Someone might be outraged that a tag-a-long politician has become rich by having her ex-President husband steer – and then drain – donations to a family foundation while she was serving as secretary of state.

Let’s replace “outrage” with something less explosive: is it reasonable for the NFL to pay Goodell $44 million?

Well, let’s consider an alternative: each team pays Goodell 1/32nd of his salary directly.

The financial and tax effect is the same, although this structure may be more acceptable to some people.

So the NFL league office is going to be taxable.

And I am looking at the NFL’s Form 990 for its tax year ended March 31, 2013. For that year, the excess of its revenues over expenses was almost $9 million.

How I wish that were me. I would be blogging as the Travelling-Around-The-World Tax Guy.

Nine million dollars would trigger some serious tax, right?

Wait.

I also see on the Form 990 that the year before there was a loss of more than $77 million.

Ouch. That, in the lingo of a tax-paying corporation, is a net operating loss (NOL). It can be carried forward and deducted against profits for the next 20 years.

Let’s assume that $9 million or so profit for the NFL is a reasonably repetitive number.

Have we eliminated any tax payable by the NFL for the next eight or more years?

No, it will not work that way. The NOL incurred while the NFL was tax-exempt will not be allowed as a deduction when it becomes tax-paying. However, if it happened once, it can happen again – especially if the tax planners REALLY want it to happen.

Even if it doesn’t happen, the federal tax would be around $3 million, which is inconsequential money to billionaire team owners who are trying to maximize their good press and minimize their bad.

And remember: tax returns filed by a tax-paying corporation are confidential. There will be no more public disclosure of Goodell’s salary.

Although if I made $44 million, I would post my W-2 on Facebook.

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.