Is Paying Cards A Sport?

What is a sport?

You and I have probably encountered that shiny-sparkly when discussing NASCAR.

But can it have a tax angle?

Oh, grasshopper. Even circles take on angles when you tax them.

Let’s travel to the UK. Their 2011 Charities Act defined sports as “activities which promote health involving physical or mental health or exertion.”

Introduce Sport England. They distribute National Lottery funding to encourage people to be more physically active. Seems a desirable cause.

It helps to be a sport if you want to tap-into that pot of Lottery gold.

Enter the English Bridge Union.

They want in.

The EBU has battling HMRC (that is, the British version of the IRS), arguing that entry fees to bridge tournaments should be exempt from VAT (“value added tax,” a sort of super sales tax). HRMC in turn looks to Sport England when developing its regulations. The EBU argued that the “physical or mental health or exertion” wording in the 2011 Act does not require physical activity.

But that is not Sport England’s position. They argue that the goal of sports is to increase physical activity and decrease inactivity.  That is not to argue that activities such as bridge do not help with mental acuity and the relief of social isolation; it just means that it is not a sport.

The EBU brought a refund suit against HMRC for VAT paid between 2008 and 2011. The amount is not insignificant: for 2012/13 alone it was over $800,000. The case went before the High Court of Justice of England and Wales.

The Court ruled that Sport England was within its rights to emphasize physical activities over mental and that Sport England could deny bridge status as a sport. Extrapolating, HMRC does not have to refund VAT paid on bridge tournament fees.

But the Court simultaneously added that it had not been asked to answer the “broad, somewhat philosophical question” as to whether bridge was actually a sport.

Seems both sides have a drum to beat following this decision.

By the way, the British courts have a different way than American courts. The lawsuit cost the EBU approximately $150,000. But they lost. They have also been ordered to pay approximately $75,000 to Sport England as reimbursement of their legal expenses.

COMMENT: I like this idea.

The EBU went to the Court of Appeal in London, where they lost earlier this year. They then appealed to the EU courts.

Here is Advocate General Maciej Szpunar of The European Court of Justice determining that bridge is a sport because it requires

… a certain effort to overcome a challenge or an obstacle” and “trains a certain physical or mental skill.”

The Advocate General’s decision will in turn be reviewed by the full Court en banc.

Soon an EU court will review a British tax decision. My understanding is that the British would not have to observe an adverse EU decision, but such a decision should nonetheless carry considerable persuasion.

And the Brits argue what constitutes a sport … because they have decided to tax something unless it is a sport. Well heck, all one has to do is remove “sport,” replace with another word, and we can continue this angels-on-a-head-of-a-pin nonsense until the end of time.

I do sympathize with the EBU. The HRMC, for example, recognizes both darts and snooker as sports, whereas you and I would recognize them as activities played in a bar. Several European countries – Austria, France, Denmark and others – already recognize bridge as a sport. To be fair, there are other countries – Ireland and Sweden, for example – that do not.

Did you know that the International Olympic Committee classified bridge as a sport back in 1998?  

But still…

I have difficulty with the concept of a “mental sport.”

By that definition tax practice – that is, what I do professionally – is a sport. 

Trust me, this is no sport.

Social Security Disability Payments and IRS Penalties

I have been thinking about IRS penalties.  I had a client that racked up payroll tax penalties, and we tried to get them waived. The IRS thought otherwise. Many tax practitioners will tell you that penalty abatement rests as much on drawing a sympathetic IRS officer as any technical argument the practitioner can offer. I am increasingly a member of that camp.

Let’s briefly discuss my client, and then let’s discuss the Arthur and Cheryl English Tax Court decision.

I acquired a new client from a sole practitioner. He had been their accountant for a number of years, and it was his usual routine to go out, review the books, prepare a payables listing, run payroll and whatnot. Fairly routine stuff. The client then bought a business. In addition to more complicated accounting, the accountant now had some additional payroll tax issues to address.

It did not go well. The accountant miscalculated certain third-quarter payroll tax deposits. Others he simply deposited late. He continued this into the fourth quarter. The client sensed something was wrong, and then decided something was in fact wrong. This took time, of course. By the time my client hired me, the prior accountant had affected two tax quarters.

The IRS –of course – came back quickly with penalties.

I disagreed with the penalties. My client – relying on a tax professional – paid as and when instructed. Granted, my client eventually realized that something was amiss, but surely there is permitted a reasonable period to investigate and replace a tax advisor. Payroll can have semiweekly tax deposit requirements, which timeframe may be among the most compressed in the tax Code. It does not mesh at all with replacing a nonperforming professional.

We got the third quarter penalties waived.

Then the IRS came after quarter four. I once again trotted out my reasonable cause request. The IRS denied abatement, in response to which we requested an Appeals hearing.  My heart sank a bit to learn that our case went before a newly minted Appeals officer. She could not understand why the client had not “resolved” the payroll issue by the end of quarter three. Surely, she insisted, my client “must have known” that there was a problem, and he should have done an “investigation” or something along those lines. She trotted out the well-worn trope that is the bane to many a reasonable cause request: a taxpayer is not allowed to “delegate” his tax responsibility to another, even if that other is a tax professional.

At what point does reliance on a tax professional extend to “delegation” of responsibilities? Apparently, my scale was quite different from that of this brand-new Appeals officer.

We lost the appeal.

Sigh. I suspect that – in about ten years – she would decide the same case differently.

Let’s talk about Cheryl English.

Cheryl became disabled in 2007. She carried a private disability policy with Hartford Insurance, and Hartford paid while she filed and waited on her social security disability claim. There was a catch, however. If Cheryl were successful in receiving social security, her Hartford benefits would be reduced by any social security benefits she received.

In 2010 she won her social security claim. She received a check of approximately $49,000, from which she forwarded approximately $48,000 to Hartford. She netted approximately $1,500 when the dust cleared.

And there is a nasty tax trap here.

If one purchases a private disability policy and pays for it on an after-tax basis, then any benefits received on the policy are tax-free. It is one of the reasons that many tax advisors – including me – frown on using a cafeteria plan to purchase disability coverage.

Cheryl received tax-free benefits from Hartford.

Then she received social security.

She consulted with two CPAs. Both assured her that – since the social security was being used to repay nontaxable benefits – it would be nontaxable.

There is symmetry to their answer.

However, taxes are not necessarily symmetrical. The Code states what is taxable. Both CPAs were wrong.

Social security can be taxable. The same is true for social security disability.

The IRS wanted tax of approximately $10,500. They also wanted an “accuracy” penalty of approximately $2,100.

OBSERVATION: Remember that Cheryl only cleared approximately $1,500 from the transaction. The IRS wanted approximately $12,600 in taxes and penalties. There clearly is lunacy here.

Cheryl took the case pro se to the Tax Court. 

            NOTE: “Pro se” means she represented herself.

The Court reviewed the Code, where it found that social security benefits could be nontaxable if one repays the benefits. That is not what happened here, however. Cheryl received social security benefits but repaid an insurance company, not the Social Security Administration. The Court looked for other exceptions, but finding none it determined that the benefits were taxable.

She owed the tax.

The Court struck down the “accuracy” penalty, though, observing that she sought the opinion of two CPAs and acted with reasonable cause and in good faith. The Court commented on the complexity of the tax law in this area, stating:

The disparate treatment of private and public disability benefits for tax purposes is curious and somewhat confusing,”

I am curious why Cheryl made no claim-of-right argument. There is a provision in the Code for (some) tax relief when a taxpayer recognizes something as income and later has to pay it back. I presume the reason is that Cheryl did not have tax (or much tax) in the Hartford years, so the tax break would have been zero or close to it when she repaid Hartford.        

Cheryl won on the penalty front, but she still had to pay taxes of $10,500 on approximately $1,500 of net benefits. Frankly, she may have been better off not having the Hartford policy in the first place.