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?

It's Opening Day!

One does not need to be a baseball fan, just exhausted with winter.

Wish I could be there.

IRS Does Not Want You To Call Next Week

So I am reading the following headline:

      IRS Asks Taxpayers to Resist Calling Next Week

I am wondering when our tax system became a Saturday Night Live skit.

The IRS does have a point. Next week includes Presidents Day and is usually one of the busiest weeks for the IRS phone lines.

The IRS wants people to instead to visit the website www.irs.gov and take advantage of the online tools there.

I try to be sympathetic – I truly do. However I cannot help reflect that we never see the following headlines:

Chick fil-A Asks Customers To Stay Away

Apple Has Nothing To Sell You

Honda Asks Potential Buyers Not To Visit Dealerships

Why the difference between the government and an actual-operating-accountable- produce-something-legitimate-or-we-go-out-of-business company?

If you even have to ask ….

Mormon Tithing and Caesar

George Thompson (GT) lives in New Jersey. He is the president of Compliance Innovations, Inc, which is owned by a trust. He and his wife are the trustees. He is a lifelong member of the Church of Jesus Christ of Latter-Day Saints (Church). He is a shift coordinator and a stake scouting coordinator with the Church. The Church does not pay him, however. He is married and has five children, two of whom are or were in college.

GT got himself into tax problems. He owed payroll trust fund penalties of over $150,000 for payroll periods in 2004, 2005 and 2007.

NOTE: We have spoken about these penalties before and referred to them as the “big boy” penalties. These penalties are for not submitting payroll tax withholdings and are some of the harshest penalties in the IRS arsenal.

He also owed regular “income tax” penalties for taxable years 1992, 1995, 1996, 1999, and 2000. These added up to over $730,000.

$150,000 plus $730,000 equals a lot of money. The IRS wanted it. I think you can see the problem.

The IRS begins its offense by sending a Final Notice of Intent to Levy, following up with an off-hand Notice of Federal Tax Lien Filing.  GT called time-out by filing a request for a Collection Due Process Hearing.

Let’s take a moment and explain what happened here. More than 25 years ago, Congress passed what has become known as the “Taxpayer Bill of Rights.” The intent was to introduce some formality to IRS Collections efforts, which too often operated as a Government Agency Gone Wild. GT applied the brake by requesting a CDP hearing. IRS Appeals would now step-in and look at how GT and Collections were behaving.

Before Appeals stepped-in, GT offered a “partial payment” installment agreement. You can guess that “partial payment” means that he is not paying off his tax in full. Collections requested a financial statement – a Form 433-A – providing GT’s income, expenses, assets and liabilities. The IRS wanted to see how much GT could pay.  

GT appeared to be doing well, listing monthly income of over $27 thousand with expenses of $24 thousand. He therefore offered to pay the IRS $3 thousand per month.

Seems fair, right?

The IRS looked at the same numbers and determined that he could pay over $8 thousand per month.

What? How could that be?

Trust me, it is easy – and common. The numbers are just magnified in this case.

When you get into this level of financial detail, the IRS classifies your expenses into two categories:

·        Necessary expenses

·        Conditional expenses

The IRS will generally disallow conditional expenses in a partial pay offer. GT had included approximately $5 thousand per month for Church tithing and college expenses. The IRS considered both to be conditional – and disallowed them. Bam! He could pay $5 thousand more per month.

Off go GT and the IRS to Tax Court.

GT leads off with Malachi 3:8-10:

Will a mere mortal rob God? Yet you rob me.

 But you ask, ‘How are we robbing you?’

In tithes and offering. You are under a curse – your whole nation – because you are robbing me. Bring the whole tithe into the storehouse, that there may be food in my house.”

The IRS fires back with Matthew 22:21:

Render unto Caesar the things that are Caesar’s, and to God the things that are God’s.”

The Court steps between the two with:

While we may be incapable of determining what belongs to God, we believe that we can, and must, decide what is Caesar’s.”

GT presented three different arguments to the Court:

(1) Given his position in the Church, tithing is required by the Internal Revenue Manual to be treated as a necessary expense.

(2) Classifying his tithing as a conditional expense is a violation of his rights under the Free Exercise Clause of the First Amendment.

(3) Classifying his tithing as a conditional expense is a violation of the Religious Freedom Restoration Act.

The Court dives into the first argument. It observes that the necessary expense test has two prongs: the expense must be for

·        The taxpayer’s health and welfare, or

·        The taxpayer’s production of income

For example, the Internal Revenue Manual allows a minister’s tithing as an allowable expense – if it is a condition of employment.

GT trots out a letter from his bishop that GT would have to resign his positions within the Church if he did not tithe. GT has a problem though, as the Church did not pay him. This would appear to present an obstacle. GT, undeterred, argues that the term “employment” in the Internal Revenue Manual is not limited to compensated employment and can include uncompensated employment.

Huh?

The Court observes that it cannot find any case specifically deciding whether the term “employment” as used in the Internal Revenue Manual is limited to compensated employment or can include uncompensated employment.

What? Can it be ...?

The Court reasons that there is a difference between a minister who is required to tithe in order to keep his/her job (and paycheck) and GT’s situation. It decides that the term “employment” must mean compensated employment.

GT argues that being active in the Church contributes to his health and welfare. The Court reflects on the interaction of religious observance and taxation, but does not agree that holding GT to his tax obligations compromises his health and welfare – or, at least, not any more than it compromises the rest of us.

GT next argues that not being able to tithe results in his being booted from Church office, thereby infringing his free exercise of religion.

The Court observes:

...petitioner overlooks the fact that it is his Church who is requiring him to resign his positions if he does not tithe. The settlement officer did not require petitioner to resign ...”

 And here is my favorite quote from the Court:

 “Petitioner’s claimed exemptions stems from the contention that an incrementally larger tax burden interferes with their religious activities. This argument knows no limitation.”

OBSERVATION: We know about Congress, taxes and “no limitation,” don’t we?

Let’s fast forward: GT loses his case. The Court is simply not going to let him treat his tithing and college expenses as a necessary expense when determining his partial payment installment offer.

My thoughts?  There are rules and guidelines when negotiating payment plans with the IRS. The more you want them to budge, the stricter the rules. The IRS did not budge an inch.  

I believe GT lost his case before he even went to Court. Why? Consider this quote from the Court:

Petitioner has a long history of not paying his taxes. As of the date of trial petitioner still had not paid his income tax liabilities for the taxable years 1992, 1995, 1996, 1999, and 2000.”

The Court was looking at GT as a deadbeat.

Here is the Court again:

Additionally, respondent has assessed trust fund recovery penalties under section 6672 against petitioner for seven different tax periods.”

Looking at? Nah. The Court had concluded that GT was a deadbeat.