A Duty Of Consistency

 

I did not expect to see the issue in an innocent spouse context.

Stacey is the ex-husband.

Stanley is the ex-wife.

In 2004 Stacey and Stanley, while married, bought property in Texas.

In 2007 Stacey filed for divorce in Florida. The court bifurcated the proceedings, granting the divorce in 2011 but reserving jurisdiction over the property settlement.

Stacey caught the attention of the IRS. In 2014 the IRS sued to reduce his 1995 to 1997 tax liabilities to judgement. The next year (2015) the IRS issued Notices of Deficiency (NODs or SNODs) to Stanley for her 2000 to 2003 years.

In 2016 Stanley requested innocent spouse relief for the 2000 to 2003 liabilities.

Not surprisingly, there is a form for innocent spouse relief, and that form includes questions about financial information.

Stanley did not include any information on line 20 about the Texas property – or any other assets either.

In 2017 the IRS granted her innocent spouse relief for most of the liabilities from 2000 to 2003.

Meanwhile, the Florida court entered final judgement, giving Stanley one-half interest in the Texas property.

COMMENT: Perhaps this is why Stanley did not include the Texas property on her 8857 filing: she did not consider it hers until a Court said that it was.

Meanwhile, her ex (Stacey) racked up IRS debt over $3.2 million.

The IRS wanted money. In 2025 the Texas property was sold for $750 grand. His half went to the IRS; her half went to escrow until a court could figure out what to do.

Stanley knew what to do: she wanted half of the proceeds. Stacey’s tax problems were his own.

The Court disagreed with her.

Why?

It had to do with her excluding the Texas property from her innocent spouse filing.

The legal concept is called “duty of consistency.” The seminal case was Herrington in 1988. The Herringtons repeatedly entered straddle transactions on the London Metal Exchange. A straddle has two sides, and theirs had an ordinary loss in the first year followed by a capital gain in the second year. The Tax Court determined that these straddles were sham transactions, nixing one of the years when the Herringtons had an ordinary loss. The Herringtons brought suit over the second year, saying that it was unfair to have them pay tax on a capital gain when the other side (the loss year) got wiped out.

The Court was not particularly sympathetic, as one would expect with a tax shelter/sham case. The Court laid out its duty of consistency doctrine:

·       Taxpayer makes an assertion or representation.

·       The government relies on it, and

·       After the statute of limitations expires, the taxpayer wants to redo or recharacterize the earlier representation in such a way to aid the taxpayer and harm the government.

·       If the doctrine applies, the government may continue to act as if the previous representation continues to be true, even if it is not.

Now Stanley was not a shelter or sham case by any stretch, but the Court did see a duty of consistency.

·       Stanley made a representation on Form 8857 by leaving the “tell us about your assets” line blank.

·       The IRS relied on the representation when it evaluated whether Stanley was likely to experience economic hardship if innocent spouse relief was not granted.

·       Stanley was now changing her representation in a way that harmed the government.

Stanley was estopped under duty of consistency. The Court ordered her half of the sales proceeds be used to pay off Stacey’s back taxes.

Our case this time was United States v Stanley, No. 25-10687, U.S. Court of Appeals, 5^th Circuit.

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?