Caleb William’s NFL Contract

 It may be that the NFL saved him from bad tax advice.

We are talking about Caleb Williams, the 2024 NFL number one overall draft pick by the Chicago Bears. He signed a four-year fully guaranteed contract for $39.5 million.

I can only wish.

But it was two additional negotiating positions that caught my eye.

(1)  He wanted to be paid via an LLC.

(2)  He wanted some/all of his contract to be structured as a forgivable loan.

I read that he was represented by his father, who has experience in commercial real estate but is not a registered agent.

But it helps to explain the LLC. The use of LLCs for real estate is extremely common, so his father would have seen their use repetitively. Still, what is the point of an LLC with an NFL contract?

It might be the expenses that an NFL player might incur: agent fees, union dues, specialized training and related travel, certain therapies and so forth. As those receiving a W-2 know, employee business expenses are presently nondeductible. If Caleb could run his NFL earnings through an LLC, perhaps he could avoid employee business expense classification and deduct them instead as regular business expenses.

There is a hitch, though. None of the four major team sports will pay compensation to an entity rather than directly to the athlete. In contrast, non-team athletes – like golfers – can route their earnings through a business entity. A key difference is that the PGA considers its golfers to be independent contractors, whereas the NFL (or MLB, NBA, or NHL) considers its players to be employees.

There is speculation that Caleb may have preferred an LLC because LLCs – ahem – “do not file tax returns.”   

Not quite. The tax treatment of LLCs is quite straightforward:

(1)  If the LLC has partners, then it will file a partnership return.

(2)  If the LLC elects to be taxed as a corporation, then it will file a corporate return. If an S election in place, it will file an S corporation return.

(3)  If the LLC has a single member, then the LLC is disregarded and does not file a tax return.

Do not misunderstand that last one: it does not say that income belonging to the LLC does not land on a tax return.

Let’s say that Caleb created a single member LLC (SMLLC). SMLLCs are also referred to as disregarded entities. The tax  Code instead considers Caleb and his SMLLC to be the same taxpayer. That is why there is no separate LLC return: all the income would be reportable on Caleb’s personal return.

Could someone have read the above and thought that income routed through an SMLLC is not taxed at all?

If so, Caleb really needs to hire a tax professional yesterday.

What about the loan forgiveness proposal?

I get it: loans are normally not considered income, as any increase in wealth is immediately offset by an obligation to repay the loan.

OK, Caleb receives contract monies, but he is liable for their repayment to the NFL. This potential liability means no immediate income to him. He would have income when the loan is forgiven, and (hopefully) he has some control when that happens.

But the NFL can call his loan, meaning he then must repay.

Oh puhleeeze.

Not to worry, says whoever. The NFL has no intention of calling the loan.

I am a huge NFL fan, but I am not an NFL team owner fan. There is no way I am trusting my money to owners who are monetizing their sport to such a degree that many fans cannot even see the games. Seriously, how many streaming services do they think an average person can afford?

What if Caleb includes conditions and guarantees and collateral and puts and ….?

Listen to yourself. You are leaving loan-land and whatever tax idea you started with. The IRS will come to the same conclusion. You have accomplished nothing, and you may even be exposing yourself to fraud charges.

I suppose Caleb could structure it as deferred compensation, the way Shohei Ohtani did with the Los Angeles Dodgers. Deferred compensation can get into crazy tax tripwires, but at least we are no longer talking about loans. If this is what he wants, then drop the loan talk and negotiate deferred compensation.

That is BTW what I would do. There is enough money here to make Caleb rich both now and later.

The NFL did Caleb Williams a favor by shooting down both proposals. 

IRS Individual Tax Payment Plans

I anticipate a question about an IRS payment plan this tax season. It almost always comes up, so I review payment options every year. It occurred to me that this topic would make a good post, and I could just send a link to CTG if and when the question arises.

Let’s review the options for individual taxes. We are not discussing business taxes in this post, with one exception. If the business income winds up on your personal return – say through a proprietorship or an S corporation – then the following discussion will apply. Why? Because the business taxes are combined with your individual taxes.

YOU DO NOT HAVE THE MONEY BUT WILL SOON

You do not have the money to pay with your return, but you do have cash coming and will be able to pay within 120 days. This is a “short-term” payment plan. There is no application fee, but you will be charged interest.

BTW you will always be charged interest, so I will not say so again.

YOU OWE $10,000 OR LESS

You cannot pay with the return nor within 120 days, but you can pay within 3 years. This is the “guaranteed” payment plan. As with all plans, you have to be caught up with all your tax filings and continue to do so in the future.

If you are self-employed you can bet the IRS will require that you make estimated tax payments. I have seen this requirement sink or almost sink many a payment plan, as there isn’t enough cash to go around.

The IRS says they will not allow more than one of these plans every 5 years. I have had better luck, but (1) I got a good-natured IRS employee and (2) the combined tax never exceeded $10 grand. Point is: believe them when they say 5 years.

YOU OWE MORE THAN $10,000 BUT LESS THAN $25,000

This is a “streamlined” payment plan. Your payment period can be up to six years.  

As long as your balance is under $25 grand, the IRS will allow you to send a monthly check rather than automatically draft your bank account.

YOU OWE MORE THAN $25,000 BUT LESS THAN $50,000

This is still a “streamlined” plan, and the rules are the same as the $10-25 grand plans, but the IRS will insist on drafting your bank account.

DOWNSIDE TO THE GUARANTEED AND STREAMLINED PLANS

Have variable income and these plans do not work very well. The IRS wants a monthly payment. These plans are problematic if your income is erratic – unless you sit on a stash of cash no matter whether you are working or not. Then again, if you have such stash, I question why you are messing with a payment plan.

UPSIDE TO THE GUARANTEED AND STREAMLINED PLANS

A key benefit to both the guaranteed and the streamlined is not having to file detailed financial information. I am referring to the Form 433 series, and they are a pain. You have to attach copies of bank statements and provide documentation if you want more than IRS-provided amounts for certain cost-of-living categories. Rest assured that – whatever you think your “essential” bills are – the IRS will disagree with you.

Another benefit to the guaranteed and streamlined is avoiding a federal tax lien. I have had clients for whom the threat of a lien was more significant than the endless collection letters they received previously. Once the lien is in place it is quite difficult to remove until the tax debt is substantially paid.

YOU OWE MORE THAN $50,000

If you go over $50 grand you will have to provide Form 433 financial information, work your way through the cost-of-living categories, fight (probably) futilely with the IRS to spot you more than the tables and then agree on an amount that will pay off the debt over your remaining statute-of-limitations (collections) period.

If you are at all close to the $50,000 tripwire, SERIOUSLY consider paying down the debt below $50,000. The process, while not good times with old friends, will be easier.

YOU CANNOT PAY IT ALL OVER THE REMAINING COLLECTIONS PERIOD

It is possible that – despite the best you can do – there is no way to pay-off the IRS over the remaining statute-of-limitations (collections) period. You have now gone into “partial pay” territory. This will require Form 433 paperwork and working with a Collections officer. If one is badly injured in a car wreck and has indefinitely decreased earning power, the process may be relatively smooth. Have a tough business stretch but retain substantial earning power and the process will likely not be as smooth. 

HOW TO APPLY

There are three general ways to obtain a payment plan:

(1)   Mail

(2)   Call

(3)   Website

There is a charge for anything other than the 120-day plan. The cheapest way to go is to use the IRS website, but the charge – while more if not using the website – is not outrageous.

You use Form 9465 for mail.

The website is https://www.irs.gov/payments/online-payment-agreement-application for online.

Set aside time if you intend to call the IRS. You may want to download a movie.

Peek-ing Into "Rollover As Business Startup" IRAs

They are called ROBS – an acronym for “Rollovers as Business Startups.” The idea is to own a business through your IRA. Perhaps your IRA could be the bank in the transaction. Perhaps the business will go exponential, which would do wonders for your IRA balance.

Me? I do not particularly care for them. 

Why? This field is so fraught with landmines I cannot help wonder why I would want to cross it. And like Al Pacino in Godfather 3, “just when I thought I was out, they pull me back in.” “They” would be a client whom we will call Jay. We were discussing a biomedical startup on the east side of Cincinnati. High risk, high reward: that type of thing. Should it hit he would be having breakfast on his yacht off the coast of St. Augustine. Maybe I could visit.

“If it goes wrong,” said Jay, “I lose my investment. There is still plenty of time for me to recover.”

In this case, Jay was right. Jay would not be working at the business. He would not be renting property or equipment to the business. He would be a passive investor, which reduces his tax risk considerably. 

But what if the business had to borrow money? What do you think the odds are that a small business, with little or no track record, would be able to borrow without the owner’s guarantee? Remember, Jay (or rather, Jay’s IRA) would be an owner. 

This is a trap. Let’s discuss how someone fell into the trap.

In 2001, Lawrence Peek (Peek) and Darrell Fleck (Fleck) decided to buy a fire protection company, Abbott Fire & Safety, Inc (AFS). The brokerage firm facilitating the deal introduced them to Christian Blees, a CPA. Mr. Blees presented a tax strategy, which he called “IACC.” IACC involved establishing a self-directed IRA, transferring money into it from another IRA or 401(k), setting up a new corporation and having the self-directed IRA purchase shares in the new corporation.

In other words, a ROBS.

There is also something subtle here. Mr. Blees had structured a tax strategy, and he sold the strategy to clients. What was his role here? We will come back to this.

Anyway, reams of paperwork were exchanged and signed, with all the waivers and exculpatories and whatnots. Peek and Fleck set up their self directed IRAs. Each puts in $309,000 for a 50% share in a new company (FP). FP in turn acquires Abbott (AFS).

Problem. AFS cost $1,100,000. FP had only $618,000 in cash. What to do? Easy! FP borrows money. Peek and Fleck give personal guarantees.

Peek and Fleck were well advised. In 2003, they each converted one-half of their IRA into a Roth. They each converted the remaining half in 2004. Remember that there is no tax in the future when money comes out of a Roth. FP is going to the stars, and Peek and Fleck are going to make a tax-free bundle.

In 2006, they sell the company for approximately $1.7 million, to be collected over two years.

The IRS examines the 2006 and 2007 tax returns. The IRS voids the IRAs. This means the IRS includes the gain from the sale of FP stock on their personal returns. The IRS also assesses the substantial understatement (20%) penalty. As backup bombardment, the IRS imposes excise taxes for excess contributions to the IRAs.

What…? 

Let’s walk through this.

An IRA is (generally) exempt from tax under Section 408(e)(1). A tax pro however will continue reading. A little further, Section 408(e)(2)(A) says that an account will cease to be an IRA if “the individual for whose benefit any individual retirement account is established… engages in any transaction prohibited by Section 4975.”

It behooves us to review Section 4975 and to stay as far away from it as possible.

Let us look at this ticking bomb defining a prohibited transaction:

4975(c)(1)(B)  (the) lending of money or other extension of credit between a plan and a disqualified person

So what? There was a guarantee, not a loan, right?

However, a guarantee is considered an indirect extension of credit (this is the Janpol case).

Peek and Fleck argued that the guarantee was between them and FP, not between them and the IRAs.

The Court pointed out the obvious: FP was owned by the IRAS, so - in the end – Peek and Fleck were transacting with their IRAs.

Oh,oh…  a prohibited transaction.

The Court noted that the guarantees existed without interruption since 2001. This meant that the IRAs ceased to be IRAs in 2001, when Peek and Fleck signed the guarantees. Yipes!

The Court now addressed the “substantial underpayment” penalty. Peek and Fleck immediately defended themselves by arguing that they had relied upon a CPA: Christian Blees. Reliance on a pro has long been accepted as reasonable cause to sidestep the penalty.

Too bad, said the Court. Mr. Blees was not a disinterested professional. He was selling a financial product. Heck, he had given it a name: “IACC.” He was not functioning as an independent CPA in this matter. No, he was functioning  as a “promoter.” Reliance on a promoter is not grounds for reasonable cause.

The Court affirmed the substantial understatement penalty.

What about the Roth conversions in 2003 and 2004? Each man would have paid tax upon conversion. Can they now get that money back?

The Court did not address this. Why? Remember that, after three years, a tax year will close. This means that the IRS cannot amend it. It also means that you cannot amend it. This case was decided in May 2013, so unless Peek and Fleck did something special to keep the 2003 and 2004 years open, there was no way to amend those years. They would simply have been out the tax they paid.

And have to pay tax again.

What else could go wrong?

The Court mused on the following questions:

(1) Did wage payments to Peek and Fleck constitute prohibited transactions?

(2) Did rent payments by FP to a company owned by Mrs. Peek and Mrs. Fleck constitute prohibited transactions?

(3) Did Peek and Fleck put too much money into their (Roth) IRAs, thereby triggering the excise tax for excess contributions?

The Court reviewed the wasteland after the nuclear blast of retroactively disqualifying the IRAs and decided that it did not need to consider these issues. Perhaps it felt the bodies were sufficiently dead.

As I said, I do not especially care for ROBS. They can detonate in a hundred different ways. Today we talked about just one of them.