Cincinnati Reds, Tax And Bobbleheads

Did you hear about the recent tax case concerning the Cincinnati Reds?

It has to do with sales and use tax. This area is considered dull, even by tax pros, who tend to have a fairly high tolerance for dull. But it involves the Reds, so let’s look at it.

The Reds bought promotional items - think bobbleheads - to give away. They claimed a sales tax exemption for resale, so the vendor did not charge them sales tax.

Ohio now wants the Reds to pay use tax on the promotional items.

COMMENT: Sales tax and use tax are (basically) the same thing, varying only by who is remitting the tax. If you go to an Allen Edmunds store and buy dress shoes, they will charge you sales tax and remit it to Ohio on your behalf. Let’s say that you buy the shoes online and are not charged sales tax. You are supposed to remit the sales tax you would have paid Allen Edmunds to Ohio, except that now it is called a use tax. 

The amount is not insignificant: about $88 grand to the Reds, although that covers 2008 through 2010.

What are the rules of the sales tax game?

The basic presumption is that every sale of tangible personal property and certain services within Ohio is taxable, although there are exemptions and exceptions. Those exemptions and exceptions had better be a tight fit, as they are to be strictly construed.

The Reds argued the following:

·      They budget their games for a forthcoming season in determining ticket prices.

·      All costs are thrown into a barrel: player payroll, stadium lease, Marty Brennaman, advertising, promotional items, etc.

·      They sell tickets to the games. Consequently, the costs – including the promotional items – have been resold, as their cost was incorporated in the ticket price.

·      Since there is a subsequent sale via a game ticket, the promotional items were purchased for resale and qualify for an exemption.

Ohio took a different tack:

·      The sale of tangible personal property is not subject to sales tax only if the buyer’s purpose is to resell the item to another buyer. Think Kroger’s, for example. Their sole purpose is to resell to you.

·      The purpose of the exemption is meant to delay sales taxation until that final sale, not to exempt the transaction from sales tax forever. There has to be another buyer.

·      The bobbleheads and other promotions were not meant for resale, as evidenced by the following:

o   Ticket prices remain the same throughout the season, irrespective of whether there is or isn’t a promotional giveaway.

o   Fans are not guaranteed to receive a bobblehead, as there is normally a limited supply.

o   Fans may not even know that they are purchasing a bobblehead, as the announcement may occur after purchase of the ticket.

The Ohio Board of Appeals rejected the Reds argument.

The critical issue was “consideration.”

Let’s say that you went to a game but arrived too late to get a bobblehead. You paid the same price as someone who did get a bobblehead, so where is the consideration? Ohio argued and the Board agreed that the bobbleheads were not resold but were distributed for free. There was no consideration. Without consideration one could not have a resale.

Here is the Board:

The evidence in the record supports our conclusion that the cost of the subject promotional items is not included in the ticket price.”

The Reds join murky water on the issue of promotional items. The Kansas City Royals, for example, do not pay use tax on their promotional items, but the Milwaukee Brewers do. Sales tax varies state by state.

Then again perhaps the Reds will do as the Cavaliers did: charge higher ticket prices for promotional giveaway games.

This is (unsurprisingly) heading to the Ohio Supreme Court. We will hear of The Cincinnati Reds, LLC v Commissioner again.

A Waitress, A Waffle House And A Lottery Ticket

It’s fun to think about winning the lottery

There is a (former) waitress in Grand Bay, Alabama who did. She worked at a Waffle House. Enter Edward Seward, a regular at the restaurant. Seward liked the lottery. As Alabama did not have a lottery, he would travel to Florida to buy tickets. He also liked giving away the lottery tickets to the waitresses at the Waffle House. Our protagonist – Tonda Lynn Dickerson – had an agreement with four other waitresses that – if they ever won – they would share the winnings equally.

Would you know that the lottery ship docked, and Tonda Lynn had the winning ticket? The winnings were more than $9 million if paid out over 30 years, and over $5 million if paid in lump sum. First thing Tonda did was quit her job.

Tonda Lynn took the matter to her dad – Bobby Reece. Turns out her family was quite close and had talked about sharing lottery winnings if ever anyone won. Bobby seemed the most invested in the lottery discussion. Johnny Reece - the brother - was not so much into it.   

Bobby contacted Louisa Warren, the general counsel for the Florida Lottery Commission. Bobby explained the family understanding about the lottery. She told Bobby:

Don’t sign that ticket, period.”

She recommended that they form an entity to claim the winnings.

Enter an attorney and an S Corporation named 9 Mill, Inc.

NOTE: Get it?

Bobby sat down at the table and decided the ownership percentages while Tonda Lynn and her husband went car shopping. Turns out that Tonda and James (the husband) owned 49% of 9 Mill, Inc.

OBSERVATION: Bobby seems to have an intuitive grasp of tax issues.

Bobby and Mrs. Reece and James went to Florida to claim the ticket. They decided to take a 30-year payout of $354,000 per year.

... and they were notified of a competing claim against the winnings.

Remember the other waitresses at the Waffle House? They lawyered up. Their attorney filed suit in the Circuit Court of Mobile County, claiming that his clients were entitled to 80% of the winnings. The waitresses had an agreement. They also had a witness – Mr. Seward – who started the whole thing by giving Tonda Lynn the lottery ticket.

Tonda seemed to have forgotten any agreement, any Waffle House, any other waitresses. She had bought the ticket herself, it seems. There was a small problem with that, however. The tickets were sequentially numbered at the bottom, and her ticket – number 18 – was missing

The Circuit Court entered an order saying that the other four waitresses were right and that Tonda Lynn had to part with 80%.

Well, 9 Mill, Inc was not going to stand for that. They countersued, and the case went to the Alabama Supreme Court. The Supreme Court overturned the Circuit Court.

Tonda Lynn was back in the money, but not for the reason that you may think. The Court agreed that there was an agreement between the five waitresses, but the Court also pointed out that it could not enforce that agreement on public policy grounds. Alabama could not enforce a contract based on gambling. Gambling was not allowed in Alabama.

I suspect that Tonda Lynn can never go back to that Waffle House.

Not too long after, the IRS contacted Tonda Lynn. The IRS wanted its gift tax – approximately $770,000.

Tonda Lynn had a lottery ticket.  The winnings went into an entity of which she and her husband owned 49%. What happened to the other 51%? According to the IRS, Tonda Lynn must have gifted it.

You have to admit, they have a point.

Now Tonda Lynn and the IRS go to Court. She presents two arguments:

(1)     No gift occurred because at the time of transfer there existed an enforceable contract under Alabama law.

(2)     Alternatively, she and her family were all members of an existing partnership that was the true owner of the lottery ticket.

Let’s address this in reverse order.

The Court noted that the partnership, if one existed, was an odd partnership because it did not observe the formalities of a business activity. Ownership had never been spelled out, for example. The members were not required to contribute to the partnership or to buy lottery tickets regularly. A family member did not even know if another member bought a lottery ticket. There may have been an understanding, but that understanding did not rise to the level of an”activity” which could be housed in an entity.

Additionally, Tonda did not buy the ticket. It was given to Tonda, who would still have to explain how the ticket got into the entity.

On the first argument the Court reminded Tonda that there could have been no enforceable contract.  Alabama did not recognize gambling.

NOTE: Odd that Tonda Lynn would forget this, as this is the same reason Tonda won her case against the other waitresses. Short memory, I suppose.

Tonda Lynn owed gift tax.

The story is not done, though. There was one more issue before the court.

It turns out that the delay in cashing the winning ticket was a tax boon to Tonda, as it allowed time for the other waitresses to submit their claim. Had they not, then Tonda would have owed gift tax of approximately $770,000. The claim introduced uncertainty about the value of the gift. What would an independent party pay for that ticket at that moment, knowing there was a cloud, the resolution of which could mean forfeiture of 80% of the winnings?

The Court discounted the gift by more than two-thirds.

It was Tonda Lynn’s only victory with the IRS.

How did it turn out for Tonda Lynn? Her husband divorced her. He then supposedly kidnapped her.  She later declared Chapter 13 bankruptcy.

Do you still want to win the lottery?

Forget About The Airline Ticket Tax Refund

Well, that was short-lived.

I had an earlier post about obtaining refund of certain airline travel taxes.

That ended last Friday. Congress extended the FAA budget through September. Yep, next month, that September. Long-term planning specialists, this Congress. Anyway, the IRS has backtracked and said that there will be no refunds for tickets purchased before or after July 23^rd.

Refund of Airline Ticket Taxes

Some taxes have come off your airline fares and you may be entitled to a refund.

The magic date is July 23, 2011. The following have expired:

·         The 7.5% tax on the base ticket price

·         The $3.70 per person per segment (a segment is one takeoff and one landing) on domestic flights

·         The international facilities tax of $16.30 for flights that begin or end in the U.S.

·         The $8.20 premium for flights that begin or end in Alaska or Hawaii

·         The 6.25% tax on the air transport of property (this does not apply to excess baggage fees)

If you buy a ticket now, you are OK as the tax does not apply and will not be collected. However, if you bought a ticket prior to July 23, 2011 for a flight after that date, you may be entitled to a refund.

Here is the rub: the IRS wants the airlines to refund you the tax they collected. The airlines want the IRS to refund the taxes. The IRS argues that the airlines have better information to handle the refund, as they have the date of purchase and credit card information. They can have the taxes refunded to your credit card, for example.  If the IRS has to refund, all this information has to be provided with the claim, as the IRS does not have the information readily. The IRS has said they will provide additional guidance on the how-to at a later date.

I think this applies to me personally, as we recently bought an airline ticket for my mom. I can tell you in advance that, unless the taxes exceed a reasonable threshold, I will not be assembling a claim to send to the IRS. It’s not worth the hassle, even to a tax CPA.

BTW, you may have read that many airlines immediately raised ticket prices when the tax ended, thereby easily (and invisibly) adding to their profits. Nice people, those.