Amos And Rodman

Do you remember Dennis Rodman?

He is more recently associated with traveling to North Korea and functioning as an off-the-record ambassador with Kim Jong-un, the dictator of that country. In the 1990s he was better known for playing with Michael Jordan and Scottie Pippen on the Chicago Bulls.

Early in 1997 the Bulls were playing the Minnesota Timberwolves. Rodman went after a loose ball, falling into a group of photographers on the sidelines. Rodman twisted his ankle. While getting back on his feet he kicked one of the photographers in the groin.

The photographer’s name was Eugene Amos. He went to a hospital, where he had difficulty walking and was in noticeable pain. The doctors offered pain medication but he refused, explaining that he was already taking medications for a preexisting back injury. Some dispute arose, and Amos left the hospital without being discharged.

He hired an attorney immediately upon leaving. 

The next day Amos went to another hospital. He complained about his groin, but the doctors did not notice anything other than the expected swelling. They were concerned about his back, though, and took a round of X-rays.

Before the lawsuit was filed, Rodman paid him $200,000 to go away.

Oh, and Amos had to sign a confidentiality provision to not discuss the matter. Standard stuff, but given that we are talking about it the agreement did not hold up as expected.

There is a Code section that addresses physical injuries:

          § 104 Compensation for injuries or sickness.

(a)  In general.

Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include-

(1)   amounts received under workmen's compensation acts as compensation for personal injuries or sickness;

(2)  the amount of any damages (other than punitive damages) received (whether by suit or agreement and whether as lump sums or as periodic payments) on account of personal physical injuries or physical sickness;

Relying upon Section 104(a)(2), Amos excluded the $200,000 from his 1997 tax return.

Wouldn’t you know the IRS pulled his return for audit?

And they disagreed with his exclusion of the $200,000 from taxable income. Why? As far as they were concerned, Rodman paid Amos all but $1 of the $200,000 to keep his mouth shut. The IRS was, however, willing to exclude the $1 from income.

Amos disagreed. He took one in the orchestra, after all.

Off to Tax Court they went.

The IRS argued that Amos had not proven his physical injuries, and that Mr. Rodman himself was skeptical that Amos sustained any injuries to speak of. The IRS further argued that Amos was required to pay $200,000 in damages to Rodman should he violate the confidentiality agreement, clearly indicating that Rodman did not intend to pay anything for alleged physical injuries.

The Court immediately dismissed the first argument, noting that if an action has its origin in a physical injury, then damages therefrom are treated as payments received on account of the injury.

The Court decided that the “dominant” reason for the settlement was to compensate Amos for his claimed injuries. However, the settlement also indicated that Rodman was paying some portion for Amos not to:

(1)   Defame Rodman

(2)   Disclose either the existence or amount of the settlement

(3)   Publicize facts relating to the incident, and

(4)   Assist in criminal prosecution against Rodman

Problem is, the agreement did not separate how much was paid for what.

The Court did what it had done many times before: it came up with a number.

The Court decided that $120,000 was payable for physical injuries and $80,000 was paid for confidentiality terms. Therefore $120,000 could be excluded under Section 104(a)(2). The $80,000 could not.

The Amos decision changed how personal injury attorneys draft documents. It is now expected that the injured party will not want to sign any confidentiality agreement. If there is one, anticipate the injured party to stipulate a nominal amount to the agreement and to request indemnification for any resulting taxes, penalties, interest, attorney fees and court costs.

And that is how Dennis Rodman contributed to the tax literature.

Taxing A Corvette

I came across an old case recently. It made me smile, as it reminded me of earlier – and skinnier – times.

Let’s set this up.

There are, broadly speaking, two accounting methods when deciding whether you have reportable income for a period: the cash method and the accrual method. There are a variety of sub, sorta- and who-actually-understands-this methods, but cash and accrual are enough for right now.

The cash method is easy: if you can deposit it at the bank you have income.  Maybe you decide not to deposit at the bank until next week, but it is still income today. Why? Because you can deposit it. The definition is “can” not “did.”

Accrual is trickier. Generally it means that you sent an invoice to someone. The act of invoicing means you have income, as someone owes you. What if you delay invoicing for a week or two? Well, then you have a variation on the above cash-basis reasoning: you could have but didn’t. Again, it is the “could,” not the “did,” that drives the test.

What if you are on the cash method and somebody pays you with property instead of cash? You have income. It makes sense when you remember that cash is a form of property. We have just gotten so used to it that we don’t think of cash that way. For tax purposes, though, someone paying you in asiago cheese and gluten-free crackers still represents income. Granted, we have to translate cheese-and-crackers into dollars, but income it is.

Let’s say that you played football. Not just any football, however. You were Vince Lombardi’s running back. It is December 31, and you and Lombardi and the Green Bay Packers are playing the New York Giants in the National Football League Championship.

COMMENT: NFL historians will immediately recognize that this was before the Super Bowl era. There was no game called the Super Bowl until the two leagues – the National Football League and the American Football League – merged in 1966. The first two Super Bowls were won tidily by Lombardi and the Packers. In Super Bowl 3 Joe Namath famously led the New York Jets over the Baltimore Colts.

So it is the championship game. You are the running back. It is December 31 and you are playing outside in Green Bay. I presume you are freezing. You run wild and score 19 points, establishing a league record. You are selected after the game by Sport Magazine as the most valuable player, which comes with the prize of a new Corvette. 

Sweet.

By the way, your Corvette is waiting for you in New York. It is now the evening of December 31, 1961.

Tax issue: Do you have income (the value of that Corvette) in 1961?

The IRS said you did.

But you throw the IRS a loop: the car is not income. No, siree. It was a gift. Alternatively, it is nontaxable to you as a prize or award.

I give you kudos, but the concept of a gift requires the presence of detached and disinterested generosity. While a creative argument, it could not be reasonably argued that a for-profit magazine was awarding an expensive car to the most valuable player of a televised sporting event out of a detached and disinterested generosity. It was much more likely that both Sport Magazine and General Motors were expecting publicity, advertising and social buzz from the award.

You still have your second argument, though.

Problem is, the prize or award exception requires you to receive it for an educational, artistic, scientific or civic achievement.

You argue your point: being a star football player “calls for a degree of artistry” requiring techniques based on “scientific” principles.

Seriously.

The Court decides:

We believe that petitioner should be caught behind the line of scrimmage on this particular offensive maneuver.”

You have income. And the Court gave us a great quote.

But when do you have income: 1961 or 1962?

The Court reasons through the obvious. You are in Green Bay. The car is in New York. You cannot get to that car - much less title it - unless you had Star Trek technology. However, it is 1961 and Star Trek is not on television yet. You have income in 1962, the following day.

Your tax case is seminal in developing the tax doctrine of constructive receipt. Normally constructive receipt accelerates when you have income, but it did not in your case.You could not have made it to the bank even if you wanted to.

So why did the IRS push the issue of 1961 versus 1962? They didn’t. Remember that you were arguing that the Corvette wasn’t taxable. The IRS had to fight back on that issue. The 1961 thing was a sidebar, albeit that is what the case is remembered for all these years later.

By the way, do you know which football player we have been talking about?

Getting A Carr Out Of New York

Did you know that New York is likely to audit you if you move away from the state? These “residency audits” are infamous, as the outcome is rarely in doubt. They are the state tax equivalent of World Wrestling Entertainment.

I have never lived in a state that would not allow me to leave. There is something about such behavior that is highly disturbing.

I am reading Patrick Carr’s request for redetermination with the New York Division of Tax Appeals.

Carr is an attorney who was admitted to the New York Bar in 1964. He was later admitted to the New Jersey Bar. He followed the traditional New York migration pattern, and by 2007 he was living in Sarasota. He was retired, so he did not bother to move his law license to Florida.

He got involved with a case. Since he didn’t have a Florida license, the court allowed him “pro hac vice” status, literally meaning “this time only.” The court allowed him – as an out-of-state lawyer – to appear in court for a specific trial.

The case went on for a while, and he had legal fee income for 2007, 2008 and 2009. 

He reported the income on his federal return as self-employment income. There is no Florida individual income tax.

Wouldn’t you know that he got pulled for a residency audit?

New York conceded that he had successfully left New York.

That should have been the end of the matter, but …

New York still wanted its taxes.

The taxpayer received a large amount of money in tax year 2007 from a case he litigated in Florida. Schedule C income for 2008 and 2009 were relatively smaller compared to 2007. The taxpayer stated that all of his schedule C income from legal services was sourced to the state of Florida.”

Let a tax pro translate the above:

We want the money.

Back to New York: 

However, the taxpayer is not licensed to practice law in the State of Florida.”

Tax pro:                  

Sounds like a Florida problem.

New York:

It was determined that he was admitted as counsel pro hac vice in the Circuit Court of the 12^th Judicial Circuit in Sarasota County, Florida. This means that he was given special permission to help litigate this particular case even though you are not licensed to practice law in the state of Florida.”

Tax pro:

He received permission from the Court. Are there any other issues?

New York:

Therefore, all of your income is subject to New York income tax, since your income was attributable to a profession carried out in New York State….”

Tax pro:

By "carried out in New York State," do you mean Sarasota?

New York admitted he never did any of the work in New York, and also admitted that he was not a resident of New York.

Tax pro:

This was productive. Stay in touch.

New York nonetheless sent him a tax bill for $68 thousand, plus interest. They reasoned that his New York law license was enough to make him taxable in New York.

Tax pro:

Why is New York dissing New Jersey? Carr had a New Jersey license as well as a New York license. Why don’t you make it 50% to keep it fair?

New York:

He used to live in New York.

Tax pro: 

He used to go to college. Why don't you bill him for tuition also?

You already know this wound up in Court.

And the Court pointed out the obvious:

·        Carr did not have an office in New York

·        Carr did not practice in New York

·        Carr had an office or other place of practice outside New York

·        Carr had a license outside New York

·        He was authorized to practice in Florida. In fact, that is what pro hac vice means

·        Holding a New York license is not the same as carrying on a profession in New York

The Court told New York to go away.

What upsets me about state tax behavior like this is the cost and stress imposed upon the individual. I can see that Carr represented himself (“pro se”) in this matter, but he is an attorney. Most people do not have the training and likely would not represent themselves. They would have to hire a tax pro to fend-off a reckless challenge by New York or another state. Even if they win, they lose – after they pay the professional fees.