Archive

Posts Tagged ‘Taxes’

A History of Tax Sheltering For Sports Team Ownership

November 24th, 2014 No comments
Tweet about this on TwitterShare on FacebookEmail this to someone

It all traces back to a September 1934 court ruling that settled a battle between the Pittsburgh Pirates and the IRS.

In those days, MLB contracts had a one-year term with a standard renewal option (called a “reverse clause”). The reverse clause gave the player’s team the right to renew the contract each year upon expiration at a salary to be negotiated between the parties. If they were unable to agree on a salary, the team could, within certain limitations, fix the player’s salary. Although the team could not force the player to accept the renewal, it did hold the exclusive right to his services and could prevent him from playing for any other team. The player was, in effect, bound to his team for his entire professional career. For teams exercising their renewal options, players effectively had two choices: accept or retire from the game of baseball.

Player contracts were therefore valuable assets, which were bought and sold for cash amongst MLB teams. For tax purposes, the Pirates expensed the cost of the contracts they bought in the year incurred.

The IRS disagreed. Its position was that the Pirates were purchasing not only the right to use the services of the player for a year, but also the right, at its option, to continue to use his services for the entirety of his career. Therefore, the cost of the contracts should not be deducted in full in the year of purchase, but rather capitalized onto the balance sheet and then depreciated over the length of his projected career (contracts at the time had an average life of three years).

The court sided with the Pirates on the grounds that there was no guarantee that the purchasing team would be able to utilize its renewal rights, as nothing could prevent the player from quitting pro baseball(1).

More than a decade later, the ruling would give flamboyant baseball entrepreneur Bill Veeck an idea that would forever change the economics of team ownership, not just in baseball, but in all team sports. He would employ the ruling to fabricate a tax shelter designed exclusively for sports team owners, and then utilize specious logic to convince the IRS of its legality.  Read more…

The Taxing Impact of State Taxes

June 28th, 2010 14 comments
Tweet about this on TwitterShare on FacebookEmail this to someone

Taxes-240x300

It’s one of life’s certainties: Athletes need to pay taxes on income earned on the road.

For each of his first seven NBA seasons, Dwyane Wade has worked in Florida, where there’s no state income tax.

Yet, each April, he undoubtedly pays a small army of accountants to file hundreds of pages of tax returns and sends out checks all over the country covering taxes on income he earned on the road.

April 15 — tax day — is quite possibly the most stressful day for professional athletes, now that 20 of the 22 states(1) with NBA franchises, and several cities and other municipalities(2) within those states, have laws that require visiting athletes to pay state income tax for each game they play there.

This so called “jock tax” is an income tax levied against visitors to a city or state who earn money in that jurisdiction. Since the state cannot typically afford to track the thousands of individuals who do business on an itinerant basis, the ones targeted are typically the very wealthy and the very high profile, namely professional athletes. Not only are the working schedules of professional athletes public, so are their salaries. The state can compute and collect the amount with very little investment of time and effort.

The states take the total salary paid to the visiting professional athlete, allocate a portion of it to the time spent within its state, and then send a tax bill for a prorated portion of the athlete’s total annual salary.  Read more…

Categories: Commentary Tags: ,