I do not watch professional, or college, sports (except for the Pro Bowlers Tour on ESPN and reruns on ESPN Classic – the entire extent of my ESPN channel viewing) nor do I follow sports in the media. It appears that the New England Patriot’s coach Bill Belichick was fined $500,000, and the team was fined $250,000, for the illegal videotaping of the New York Jets' defensive coaches signals in the teams' Sept. 9 season opener.
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The various tax blogs have been abuzz lately concerning the question of whether the coach can deduct his $500,000 fine as a business expense. I guess I should weigh in with my 2 cents worth on this topic.
The various tax blogs have been abuzz lately concerning the question of whether the coach can deduct his $500,000 fine as a business expense. I guess I should weigh in with my 2 cents worth on this topic.
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I had not previously blogged on this topic because, frankly, my dear, I don’t give a damn. It certainly is not an issue that would affect me or any of my clients (although there was the one year some 25+ years ago that we prepared the 1040 for the then captain of the New York Giants football team, who had gone into a short-lasting partnership with a regular client of ours on a restaurant near the stadium – FYI he never paid us). But then perhaps it does indirectly affect me and my clients, considering the title of this posting.
I had not previously blogged on this topic because, frankly, my dear, I don’t give a damn. It certainly is not an issue that would affect me or any of my clients (although there was the one year some 25+ years ago that we prepared the 1040 for the then captain of the New York Giants football team, who had gone into a short-lasting partnership with a regular client of ours on a restaurant near the stadium – FYI he never paid us). But then perhaps it does indirectly affect me and my clients, considering the title of this posting.
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IRS instructions state that “Some miscellaneous expenses that you cannot deduct are...Fines and penalties you pay for violating a law.” Internal Revenue Code Section 162(f) states “No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.”
IRS instructions state that “Some miscellaneous expenses that you cannot deduct are...Fines and penalties you pay for violating a law.” Internal Revenue Code Section 162(f) states “No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.”
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So, to digress a moment, the fine on a ticket for overtime parking while visiting a client’s office is not deductible because it is imposed by and paid to a Municipal Court - although the quarter put in the meter is deductible.
So, to digress a moment, the fine on a ticket for overtime parking while visiting a client’s office is not deductible because it is imposed by and paid to a Municipal Court - although the quarter put in the meter is deductible.
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The fine in this case was not imposed by or paid to a governmental agency or entity for the violation of a legal statute. They were paid to the NFL for breaking a rule – basically not playing fair. So a deduction for this fine is not specifically denied in the Code. Neither does the Code specifically allow such a deduction.
The fine in this case was not imposed by or paid to a governmental agency or entity for the violation of a legal statute. They were paid to the NFL for breaking a rule – basically not playing fair. So a deduction for this fine is not specifically denied in the Code. Neither does the Code specifically allow such a deduction.
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Kelly Phillips Erb (a.k.a. The Tax Girl) points out that “Canadian tax laws allow for a deduction for fines and penalties ‘provided the action giving rise to the penalty was done to earn business income.’” But that is Canada and not the US.
Kelly Phillips Erb (a.k.a. The Tax Girl) points out that “Canadian tax laws allow for a deduction for fines and penalties ‘provided the action giving rise to the penalty was done to earn business income.’” But that is Canada and not the US.
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We now must determine if the fine is an “ordinary” or “necessary” business expense under Code Section 162(a). An "ordinary" expense is one that is common and accepted in a field of business, and a "necessary" expense is one that is helpful and appropriate to your business.
We now must determine if the fine is an “ordinary” or “necessary” business expense under Code Section 162(a). An "ordinary" expense is one that is common and accepted in a field of business, and a "necessary" expense is one that is helpful and appropriate to your business.
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Unfortunately, lately such an expense has become all too “common” and “accepted” in the business of professional sports. It is certainly not “helpful” to the coach, but one could argue that it is appropriate in the field of professional sports that such fines be assessed. If the coach refused to pay the fine I expect he would be barred from participating in the NFL, so one could also say it is “necessary” for him to pay it in order to maintain his current position and salary.
Unfortunately, lately such an expense has become all too “common” and “accepted” in the business of professional sports. It is certainly not “helpful” to the coach, but one could argue that it is appropriate in the field of professional sports that such fines be assessed. If the coach refused to pay the fine I expect he would be barred from participating in the NFL, so one could also say it is “necessary” for him to pay it in order to maintain his current position and salary.
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I have reviewed the arguments in the various tax blog postings on this subject – mostly for deducting the fine (our good friend the Tax Girl stands alone, although Jim Maule is not so strongly for). A listing appears at the end of this post. These discussions report several Tax Court cases in which a business entity was allowed to deduct a fine assessed by a related non-governmental organization.
I have reviewed the arguments in the various tax blog postings on this subject – mostly for deducting the fine (our good friend the Tax Girl stands alone, although Jim Maule is not so strongly for). A listing appears at the end of this post. These discussions report several Tax Court cases in which a business entity was allowed to deduct a fine assessed by a related non-governmental organization.
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First, my answer on what should be - The punitive value of such a penalty should not be reduced by allowing the “perpetrator” to recover a substantial % of the fine via a tax deduction. I believe that the Tax Code should be revised by Congress to make certain fines and penalties assessed by non-governmental industry-policing entities, such as the fine discussed here, non-deductible. The federal and state government, and ultimately its individual taxpayers, should not have to subsidize this type of behavior.
First, my answer on what should be - The punitive value of such a penalty should not be reduced by allowing the “perpetrator” to recover a substantial % of the fine via a tax deduction. I believe that the Tax Code should be revised by Congress to make certain fines and penalties assessed by non-governmental industry-policing entities, such as the fine discussed here, non-deductible. The federal and state government, and ultimately its individual taxpayers, should not have to subsidize this type of behavior.
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However, as tax law professor Jim Maule of MAULED AGAIN points out in his, as usual, thorough and scholarly exposition on the subject, “the determination of whether the fines are deductible must be made under the law as it is, not the law as we would prefer it to be.” Unfortunately, again using the “when in doubt – deduct” rule, I would agree with the prevailing opinion that the fine can be deducted as an ordinary and necessary business expense on the coach’s Form 1040.
However, as tax law professor Jim Maule of MAULED AGAIN points out in his, as usual, thorough and scholarly exposition on the subject, “the determination of whether the fines are deductible must be made under the law as it is, not the law as we would prefer it to be.” Unfortunately, again using the “when in doubt – deduct” rule, I would agree with the prevailing opinion that the fine can be deducted as an ordinary and necessary business expense on the coach’s Form 1040.
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I think I also agree with the closing comments on Jim Maule’s post:
I think I also agree with the closing comments on Jim Maule’s post:
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“The cynic in me thinks that if the IRS challenged the deduction and prevailed, Congress would enact some sort of moratorium barring the IRS from challenging the deduction of fines imposed by the NFL. Not far behind would be special legislation making sports fines explicitly deductible no matter how common or rare the underlying transaction, unless the fine was imposed on account of violation of a government’s criminal law.”
“The cynic in me thinks that if the IRS challenged the deduction and prevailed, Congress would enact some sort of moratorium barring the IRS from challenging the deduction of fines imposed by the NFL. Not far behind would be special legislation making sports fines explicitly deductible no matter how common or rare the underlying transaction, unless the fine was imposed on account of violation of a government’s criminal law.”
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How would the coach deduct the $500,000 fine? Since, I assume, he is a W-2 employee of the New England Patriots he would have to claim the fine as an “employee business expense” on Form 2106 (or Form 2106-EZ), which would be carried over to Schedule A to be reported as a miscellaneous expense subject to the 2% of AGI exclusion. Such employee business expenses are not deductible in calculating the dreaded Alternative Minimum Tax (AMT), but based on his level of income the coach would certainly not fall victim to AMT. As I have said here before – millionaires don’t pay AMT.
How would the coach deduct the $500,000 fine? Since, I assume, he is a W-2 employee of the New England Patriots he would have to claim the fine as an “employee business expense” on Form 2106 (or Form 2106-EZ), which would be carried over to Schedule A to be reported as a miscellaneous expense subject to the 2% of AGI exclusion. Such employee business expenses are not deductible in calculating the dreaded Alternative Minimum Tax (AMT), but based on his level of income the coach would certainly not fall victim to AMT. As I have said here before – millionaires don’t pay AMT.
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Ryan Ellis (the blogger formerly known as Tax Player) of the TAX INFO BLOG, speaking at the TAX PROF BLOG, does the following computations for us:
Ryan Ellis (the blogger formerly known as Tax Player) of the TAX INFO BLOG, speaking at the TAX PROF BLOG, does the following computations for us:
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“It's been reported Bill has an annual salary of about $5 million, so let's use that as a rough approximation of AGI. Assuming no other miscellaneous itemized deductions subject to the limit that shaves $100,000 off his deduction right there, leaving him with $400,000. The Pease phaseout {the “read my lips” tax – rdf} will get him, as well. Assuming $5 million of AGI and $1 million of itemized deductions (about standard), the Pease phaseout will reduce his itemized deductions by $145,308. The pro-rated share (40%) of this assigned to the remainder of the fine is $58,123. That leaves him with $341,877 to deduct. Assuming he is in the 35% bracket, the federal tax subsidy on this will be $119,657. The IRS will subsidize 24% of the Belichick fine.” Plus the coach’s home state (if it has a state income tax) will also kick in something toward the $500,000.
“It's been reported Bill has an annual salary of about $5 million, so let's use that as a rough approximation of AGI. Assuming no other miscellaneous itemized deductions subject to the limit that shaves $100,000 off his deduction right there, leaving him with $400,000. The Pease phaseout {the “read my lips” tax – rdf} will get him, as well. Assuming $5 million of AGI and $1 million of itemized deductions (about standard), the Pease phaseout will reduce his itemized deductions by $145,308. The pro-rated share (40%) of this assigned to the remainder of the fine is $58,123. That leaves him with $341,877 to deduct. Assuming he is in the 35% bracket, the federal tax subsidy on this will be $119,657. The IRS will subsidize 24% of the Belichick fine.” Plus the coach’s home state (if it has a state income tax) will also kick in something toward the $500,000.
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Now if this were a Schedule C deduction, with federal and state income tax at the highest level and the Medicare portion of the self-employment tax, we are talking about a total tax subsidy of close to 45% of the $500,000!
Now if this were a Schedule C deduction, with federal and state income tax at the highest level and the Medicare portion of the self-employment tax, we are talking about a total tax subsidy of close to 45% of the $500,000!
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And that’s my 2 cents worth on the issue. Here is what other tax bloggers have said:
And that’s my 2 cents worth on the issue. Here is what other tax bloggers have said:
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TTFN
TTFN
2 comments:
I personally think they really should.
what about the $250,000 fine that the team had?
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