The "Jock Tax"

by Dominick Stinelli 13. November 2015 12:43
When the average taxpayer travels out of state for business they do not typically file an income tax return in every state in which they travel.  Unlike the average taxpayer, however, professional athletes tend to encounter much more complex state income tax filing requirements.  Many states have realized that with minimal effort, they can generate tax revenue from visiting athletes.  Due to their high profile and corresponding high income, states have found it very easy to track and tax professional athletes who step foot in their state to play - an income tax now known as the “jock tax”. The jock tax originated in California in the early 90’s, as the state imposed the tax on professional basketball players playing in the NBA finals in Los Angeles.  Most other states have since followed suit, and as of today, there are only a handful of states without a jock tax.  As a result of the jock tax, professional athletes must now adhere to a burdensome and complex tax policy, which often results in filing dozens of state and local income tax returns.  The method of applying this tax has often been debated and, to add further complication, has not been universally accepted by the various states and localities.  Typically a professional athlete would allocate their income for the year based on the number of days they worked each year, which would inherently include their training and practice days.  In an effort to increase the allocated income to their particular state or locality, some jurisdictions assessed the tax based on the number of games an athlete played in a given year.  The City of Cleveland imposed the jock tax in such a fashion.  It also assessed the tax on athletes playing for visiting teams, who were on the roster but did not actually travel with the team and did not set foot in the city.  As a result of the city’s stance, two professional athletes filed suit against Cleveland claiming that the city was subjecting athletes playing for visiting teams to disproportionately high taxes.  Just this week, the Ohio Supreme Court ruled on behalf of the athletes, stating that Cleveland should base the tax on the number of days worked each year, as opposed to the games they played. The court also overturned previous rulings which upheld the tax levied against an athlete who was sick and did not travel with the team for a game played in Cleveland.  A big win for professional athletes is now causing Cleveland to change its stance.
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Did you know that the NFL is a tax-exempt nonprofit?

by Steven Sodini 18. December 2012 08:23
Wastebook is an annual publication by Senator Tom Coburn, MD, of Oklahoma, of the Top 100 biggest wastes of taxpayer monies each year.  For the 2012 edition of Wastebook (which is the primary source for this discussion), the topic that Senator Coburn ranked #2 on his 2012 list may surprise many people, since a lot of people (including this author) are big sports fans. As of October, 2012, the National Football League (NFL), the National Hockey League (NHL), and the Professional Golfers’ Association (PGA) are all currently classified as non-profit organizations to exempt themselves from federal income taxes on earnings.  Citing the Form 990’s filed by these organizations (which are available to the public), Senator Coburn concludes that taxpayers may be losing at least $91 million in federal revenue by subsidizing these tax loopholes for professional sports leagues that already benefit widely from rabid fans and generate billions of dollars and turning a profit, while claiming to be non-profit organizations. According to Senator Coburn, based on its 2010 Form 990, the registered NFL nonprofit alone received $184 million from its 32 member teams and holds over $1 billion in assets.  Together with its subsidiaries and teams – many of which are in fact for-profit, taxed entities – the NFL generates an estimated $9 billion in revenue each year.  All 32 of its teams are included in the top 50 most expensive sports teams in the world, ranking alongside some of the world’s famous soccer teams. Almost half of the NFL teams are valued at over $1 billion.  According to their own Form 990 for 2010, the PGA generated over $900 million in revenue, mostly through television rights, tournament earnings and sponsorships, and royalties.  In 2009, the NHL received nearly $76 million from its member teams, according to its own Form 990. As also disclosed on their Form 990’s, league commissioners and officials benefit from the nonprofit status of their organizations.  Roger Goodell, commissioner of the NFL, along with 7 other top NFL officials, reported a combined $51.5 million in salary and perks in 2010 alone.  Tim Finchem, commissioner of the PGA Tour, earned $5.2 million in 2010.  The NHL’s commissioner, Gary Bettman, received $4.3 million in 2009.  In comparison, the average salary of a traditional nonprofit CEO is $3.4 million.  These organizations are clearly taking advantage of the provision of the tax code that allows industry and trade groups, such as the U.S. Chamber of Commerce, to qualify as non-profit and tax-exempt.  None of these groups are permitted to promote a specific brand within an industry but each may promote the industry itself.  Qualifying organizations only pay taxes on few types of income and expenditures, including lobbying.  State and local governments also normally exempt these organizations from state income and sales tax as well, all of which adds up to an estimated $10 billion additional benefit to the nonprofit sector.  Noting the advantage in operating largely tax-free, the NFL, NHL, and PGA are all registered with the Internal Revenue Service (IRS) as IRC Section 501(c)(6) nonprofit trade organizations. These leagues all state that they help the professional sport in each of their leagues. On its 2010 Form 990, the NFL described itself as a “trade association promoting interests of its 32 member clubs.”  The NHL said its mission is “to perpetuate professional hockey in the US and Canada” on its own Form 990. These vague statements aside, it is pretty clear that major professional sports leagues are not in the business of simply promoting the hockey, football, or golf industry, but are rather in fact businesses with a primary purpose to make money.  The reason the NFL was even given tax exemption status in the first place stems from the 1966 merger of the then-American Football League (AFL) and NFL, where Congress passed a law granting specific antitrust exemptions to the new NFL.  Also, at that time, it added “professional football leagues” to the list of entities eligible for nonprofit status.  According to the IRS, “Section 501(c)(6) of the Internal Revenue Code provides for the exemption of business leagues, chambers of commerce, real estate boards, boards of trade and professional football leagues, which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual” (emphasis added).  However, it seems very unlikely that back in 1966, Congress envisioned the NFL becoming a $9 billion per year business nearly 50 years later, much of which clearly inures to the benefit of private investors. By contrast, one major sports league, Major League Baseball (MLB), filed as a nonprofit for years, but later chose to become a for-profit limited liability corporation (LLC) in 2007, in part due to an opposition to the IRS’ new salary transparency rules for nonprofits, which require releasing information on salaries above $150,000.  Although the NFL has lobbied over the years in Washington against an expansion of the disclosure reporting, they have found little support to date.  It is clear that major professional sports leagues have no business being permitted to be eligible for federal tax exemption.  Removing them from federal nonprofit status may also benefit states and localities, which lose out on much needed revenue.  One widely circulated example, according to the Indianapolis Business Journal, was at this year’s Super Bowl in Indianapolis, where “hotels and restaurants [did not tax] National Football League employees … The NFL [used] its tax-exempt status as a 501(c)(6) to avoid paying taxes, in addition to fuel, auto rental and admissions taxes.
Categories: Tax

Legislative Changes Applicable to PA Business Taxpayers

by Tim Marshall 9. August 2012 10:15
With the passage of both H.B. 761 and Senate Bill 1263 in July, the Commonwealth of Pennsylvania has enacted selected legislative changes for its business taxpayers.  These changes, some of which became effective in July, affect areas including Corporate Net Income Tax, Sales Tax, Administrative Tax Appeals Request For Compromise, Research and Development Credits, 1099-MISC Reporting Obligations and Penalties, and EFT Payments.   More information is available in this alert from BDO’s State and Local Tax office.
Categories: Tax

IRS Updates Rules for Reporting Agents to Deposit Employment Taxes

by Tom Guappone 7. August 2012 10:00
The IRS updated the rules for depositing federal employment taxes. Taxpayers can now designate a reporting agent to make federal deposits for federal, social security and Medicare withholding taxes. Information on how to designate a reporting agent can be reviewed within Rev. Proc. 2012-32.   Rules for batch and bulk providers to make electronic payments on behalf of other taxpayers can be found by reviewing Rev. Proc. 2012-33.   Both Revenue Procedures will be published in Internal Revenue Bulletin 2012-35 on August 20, 2012.
Categories: Tax

What Is Next For the Individual Taxpayer Identification Number?

by Jane Lamberson 16. July 2012 14:30
Just when we thought we understood the complex set of rules  the Internal Revenue Service (IRS) had issued for nonresident aliens to obtain a taxpayer identification number (ITIN),  the IRS has announced  yet more changes.  These changes could affect many of the [1] nonresident aliens selling real estate in Southwest Florida and across the country, as they may find it harder than ever to obtain an ITIN number to transact business in the United States. On June 22, 2012 the IRS issued IR 2012-62, changing how ITIN numbers are to be obtained through the end of 2012. These interim changes are designed to strengthen IRS procedures for issuing numbers and are part of a comprehensive review of the ITIN processing procedures.   The new rules require that either: a) original documents be sent to the IRS along with the W-7 application, or b) certified copies of the documents must be sent from the issuing agency.  A key change is that a certifying acceptance agent can no longer merely certify that the nonresidents’ original documents are a true copy. The certifying acceptance agent must now send the certified copies to the IRS with the W-7 application. With the new regulations a nonresident alien will need a certified copy of their passport (or other acceptable documents) from the issuing agency in order to: a) sell US real property; and, b) file for a withholding certificate to get a reduced withholding tax based on, for example, a maximum tax liability calculation.   This means they will need to get the certified copy BEFORE they come to the US to transact any business that requires an ITIN number if they want to file a W-7 application for an ITIN number. Without the certified copy from the issuing agency, the only way to complete the application is to file with the original documents. In summary, it appears the new regulations will require every nonresident alien to get a certified copy of the required documents needed for the ITIN application process. (Of course there is always the alternative of submitting original documents to the IRS.)  That way if the need for an ITIN number ever arises, the required documents will be available. Keep in mind that certified documents are only valid as long as they are not expired.  With the many uncertainties of the ITIN program, I anticipate we may see a whole new application process in the coming year. Until then nonresidents will have more of a headache obtaining an ITIN number than ever before. Jane E. Lamberson, CPA is with the Naples office of Urish Popeck & Company of Florida, LLC and practices extensively in the area of International Taxation.  She currently is a certifying agent for ITIN applications for the Internal Revenue Service. [1] A limited number of prospective applicants are exempt from the process - military spouses and dependents without social security numbers who need an ITIN, and nonresident aliens applying to claim treaty benefits.   
Categories: Advisory

Landmark decision by the U.S. Tax court provides guidance for a defined value clause (formula clause gifts) used in the taxpayer’s gifting strategy

by Dennis Stuchell 18. June 2012 08:45
  In March of 2012, the U.S. Tax Court filed its memorandum of findings regarding a defined value clause used in the taxpayer’s gifting strategy in Wandry v. Commissioner (March 26, 2012).  Not only was the decision a big win for the taxpayer, but the Tax Court provided guidance for drafting a successful defined value clause.  The ruling is considered a landmark decision, because it allows tax-free ownership transfers from one generation to another with certainty and in an orderly manner." The current tax regime imposes a gift tax of up to 35% when taxpayers give assets away, with exceptions.  Individuals now get one $5.12 million lifetime exemption, and they can also give up to $13,000 of assets a year to an unlimited number of recipients. (In 2013 the lifetime break is scheduled to drop to $1 million and the top rate to rise to 55%.) This means an owner who wants to give a business to children or others, such as employees, can use these exemptions to transfer ownership tax-free. He can even use the $13,000 annual exclusion to transfer value bit by bit. In the Wandry case, Dean and Joanne Wandry, a Colorado couple, each gave units in a family-owned limited-liability company worth $1,099,000 to their heirs in 2004.  To avoid paying tax, they specified the gifts should equal the dollar amount of their exemptions - a key point.  (At the time of the original gifting, the lifetime exemption was $1 million and the annual exclusion $11,000.) In Wandry, as in other cases, the givers have to get a professional appraisal if - as is common - the company is hard to value. The Internal Revenue Service can contest the appraisal after the gift, as it often does.  In Wandry, the value rose about 20% after the IRS appraisal. That brings up an important issue: If values rise after an IRS challenge, must the giver write a big check for tax on the amounts above the exemption?  According to the Wandry decision, no. The judge held the couple intended to make a gift equal to their exemptions, so the excess was never actually given by them. No tax was due. Prior to the Wandry decision, often the best outcome is for a family to designate a charity to receive the excess. No tax is due, but the family gives up some control.  The Wandry case is a boon not only for business owners but also wealthy families with "family limited partnerships" or entities holding publicly traded stocks. Even though the stocks' value is easy to determine, submerging them in a nontraded company provides valuable discounts when units are transferred to heirs. The IRS may appeal the decision, so taxpayers who rely on it run a risk.
Categories: Tax

IRA Owners and Advisors: Take a Final Look at Roth Conversions before 10-17-11

by Rocco Romano 4. October 2011 11:23
IRA OWNERS AND ADVISORS: TAKE A FINAL LOOK AT ROTH CONVERSIONS BEFORE 10-17-11   Many taxpayers who were willing to pay income taxes on their retirement funds at 2010 rates (or under the special installment rules allowed) in exchange for tax-free future earnings, converted their traditional individual retirement account (“IRA”) to a Roth IRA. Each of these 2010 conversions should be closely scrutinized to ensure that the taxable amount on the conversion does not exceed the current fair market value of the account. A market decline gives taxpayers a chance to convert a traditional IRA or investments in a qualified plan to a Roth IRA at a much lower tax cost than would have been possible when stock market values were higher. Taxpayers who have already converted also have the chance to take advantage of the lower tax cost provided they take action on or before October 17, 2011.     RECHARACTERIZING A ROTH CONVERSION BACK TO A REGULAR IRA If the investments have declined in value since the conversion, the tax bill will be artificially high unless the market recovers quickly. In order to avoid paying income taxes on value that no longer exists, the taxpayer can recharacterize a Roth conversion that took place in 2010 and treat it as if it had never occurred. This process involves transferring the converted amount (plus earnings or minus losses) from the Roth IRA to a traditional IRA via a direct, trustee-to-trustee transfer. For example, a taxpayer converts a traditional IRA invested in a stock fund to a Roth IRA invested in the same stock fund in March 2010. At the time of the conversion, the regular IRA had a $50,000 balance, all of which is attributable to deductible contributions and their earnings. The taxpayer’s Roth IRA is currently worth only $40,000. To avoid paying tax on the March 2010 conversion value that includes $10,000 of lost value, the Roth IRA can be recharacterized on or before October 17, 2011, as a traditional IRA. (This date is effectively the extended due date for 2010 individual tax returns, as October 15, 2011, is a Saturday.) The easiest way to make a recharacterization is to do so before filing the income tax return affected by the Roth conversion. Thus, if an individual taxpayer has extended and not yet filed the 2010 return, the return should simply report both the Roth conversion and recharacterization in order to produce a net effect on taxable income of zero. Taxpayers who have already filed their 2010 income tax return and paid taxes on the Roth conversion are not precluded from recharacterizing the conversion by October 17, 2011.1 If a 2010 conversion is recharacterized after the taxpayer timely filed the 2010 return, an amended return should be filed to reflect the recharacterization2 and to receive a refund of taxes paid.   RECONVERTING TO A ROTH IRA If the Roth IRA continues to be the desired retirement vehicle, the recharacterized funds can be returned to a Roth IRA after a specified waiting period. The reconversion cannot be made before the later of: 1. The beginning of the taxable year following the taxable year in which the amount was converted to a Roth IRA; or 2. The end of the 30-day period beginning on the day on which the IRA owner transfers the amount from the Roth IRA back to a traditional IRA by recharacterization. This limitation applies whether the recharacterization occurs during the taxable year in which the amount was converted to a Roth IRA or the following taxable year. Assuming, for example, that a Roth IRA was recharacterized as a regular IRA on October 17, 2011, the earliest date the funds could be reconverted to a Roth IRA would be November 17, 2011.
Categories: Tax