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Discussion:Ball Player

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Discussion Forum Index --> Tax Questions --> Ball Player

Ckenefick (talk|edits) said:

12 July 2013
A while ago, a client begged me to see his kid play in a High School baseball game (sophomore year). I said, "Ok. Our CPA firm provides a wide variety of services, including talent evaluation." Client laughed and chalked it up to me being a jackass. Anyway, the kid wasn't half bad. A left-handed catcher, mind you. Client, a skilled ball player in his own right, said he was going to step away from his construction business for a little while and try to develop his kid into a professional.

A couple years go by...and kid gets drafted by a major league team. He gets a pretty big signing bonus. When I go to prepare dad's return, dad tells me to include 1/2 of kid's signing bonus on dad's return. I said, "Why?" He said he and son had an informal agreement, dating back to the kid's sophomore year in High School. Specifically, in exchange for dad's "development" services (and future agent services), dad would get 1/2 of the signing bonus. I said, "Makes sense to me." So we reported 1/2 on dad's return and deducted the same amount on kid's return, as a business expense.

To make a long story short, kid's return gets selected for audit. Basically, IRS is saying, "No way. No deduction here."

Any ideas about all of this?

Marcilio (talk|edits) said:

12 July 2013
When son was a minor, he couldn't enter into a contract, therefore any terms of the "contract" are null and void. In real terms, the son probably put 10,000+ hours into developing his skills. His father put in, what, 1,000 hours? Doesn't sound like a 50/50 arrangement here. What if the son had been a washout? Would the father have any recourse? Of course not, therefore his was not at risk. I can't think of anything to support the father's argument.

Ckenefick (talk|edits) said:

12 July 2013
When son was a minor, he couldn't enter into a contract, therefore any terms of the "contract" are null and void.

Good point, but these contracts do require the signature of a parent/guardian, so they are not null and void.

Scrivenerjones (talk|edits) said:

12 July 2013
Did the kid issue Dad a 1099-MISC?

Ckenefick (talk|edits) said:

12 July 2013
No.

WEISSEA (talk|edits) said:

12 July 2013
Rev Ruling 2004-50 "This ruling holds that certain amounts paid to an employee as a signing bonus for a baseball contract or as a ratifying bonus pursuant to a collective bargaining agreement are wages for purposes of the Federal Insurance Contributions Act (FICA)".

So 1/2 bonus is a gift from son to father Unless there is evidence, preferably written, there is some other arrangement (e.g. informal partnership where father provides agent services and son provides captial).

Ckenefick (talk|edits) said:

12 July 2013
Son properly reported the signing bonus as wages, because it was included in his W2.

Oh yes, there was a compensation arrangement, as outlined in the OP. Basically, a contingent compensation agreement. If son gets signed, father gets 1/2 of the signing bonus. Not a common law partnership. In a partnership, the partners need to split the profits earned by the partnership. That is, if son takes 1/2 of his signing bonus and contributes it to a partnership, and it is immediately paid out to dad, that's not much of a tax law partnership.

ZL28 (talk|edits) said:

12 July 2013
did son report the expense on Sch C or 2106?

Ckenefick (talk|edits) said:

12 July 2013
2106

MWPXYZ (talk|edits) said:

12 July 2013
Randy's son played ball, too. But, both were right handed.

Ckenefick (talk|edits) said:

12 July 2013
[Sidebar: Come on MWP, don't ruin all the fun..........]

Ok, now then. Let's proceed. Any ideas here?

ZL28 (talk|edits) said:

12 July 2013
What if a baseball agent had cut a similiar deal with this kid; that the agent would get 50% of the signing bonus; that would be allowed...so why is this being disallowed? The only reason I see it that it appears

there wasn't

a. a contract in writing

b. if there was a contract in writing, the father was on the other side of the contract and the guardian

   at the same time...which may weaken the case in one sense, but should it necessarily preclude it?


IF the IRS, won't allow the 50/50...would they allow 60/40 or 70/30?

did the son get hit with amt?

Ckenefick (talk|edits) said:

12 July 2013
IRS raised the contract issue, but it went away. Although there was no written contract, there is credible testimony that (1) there was a verbal contract/agreement (2) that dad did just as he said he would do - take time away from dad's business (and the related profit decline i dad's business proves it) and also coach his kid for those last few years of high school. So, all the facts we put forth to the IRS have been backed up.

One argument the IRS is making, however, is that the son was not in the *business* of being a professional baseball player when the *expense* in question was incurred. Not sure what you guys think of that...

By my feeling is that IRS has a problem with the related party-ness here. So, we might say, well, a professional, yet unrelated, coach would have demanded compensation, right? For that reason, I don't see a whole lot of difference between a related and unrelated coach. The main difference, as I see it, is that a traditional coach may have demanded payment as the services were performed and provided, which gets into this issue: Dad really knew his kid. Dad really knew baseball also. Dad was willing to take a risk and bet on his kid. Dad was willing to be paid "on the back end" so to speak.

And yes, son fell into the AMT...but the overall familial tax savings were quite nice - including at the state level.

ZL28 (talk|edits) said:

12 July 2013
Interesting...maybe the fact that the kid fell into AMT could allow you to present all your info and say

a. hey if this were a regular coach he would want to be paid in a timely manner, like each week, as opposed

   to taking the risk that years later this kid would be so successful....this is the reason the father
   merits such a high percentage.

b. then maybe you could throw out a 'bone' and say what if we do 60/40 or 70/30 or whatever ratio reduces the AMT...look what is going on here...this kid is getting limited benefit bc of AMT taxes on the payout to his Dad....and the father is picking up all the income....not such a great deal at 50/50

I wonder if at 60/40 if the overall situation would improve for your clients


c. one issue re above though....is if modify ratios to 60/40 son then gave too much money to father...and if only some of it is deemed remuneration, what is the rest of it deemed...a gift...or can we get out of this and have the father repay the son the excess funds..............and then years down the road this kid gift his mom and dad 13k each per year.

ZL28 (talk|edits) said:

12 July 2013
One argument the IRS is making, however, is that the son was not in the *business* of being a professional baseball player when the *expense* in question was incurred. Not sure what you guys think of that...


Interesting again..at a minimum, the second that kid got the bonus, he was in the 'business'. And it looks like his first business transaction was to pay his father.

These guys are cash basis; not accrual.

Therefore can we not squash this argument based on this virtue.

Cash basis son receives wages b/c he is in the 'baseball business'....and his first transaction in business is to pay coach/trainer et al as a business deduction.

Ckenefick (talk|edits) said:

12 July 2013
That's kinda what I'm thinking. Isn't pretty well settled that one (or a business) can pay compensation for past services rendered?

ZL28 (talk|edits) said:

12 July 2013
does IRS have any citations where a deduction in this scenario is precluded; looking at the directions of the 2106 for a few, i didn't

see anything about restrictions for payment of past services; i only saw 'cash basis'....that he's deducting business expenses.

at the very latest, son was

in the business as soon as he rec'd the money, and he paid for business expenses while he was a pro baseball player.........i don't see anything in there precluding payment for past services.

MWPXYZ (talk|edits) said:

12 July 2013
But it IS interesting that the timing of the payment, rather than the timing of the services rendered, is the basis for determining whether the deduction was in connection with a trade or business. Would Section 195 (now) void the "client's" argument?

I suppose that the educational aspects of the father's activities could allow the IRS a denial of the deduction. I am not sure that many colleges and smaller well connected trade schools don't perform a substantial amount of job placement services, yet the education expenses are not deductible. Maybe the "cost" for those services should be broken out for the benefit of students. Of course the educational facilities would have to accept payment for those services, only after the graduates become employed?

Perhaps an autographed baseball might halp the cause, if not with the agent, at Appeals or in Court.

It was certainly helpful to have a contractor involved in a bidding war.

Ckenefick (talk|edits) said:

12 July 2013
I think Sec 195 could be applicable, but the IRS is not arguing it. IRS is "swinging for the fences" here - going with an all or none position.

I will consider autographing the baseball, but most of the time, people prefer to take my signature on a regular piece of paper.

Fr. Mackelhenry (talk|edits) said:

12 July 2013
Quote: "Also, a minor can void a contract for lack of capacity only while still under the age of majority. In most states, if a minor turns 18 and hasn't done anything to void the contract, then the contract can no longer be voided."

http://www.nolo.com/legal-encyclopedia/lack-capacity-to-contract-32647.html

MWPXYZ (talk|edits) said:

12 July 2013
I would think, or would have thought that, the educational aspects of the father's involvement with a "high school" age son would have allowed the IRS to characterize the payments as nondeductible education expenses. Assuming today's drafting rules, it would seem that the Dad's responsibilities would be significantly in the education/development of his young son.

I would think that more than an informal agreement regarding a one time transaction (no consistent treatment of payments or transactions) would be required to support the "assignment of income"when arguing with the IRS. Maybe a few people who could credibly testify to the arrangement would help. Would a non-related party negotiated for compensation for merely the amount of the signing bonus; or, would they require compensation based on many years of their mentee's possible compensation? After all, the fruit of the dad's labor may not yet appear while the son is merely in his late teens.

Dad should have patented the unique technique that allowed his ("lefty") son to obtain success as a catcher.

However, I am going through my client listing thinking of low tax bracket Dads who have paid college tuitions and gave their offspring sound insights, whose progeny are expected to leap into high tax brackets upon graduation.

Ckenefick (talk|edits) said:

12 July 2013
Maybe a few people who could credibly testify to the arrangement would help.

IRS has already been notified that we can provide affidavits from numerous people, which will speak to dad's dedication, involvement, time spent, etc. mentoring/coaching the kid. I also told the IRS that dad always looks tan, naturally, even in the winter. They didn't laugh.

Would a non-related party negotiated for compensation for merely the amount of the signing bonus; or, would they require compensation based on many years of their mentee's possible compensation?

Hard to say. Good thing that this is America, where whatever business deal is struck, *should be* respected, which is part of our argument. I have cited Subchapter K for this position.

Dad should have patented the unique technique that allowed his ("lefty") son to obtain success as a catcher.

Most people won't understand what you're saying here, so I will expound: Left-handed catchers are very, very rare.

Fsteincpa (talk|edits) said:

12 July 2013
http://www.sportsonearth.com/article/44139204/

Podolin (talk|edits) said:

12 July 2013
then years down the road this kid gift his mom and dad 13k each per year. Not to be technical or nuttin', but try 14k (or28 after wedding).

A left-handed catcher, mind you. Left-handed catchers are very, very rare. No 7216 issue here.

I think Sec 195 could be applicable,... Me too.

I would think, or would have thought that, the educational aspects of the father's involvement with a "high school" age son would have allowed the IRS to characterize the payments as nondeductible education expenses. Might be their best attack.

Good thing that this is America, where whatever business deal is struck, *should be* respected, which is part of our argument. I have cited Subchapter K for this position. That is, if son takes 1/2 of his signing bonus and contributes it to a partnership, and it is immediately paid out to dad, that's not much of a tax law partnership. Inconsistent?

OK, exactly what is the IRS' basis for their position? Don't they need to say a reason?

MWPXYZ (talk|edits) said:

12 July 2013
I think that sportsonearth author misses the point that there have been substantially more right handed batters than left handed batters. Although the gap is lessening, I believe this year in the MLB (with some continuing roster changes) that there are about 200 RH, 135LH, and 50 SW hitters. A left handed catcher would be more popular if bunting was more popular than base stealing.

Ckenefick (talk|edits) said:

12 July 2013
They just don't like the smell of the whole thing. First, they've stated that the services were not performed when son was engaged in any business. Second, they dispute there was an agreement. Third, they say that if there was an agreement, the percentage in question (50%) is unreasonable. Fourth, here's a quote I wrote down from our last meeting: "Dad was an avid baseball fan and he would have performed the same services for his son without compensation."

Basically, that quote kind of sums up the feel I'm getting from this whole sitation. They're implying that this is normal stuff a dad does for a kid, it's not arms length, it smacks of related party-ness, it's a gift, dad would have done the "work" without compensation, etc.

Ckenefick (talk|edits) said:

12 July 2013
Good article by Fred.

I think that sportsonearth author misses the point that there have been substantially more right handed batters than left handed batters.

Are you saying that this has an impact on the "handedness" that a club would prefer its catcher to have?

MWPXYZ (talk|edits) said:

12 July 2013
The RH batter is able to make the LH catcher alter his throw to second (and even more so, to third), to some extent. The LH batter is able to make the RH catcher alter his throw to second as well as the occasional pickoff throw to first. If there are more RH batters it would seem that LH catchers are at a disadvantage. And, since LH is to a firstbaseman's advantage; a LH catcher is likely to get moved to first during his lifetime.

Ckenefick (talk|edits) said:

12 July 2013
Fascinating. The statistics "thrown out" by MW are interesting. If I take 200 RH hitters and divide it by 385 total hitters, I get 52% RH hitters. It was just a few years ago that 59% of batters (both leagues) were RH hitters. As MW astutely notes, the gap between RH and LH hitters is lessening. It seems that if these trend continues, to the point of 50/50, perhaps a LH catcher would be viewed, by the clubs, as no different than a RH catcher. And if the trend really "swings" to having MORE LH batters than RH batters...wouldn't a left-handed catcher perhaps be more *valuable* than a RH catcher??

What if an astute father noted this trend, and placed a bet on the trend continuing...

TTMM (talk|edits) said:

12 July 2013
Did the dad actually receive the money? If he did, that would help to show economic substance of the transaction.

Did the player hire an agent or did dad do the negotiations? If dad did them, that is more than what "any dad" would do and he should be paid accordingly. What does an agent usually charge? The player should at least get to deduct that amount.

Did the player go to college? Did dad continue his services during college years? What else did dad do besides instructional and supportive that he could be compensated for?

I would probably also talk to the IRS about dad's previous business experience especially if he negotiated with different teams.

Ckenefick (talk|edits) said:

12 July 2013
Yes, dad rec'd the money (and reported it on his own 1040).

Dad did all of the contract negotiations on behalf of son. Since son was a minor, dad also had to sign the contract.

Son did not go to college.

Podolin (talk|edits) said:

12 July 2013
I am no lawyer and no sports industry maven. I found this interesting comment "As a general rule, contracts may be either oral or written. However, the law requires a written agreement in specific situations. Most states have statutes that require the following types of contracts to be in writing or they will be unenforceable: An agreement that cannot be performed within one year after the agreement is made; "- here http://sportslaw.uslegal.com/sports-agents-and-contracts/sports-contracts-%E2%80%93-basic-principles/#sthash.sOnb9YL5.dpuf

MWPXYZ (talk|edits) said:

13 July 2013
"What if an astute father noted this trend, and placed a bet on the trend continuing... "

Do the larger accounting firms offer signing bonuses? If so, are your offspring in trouble? Is there a trend you would be exploiting?

MWPXYZ (talk|edits) said:

13 July 2013
It also seems, in this situation, the FICA/SECA tax will be paid twice on half the bonus.

Harry Boscoe (talk|edits) said:

13 July 2013
"...paid twice." And both the father and the son will get credits toward their social security retirement benefit.

Podolin (talk|edits) said:

13 July 2013
credits toward their social security retirement benefit. Absolutely! This is exactly why we try so hard to max out the portion of S corp. distributions that get treated as salary. Gotta think of the future.

Harry Boscoe (talk|edits) said:

13 July 2013
Maybe it all depends on how you feel about "entitlements"!

Ckenefick (talk|edits) said:

13 July 2013
Ok, Ok. Once in a while things get a little slow on TA Board and *someone* has to be a little creative, by making up a case...kind of. The facts presented in the post have been embellished and altered slightly (like the left-handed thing), but they *catch* the essence of Hundley, Cecil Jr., (1967) 48 TC 339. It's quite a good case, if you can find it, you ought to read it.

In the link below, it is referenced in Tax Trivia question #4.

http://www.americanbar.org/content/dam/aba/publishing/newsquarterly/05win/bite.authcheckdam.pdf

Son (taxpayer in the case) had quite a career in the majors and is also the creator of Fantasy Baseball Camps. Here's his Wiki page:

http://en.wikipedia.org/wiki/Randy_Hundley

...and son's son (Todd Hundley) also played in the majors for many years.

In case you're interested, the taxpayer won the tax case at issue and the deduction was allowed. It is apparent in reading the case that the judge just may have been a big baseball fan. Check out all the adjectives in the judge's decision:

Cecil honed the edges of petitioner's ballplaying ability to razor sharpness by his skilled and dedicated coaching. Not only did he teach him his own unique one-handed catching technique, but he made a pull hitter out of a 155 pound boy. He diligently cultivated the major league clubs' scouts, traveling around for 2 years at his own expense to keep in close touch and on friendly terms with them all. When he was not away he received them in his home, entertaining them and their families and establishing a firm and cordial relationship. He kept petitioner in the public eye by handling his publicity so that almost every major league club sought to sign a contract with petitioner immediately upon his graduation from high school when he was first available. And, finally, he conducted the final negotiations in such an unusual and skillful manner that he not only obtained a huge bonus for petitioner's signature on a contract but also a minimum salary of $1,000 per month during the playing season for 5 years. While we recognize that the reasonableness of the contingent compensation is to be viewed in the light of the circumstances when the contract for it was made and that it is immaterial that in the actual working out of the contract such contingent compensation may prove greater than the amount which ordinarily would be paid,California Vegetable Concentrates, Inc., 10 T.C. 1158 (1948), acq. 1948-2 C.B. 1, citing Austin v. United States, 28 F. 2d 677 (C.A. 5, 1928); sec. 1.162-7(b)(2), Income Tax Regs., we have detailed the services performed which in our view demonstrate that the contingent compensation actually was not greater than ordinarily would be paid for so many varied skilled services.

...now that's a good dad.

You might want to contrast the case with Allen, Richard, (1968) 50 TC 466, affd (1969, CA3). This is "Dick" Allen. He is most known for playing for the Phillies (and for breaking racial barriers). In Allen's case, he did the same thing as Hundley...paid a portion of his signing bonus to his mother. But in this case, mom did nothing and knew little about baseball. So, Allen lost his case.

Here's Dick's Wiki page:

http://en.wikipedia.org/wiki/Dick_Allen

And, I must also mention that Cecil Hundley's middle name is 'Randolph.' He goes by Randy. Somewhere way above MWPXYZ said this:

Randy's son played ball, too. But, both were right handed.

So, we must give credit for MWPXYZ for solving the riddle and seeing this post for what it really was...I unfortunately do not have season tickets for any club to give away to the big winner of this Post, but if I did, MWPXYZ would get them...

CathysTaxes (talk|edits) said:

13 July 2013
WOW, I remember Randy Hundley when he played with the Cubs!

MWPXYZ (talk|edits) said:

14 July 2013
"It is apparent in reading the case that the judge just may have been a big baseball fan."

That is the reason for the autographed baseball comment. It seems the judge bent over backwards to argue against the IRS arguments, including this statement, "The contingent compensation agreement is properly viewed as essentially a joint venture arrangement . . ." to blunt the IRS' education argument. Randy had a great rookie year in 1966, and it seems, improved his hitting skills in 1967 when the court case was decided. Unfortunately his hitting tailed off and his knees wore out; or visa versa.

Now, perhaps if Dick Allen's mom had helped him with his hitting he could have lasted longer as a DH, rather than trying to catch.

Unfortunately, due to section 195, I can't find anything I can take away from this case to save taxes for my clients. Unless one can use this case to justify the need for only one good witness to "prove" an informal agreement among related parties!

Another interesting case of father/son casualness in transactions is Michelson (37 TCM 1534, 1978) in which the court tried to determine the ownership of a farm business that sorta was transferred some way to the son, perhaps. Part of my interest in the case is also due to hometown history.

MWPXYZ (talk|edits) said:

14 July 2013
Another interesting baseball tax story is the strategy first employed by Bill Veeck in amortizing player contracts to create large tax dedcutions for fellow investors. I am not sure that the strategy was explained in "Veeck as in Wreck" but it was touched on in "30 Tons a Day", a book title that was inspired by either the biggest issue at Suffolk Downs or by the dealings of Massachusetts politicians.

Ckenefick (talk|edits) said:

14 July 2013
Unfortunately, due to section 195, I can't find anything I can take away from this case to save taxes for my clients. Unless one can use this case to justify the need for only one good witness to "prove" an informal agreement among related parties!

A few comments on that: (1) I agree with you that every shred of evidence is important in developing a case, including eyewitness testimony, expert testimony, affidavits, depositions, etc. This stuff is important, is allowable as part of the discovery process, and the judge will consider it. But I think we all know this. The tax law tries to get at the economic reality of things, even if said reality might be inconsistent with no formal documentation or inconsistent documentation, like who holds legal title to property. With that said, the case also speaks for the "good idea" of having documentation to bolster your position. (2) I also think the 195 issue is relevant. Perhaps it was cases like this that did indeed lead to the advent of 195. Almost as if the Treasury is throwing in the towel and will give you amortization under 195. But do note, what you'd have in the OP situation is immediate income inclusion and largely what amounts to a deferred deduction on the other end. As such, when we throw 195 into the mix, perhaps a taxpayer will re-consider paying the expense if he knows there won't be an immediate deduction. (3) In terms of other things, the case stands for the proposition that related party transactions, consummated on reasonable terms (and even if contingent), will be respected. A while ago, I started a post on paying a kid a reasonable allowance for chores done around the house. Let's say the parent doesn't have his own business. My thought was - you don't necessarily need a business. Pay the kid $3k each year as a household employee (say from age 8 to 18). Contribute the $3k to a ROTH. That's $30k in the kids ROTH. Earnings escape taxation. Might grow to a massive sum by the time the kid hits retirement age. Moreover, kid might contribute to a ROTH after he leaves the house and takes up "different" empolyment. I think Hundley stands for the propostion that if work is done, even by a related party, and the remuneration for which falls outside the legal duty of support, the compensation arrangement should stand. (4) I also think the case touched on the assignment of income principle.

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