Professional athletes sometimes become the subject of interesting (to me anyway) tax cases. For example, I teach the basic federal income tax class here at Villanova both in the law school and graduate tax program. In those classes, I often discuss Dennis Rodman and his kicking a cameraman, which spawned the case Amos v Commissioner, involving the issue of whether the settlement payments the ex-diplomat and NBA star gave to the kickee-photographer were excluded under Section 104(a)(2). Another involves NFL Hall of Famer Paul Hornung, Hornung v Commissioner. The part of the Hornung case I teach involves the doctrine of constructive receipt, and in particular whether the value of a Corvette that Hornung won as MVP of the NFL championship played on December 31, 1961 had to be included in gross income in 1961, or in 1962, when he picked up the car. It’s a neat case and while most of my students have no idea who Hornung is (and increasingly Rodman), it allows me to inject popular culture into my class.
Earlier this month the Tax Court decided a case involving ex-Redskin star George Starke. This allows me to take the opportunity to connect some sports and NFL references to tax procedure.
Last year, in updating the Saltzman Book chapter on civil penalties, we weaved in the case of Bill Romanowski (another NFLer who had some troubles, including fights with teammates and problems controlling his saliva on the field). Romanowski’s case involves a successful reliance defense to accuracy-related penalties in a horse-breeding “investment.”
Reliance cases are notoriously fact-specific, but the Romanowski opinion is a helpful case for practitioners wanting a successful case even where tax advisors have a financial interest in the investment. It shows how with the right facts (maybe needing a football player juiced up on steroids who took many hits to the head), a taxpayer can still hide behind the advisor to shield penalties.
Just this month, in Starke v Commissioner, the Tax Court decided another case involving a former NFL player, George Starke. After starring at Columbia (both in hoops and football) Starke in the 70’s and 80’s was a member of the Super Bowl winning Redskins’ offensive line, known as the Hogs.
After retiring Starke started a nonprofit training institute in DC called Excel that provided “a two-year program that taught basic reading, writing, and arithmetic in addition to providing job counseling and technical training. The program was available free of charge to any persons who wanted to participate so long as they committed to the attendance requirements.”
The tax problems arose because of sloppy financial management at Excel. Starke took a salary and had a housing allowance; he also had access to a credit card “for both personal and Excel- related expenses, but he did not consistently provide receipts to Excel showing his expenses.”
Like many small organizations the bookkeeping was not precise and there was little in the way of control over the use of the card. One of the accountants testified that if an “employee made a purchase on one of Excel’s credit cards and the employee could not show that it was an expense benefiting Excel, Excel would treat the expense as an advance or prepaid expense on the employee’s behalf.”
Starke left Excel in 2010. The ledger reflected a number of Starke’s credit card purchases in the years 2003-2006; Starke paid back some of the amounts reflected on his card between the years 2007 and 2010. When he left Excel, Starke received a 2010 1098 MISC for over $83,000; presumably for the advances and prepaid expenses that he failed to repay.
Starke failed to include the amounts from the 1098 MISC on his 2010 return, and IRS issued a stat notice, which Starke timely appealed by filing a petition to Tax Court.
So what’s the issue? As in sports, timing can be everything. Here, the proper year for inclusion according to the Tax Court was not 2010, but the years Starke made the charges on the card. Here’s how it gets there.
The Tax Court opinion briefly discusses the impact of the issuance of the information return on burden of production and burden of proof (issues we discussed in the context of information returns last year here; I also discussed both federal and state law causes of action for erroneous information returns here):
For example, in an unreported income case such as this, the Commissioner generally must make some minimal evidentiary showing (which he has done) for the presumption of correctness to attach. And where there is a reasonable dispute with respect to an item reported on an information return, the Commissioner has the burden of producing reasonable and probative information (which he has done).
After laying that out (and noting that Starke did not argue for a burden shift under Section 7491(a)) the Tax Court indicated it did not matter anyway because Starke was going to be successful based on the preponderance of the evidence.
That evidence, in the way of testimony and the written records, reflects that Starke did not have cancellation of indebtedness income in 2010, but that the payments he received in earlier years may have been income in those years. Tax year 2010 (the year at issue) would have been proper if the IRS could have established that the payments Starke received in earlier years were loans:
In the case of a loan, which is not included in income at the time the funds are disbursed, the parties agree that the amount will be repaid and the debtor-creditor relationship is established at the outset. However, an advance that is considered compensation for services, albeit services to be rendered in the future, constitutes taxable income in the year it is received. We determine whether a bona fide debtor-creditor relationship exists by examining all of the pertinent facts and “[a]n essential element is whether there exists a good-faith intent on the part of the recipient of the funds to make repayment and a good-faith intent on the part of the person advancing the funds to enforce repayment.
The Tax Court discussed how the parties did not intend to treat the personal payments Starke made on the Excel credit card as loans to Starke. For example, there was no loan document, no other written evidence memorializing a loan agreement, and there was an accountant letter from 2005 characterizing the payments as advances and not loans.
Given that there was no loan and the other years were not before the Tax Court, Starke won:
Because we agree that the payments were not loans, we would ordinarily look to whether the payments are considered advances; however, whether the payments are advances is irrelevant in this case because all of the items recorded by Excel as advances or prepaid expenses were recorded for years that are not before the Court. According to Excel’s general ledgers, all of the payments were made before 2010. Because advances are taxable for the year in which they are paid, any advance would have been taxable for years that are not before us.
So, unless those earlier years are still open under Section 6501, Mr. Starke may have one more victory on his resume.