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Serena & Taxman Bring Dominant Expectations to U.S. Open

8/26/2015

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By Brett Pollard | Disclaimer
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        With the 135th U.S. Open set to begin August 31st, the final Grand Slam event of 2015 is filled with an array of storylines. The story arguably taking center stage is whether Serena Williams can cap off her remarkable year by becoming the first player to win every Grand Slam tournament in the same calendar year since Steffi Graf in 1988. If Serena does not falter and continues in her dominance, she will become the sixth player to ever do so.

        Just how dominant has Serena’s form been over the past few years? Currently, the differential in Williams’ ranking points over No. 2 ranked Maria Sharapova is equivalent to the distance between Sharapova and the 138th ranked player on the women’s tour.  Not surprisingly, this has led to Serena being listed as the EVEN favorite for the 2015 U.S. Open odds. 

        But Serena is no stranger to leaving the competition far behind. At only 33 years old, Serena and her 21 Grand Slam singles titles have earned $73,293,424 in overall prize money. This is the most ever won by a women’s tennis player and doubles second place Maria Sharapova’s $35 million in career earnings. If Serena can capture this U.S. Open for the seventh time in her illustrious career, these earnings will see a “small” bump of $3.3 million in prize money.

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        While Serena seems to defeat just about anyone she faces, one foe she may have to settle with at “deuce” is the taxman. New York, home of the 2015 U.S. Open and an income tax rate up to 8.82%, would expect Serena to serve up to them nearly $270,000 of her U.S. Open prize money. Additionally, the federal government would expect approximately $1.2 million of Serena’s prize. While these taxes will net Serena only 55% of her original winnings, Serena is spared writing the host city of New York City an additional $126,000 check. New York City generally imposes their city income taxes only on their residents providing some tax relief for the Palm Beach Gardens, Florida resident.

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         Writing a tax check of nearly $1.5 million for two weeks of work would be a major issue for some but for Serena, she doesn’t let even the fiercest of competitors get to her. In 2013, Serena shared what really matters to her. “…[H]alf of [my earnings] goes to Uncle Sam. I love him. I'm always giving him half my money. I never in my life have picked up a cheque, I don't play tennis for the money. I love Grand Slams.” While Serena seems amicable to her toughest opponent, this affection only goes so far. She has publicly questioned whether it was even “legal” for France, home of fellow Grand Slam – the French Open – to assess a 75% income tax rate. 

        While we will have to watch and see how Serena’s path to history shapes up, two things are certain at this U.S. Open.  Serena will be dominating sports headlines throughout the duration and the taxman will be dominating checkbooks after the U.S. Open. 

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A Legal Analysis of Cardinals-Astros Hackgate

8/13/2015

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By Nick Bertron | Disclaimer
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Early last month the New York Times first broke news that members of the St. Louis Cardinals front office were under investigation for allegedly hacking into an internal network of the Houston Astros. According to the Times, the FBI and Justice Department have uncovered evidence that Cardinals officials tapped into the Houston Astros database containing proprietary player information using passwords from former Cardinals executives now working for the Houston Astros. Federal authorities believe the breach was carried out by vengeful front office employees attempting to embarrass Astros GM Jeff Luhnow, who worked as an executive for the Cardinals until leaving the club in 2011.

In the weeks since the story broke one Cardinals’ employee has already been terminated in connection with the investigation, although no charges have been filed. An article in the St. Louis Post-Dispatch reports that Cardinals director of amateur scouting, Chris Correa, was terminated on July 1st and has admitted to being at least partially responsible for the hack. In a prepared statement from his lawyer, Nicholas Williams, Correa shed some light on a possible motive:

“Mr. Correa denies any illegal conduct. The relevant inquiry should be what information did former St. Louis Cardinals employees steal from the St. Louis Cardinals organization prior to joining the Houston Astros, and who in the Houston Astros organization authorized, consented to, or benefitted from that roguish behavior?”

         Correa’s comments seem to support the proposition that any alleged theft of proprietary information that may have occurred was in fact done to embarrass Jeff Luhnow and was not a calculated attempt by the Cardinals organization to obtain a competitive advantage. While that may be considered a mitigating factor when punishments are eventually handed down, the St. Louis Cardinals and any participating employees still face potential liability for arguably violating a number of federal computer hacking statutes.

1.      The Computer Fraud and Abuse Act

    The Computer Fraud and Abuse Act (CFAA) penalizes various conduct relating to remote access of another’s computer. Under the applicable provisions of the statute individuals guilty of violations could be issued a fine, sentenced up to 10 years in prison, or both. The statute would also allow the Houston Astros to sue individual hackers for economic damages in civil court if they suffered damage or loss exceeding $5,000.  

       Section (a)(4) imposes liability on anyone who “knowingly and with intent to defraud, accesses a protected computer without authorization . . . and by means of such conduct furthers the intended fraud and obtains anything of value.” One issue that arises in this case is whether the information contained in the Astros database was actually something of “value.” The statute itself does not define “value” and the general consensus among Major League General Managers seems to be that the information’s shelf-life is too short to be valuable to other clubs. In an article published on SB Nation, Jeff Luhnow himself was quoted as saying “the idea that one team’s outdated intellectual property would have remained helpful to a rival even in the short term is illogical. If you were to take a snapshot of the database of one team, within a month it would not be useful anymore, because things change so quickly."

      Section (a)(5)(C) of the CFAA could be another source of potential liability. This provision provides penalties for anyone who “intentionally accesses a protected computer without authorization, and as a result of such conduct, causes damage and loss.” For the Houston Astros “damage and loss” means impairment to the integrity of the information and includes any reasonable cost including the cost of responding to an offense, conducting a damage assessment, and any revenue lost. Cardinals’ employees would likely take the position that there is no damage and loss because the information compromised during the breach is outdated intellectual property and the response to the breach has been handled exclusively by the FBI and Justice Department. The Astros on the other hand, can show damage and loss by demonstrating that they invested significant employee time in addressing the breach, or that the hack has negatively affected their relationship with other teams.

2.      Economic Espionage Act

       The Economic Espionage Act (EEA) governs criminal penalties for the theft and misappropriation of trade secrets. The EEA defines a trade secret as (1) information that the owner has taken reasonable measures to keep secret and (2) the information derives independent economic value from not being generally known and not being readily ascertainable through proper means by the public. Under the EEA an individual who steals or otherwise misappropriates a trade secret is subject to a fine and may be sentenced to up to ten years in prison. 

       A charge under the EEA could be forthcoming if investigators discover that information taken by the Cardinals was used in their internal baseball operations. If the information was used by high ranking executives with authority to make player personnel decisions it would be easier to prove that the information had intrinsic economic value and that the Cardinals used that information for their own economic benefit. 

        The issue with bringing charges under the EEA is whether the information housed in the Astros’ database actually qualifies as a trade secret. The statement issued by Chris Correa’s attorney suggests that information in the database was taken from the Cardinals’ organization when Jeff Luhnow and other executives left the team in 2011. If that statement is proven to be true that information would not be protected under the EEA. Additionally, if the information was accessed using a master list of passwords left by Jeff Luhnow in the St. Louis Cardinals front office it would be difficult to prove that reasonable steps were taken to protect the information. 

3.      Federal Wire Fraud (Communications Act)

      Any use of a computer as part of a scheme to defraud another person generally falls within the scope of the federal wire fraud statute known as the Communications Act. An individual found guilty of federal wire fraud could face a fine or imprisonment of up to 20 years depending on the seriousness of the offense. To obtain a conviction for federal wire fraud the government must prove beyond a reasonable doubt that an individual: (1) used wire communication, (2) in the furtherance of a scheme to defraud, (3) involving a material deception, (4) with the intent to deprive another, (5) of property or honest services. 

        Federal wire fraud legislation is the broadest sweeping of the computer hacking statutes and a federal prosecutor could potentially prove each of the five elements in this situation. During the alleged hack the Cardinals’ officials used wire communication by remotely accessing the Houston database from a home computer. The use of wire communication appears to be in furtherance of a scheme to defraud because officials stole proprietary player information when they accessed the database. The hackers used a material deception by misrepresenting themselves as Houston Astros front office personnel. It was apparently the Hackers intent to steal proprietary information from the database and intangible intellectual property was actually taken during the breach. 

        In total, any Cardinals’ officials implicated in the breach will be exposed to potential civil and criminal liability on top of any discipline handed down by the St. Louis Cardinals. If proven to be in violation of one or more of the computer hacking statutes, each individual could be sued for damages in civil court by the Houston Astros and could potentially face a 20-year prison sentence if convicted by a federal prosecutor. 

        As for the St. Louis Cardinals organization, any discipline for their role in the breach is going to be handed down by Major League Baseball. While the organization could be vicariously liable to the Houston Astros for civil damages caused by their employees, Major League Baseball’s Constitution does not allow teams to sue one another and all disputes are handled internally. Rob Manfred and the Commissioner’s Office have decided to wait until the conclusion of the investigation before handing down any discipline, but when they do the St. Louis Cardinals could face a fine of up to $2,000,000 for not acting “in the best interest of baseball.” 
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Why Athletes Should Track D.C.'s Autonomy Efforts

8/4/2015

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By Hannah Zimmerman | Disclaimer
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            At the beginning of this year, MLB free agent Max Scherzer caught the attention of many when he signed a $210 million, seven-year contract with the Washington Nationals. Not only did his contract’s stature capture the attention of many, but as Rick Maese of the Washington Post described “[Scherzer’s] contract is not only historic in terms of its size but noteworthy in structure. The deal takes advantage of District tax laws to save Scherzer money — possibly in the seven or eight figures…” While Scherzer’s contract did not discover some new unknown tax law, it’s noteworthiness may have caught the attention of the last group he would wish to pay attention to his new signing – those who have the power to change the District tax laws his “deal takes advantage of.” 

            As was detailed when Scherzer signed this new deal, the District of Columbia imposes an income tax but technically does not impose a ”jock tax”. Though that isn’t for lack of effort. The D.C. mayor typically has attempted to include a “jock tax” in the district’s annual budget nearly every year. However, under the U.S. Constitution, Congress has authority over the District, which it exercises by requiring D.C. to submit it’s annual budget for approval. Congress has nixed the “jock tax” every time it has been included in the proposed budget. This is most likely due to the fact that states would be required to give their professional athletes credit for taxes paid to D.C. – directly reducing the revenues in the states in which those athletes live and (more importantly) in which Congressmen represent. Since there are no full congress members from D.C., not much political capital is spent annually voting against assisting D.C.’s revenue raising efforts. The fact that the District of Columbia has one of the highest income tax rates in the U.S. – 8.95% for the highest income bracket – does not help their case, either.

            The District can currently tax income, but the Home Rule Act exempts individuals from paying state income taxes if they don’t live in D.C. The result is that D.C.’s professional athletes can avoid the relatively high tax rate by living outside the District each offseason, something previously-mentioned Max Scherzer took advantage of when he signed a $210 million contract with the Washington Nationals earlier this year. Scherzer lives in Florida, which does not have a state income tax. Other D.C. athletes have done the same. Fellow Nationals Jayson Werth and Ryan Zimmerman live year-round in Virginia, which has only a 5.75% tax rate, and Bryce Harper resides in Nevada, which also does not collect a state income tax.  

            Implementing a “jock tax” seems counter-intuitive, since the current income tax exemption arguably draws some athletes to D.C. But the “jock tax” provision of the budget is only a small piece of the bigger picture for D.C. residents. More than half of the District’s $13 billion budget is funded through taxes collected from D.C. residents and businesses, but decisions on how that money is spent must first be approved by Congress. Every year the District submits its budget request to Congress, who considers the budget as part of one of its federal appropriation bills. And approval can take months, especially if there are broader arguments over the federal budget.

            In an effort to control its own budget, in 2013 the D.C. Council passed the Budget Autonomy Act, which would separate the District’s local budget process from the federal process. As with any “ordinary” legislation, Congress would still review the local budget, but after a 30-day review period the budget would automatically be approved unless Congress moved to block it. Unfortunately, D.C. has never passed a budget under the Budget Autonomy Act. Debates over the Act’s legality sparked a lawsuit, and an injunction was placed on the Act by a federal judge last year. 

            This year, things could be turning around. The injunction was vacated by the Court of Appeals, which sent the case back to the local D.C. Superior Court to decide if the Act is legal. Because the Court of Appeals’ decision came so late in the budget process, the Council had only prepared one District budget containing both federal and local portions. The District submitted the budget through the usual federal appropriation process, and after approval from the mayor and Council, a second, identical budget was sent to Congress as “ordinary” legislation. Two live versions of the District’s budget are currently making their way through competing approval processes, a situation unprecedented on Capitol Hill. While unprecedented, one precedented issue remains in both budgets – if either become law unedited, D.C. will have a “jock tax”.

            That being said, D.C. shouldn’t be holding it’s breath for a “jock tax” quite yet. Because one budget was submitted through the federal appropriation process, it is likely that any alterations by Congress will be final, at least for this year. D.C.’s future budget autonomy lies in the hands of the D.C. Superior Court, which may not take up the case until after the D.C. Council actually passes a budget under the Budget Autonomy Act. Until then, D.C.’s mayor and the D.C. Council Chairman have said that they would consider the budget passed as soon as it clears the 30-day review period without being overturned. 

            While this is all currently up in the air with much speculation, Scherzer and other Nationals should keep a close eye on D.C.’s developments – if D.C. does implement a “jock tax” Scherzer would lose around $700,000 to D.C. taxes.


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