By Jonathan Nehring | Disclaimer

Today, the biggest names in the music industry will gather at the Staples Center for the 57th Grammy Awards. Two weeks later, the film giants of the world will congregate nine miles down the road for the 87th Oscars (aka the Academy Awards) at the Dolby Theater. While both of these award ceremonies will have a large variance in attendees, one attendee will be VIP at both - the IRS. 

The reason for the IRS's attendance at both is due to another common guest of both ceremonies - Distinctive Assets. Since 1999 the company Distinctive Assets has put together gift bags which are handed out at both of these ceremonies. Today, the popularity and value of these gift bags has skyrocketed. A gift bag at the Grammys this year is expected to be worth $25,000 and the Oscars gift bag is worth $168,000.

It may seem odd that receiving so many gifts would be a bad thing but tax officials considers those gift bags to be income and taxes them according to the fair market value of the gift bag. Since this “income” will be “earned” in Los Angeles, CA both the IRS and California’s FTB will tax these gift bags up to 39.6% and 13.3%, respectively.[1]

This means if you are a lucky recipient of a gift bag you could owe $13,225 in taxes for a Grammys gift bag and $88,653 in taxes for an Oscars gift bag.  

This equates to a big day for taxing authorities. Approximately 121 individuals will receive an Oscars gift bag and approximately 473 individuals will receive a Grammys gift bag. For the IRS and California FTB that equals a $6.26M payday from the Grammys and a $10.73M payday from the Oscars. [2]

The IRS isn't shy about announcing their presence at these award shows either. Since 2006, the IRS and AMPAS reached an agreement that requires the Academy Awards to include with the gift bags any applicable tax forms as a reminder of the tax due. 

The actors and actresses aren't at a total loss; they can follow George Clooney’s footsteps and donate their gift bag to charity and receive a tax deduction for doing so. However, given the amount of income movie and music stars make, it is unlikely they will be able to utilize much of that tax deduction. 

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By Jonathan Nehring | Disclaimer

4/30 UPDATE: The Ohio Supreme Court ruled unanimously in favor of the taxpayers in both Hillenmeyer's and Saturday's case. These rulings deemed Cleveland can no longer collect tax on professional athletes who don't travel to Cleveland with the team and can no longer apportion income to Cleveland under the "games played" apportionment method. 

Original Post:

Today the Ohio Supreme Court will be hearing oral arguments for two “jock tax” cases. If you don’t know much about the “jock tax”, this article gets a bit technical so you may want to read about how the “jock tax” works first.

Here is everything you need to know for these cases.

• The technical names for these two cases are 1) Hunter T. Hillenmeyer v. City of Cleveland Board of Review and Nassim Lynch, Cleveland Tax Administrator and 2) Jeffrey B. Saturday and Karen B. Saturday v. City of Cleveland Board of Review and Nassim Lynch, Cleveland Tax Administrator. 
  
• Technical names aside, these cases involve a dispute between the city of Cleveland and former Chicago Bears Linebacker Hunter Hillenmeyer and former Indianapolis Colts Center Jeff Saturday. 
  
• The dispute is in regards to how Cleveland assessed income tax on these two former NFL players.
  
• Both of these cases, while separate cases, share the same theme which is an opposition as to how Cleveland assesses income tax on nonresident professional athletes. 

• Hillenmeyer and Saturday are raising the following arguments in their case against Cleveland:

• The Players Association for the MLB, NBA, NFL, and NHL have all filed an Amicus Curiae brief together in support of Hunter Hillenmeyer’s position in this dispute. 
  
• Jeff Saturday’s case raises two additional issues. Saturday actually never went to Cleveland to play against the Browns! He was injured for four games of the 2008 season. One of those games was against Cleveland and he stayed in Indianapolis to rehab instead of going with the team to Cleveland. However, Cleveland required the Colts to withhold income tax from Saturday’s check for that game “played” in Cleveland. Because of this, Saturday raises the two following issues:
  
• Cleveland taxing nonresidents who never perform a work or service in the city violates the U.S. Constitution’s Due Process and Commerce Clause.
  
• Cleveland taxing nonresidents who never perform a work or service in the city violates the Ohio and Cleveland law.
  

If you wish to research the topic further, you can read official oral arguments previews of these cases here. TaxaBall will provide updates with the case as they occur. 

You can watch video of the oral arguments here. (Jeff Saturday's Oral Arguments) (Hunter Hillenmeyer's Oral Arguments)

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By Jonathan Nehring | Disclaimer

On Monday, the Detroit Pistons waived SF Josh Smith. An NBA team willing to waive a player who they owe $13.5M this season and the next two seasons, came as a large surprise to many within the NBA community. Shortly after making this move Stan Van Gundy, the Piston’s head coach and president of basketball operations, let the media know this was done “to give [Josh Smith] his freedom to move forward.” Although Van Gundy was referring to Smith’s freedom to join a NBA title contender, it turns out this move gives Smith the freedom to spend $1.3M however he chooses. 

The financials behind the Piston’s waiving Smith.

The Pistons are under contract to pay Josh Smith $13.5M this season, $13.5M in 2015/16 and $13.5M in 2016/17. However, by waiving Smith and using the “stretch provision”, the Pistons will pay Smith the $13.5M owed to him this season and then will pay Smith the remaining $27M – to not play for the Pistons – over the next 5 years. Below is a comparison of Smith’s salary before and after the Pistons used the stretch provision on his contract.

How this move saves Josh Smith $1.3M. 

Professional athletes must pay state and local income taxes in each location they play. Tax authorities deem athletes to “earn” their income in the various NBA arenas they play each season. So, because Smith is being paid to not play, the income he will earn from the Pistons going forward will be “earned” in the state where he is a resident. Assuming Smith is financially savvy and lives in a state without an income tax, Smith’s salary (from the Pistons) going forward would be earned tax free in regards to state and local income tax. Looking at the tables below, we see what Smith would have owed in state and local income taxes before and after the Pistons used the stretch provision on his contract.[1]

In addition to this move saving Smith millions in state and local tax, this move will save Smith some future federal income tax owed. Although Smith, like most professional athletes, would remain in the top marginal federal tax bracket regardless of being waived by the Pistons, the fact that our tax system is based on marginal tax rates will save Smith a little over $100,000 in future federal tax liability. By stretching Smith’s salary until 2020 instead of 2017, Smith will now be able to take advantage of lower marginal rates for three years he would not have originally been able to take advantage of. The table below details what Smith would have owed in federal tax before and after being waived by the Pistons.[2]

While it is highly likely Smith will sign a new contract with another NBA team for this season and possibly future seasons, the tax impact by his re-signing will be minimal. The income from the new contract will be subject to state and local income taxes in each location Smith and his new team plays. However, Smith will not be earning any of his old salary in those locations; he will only be earning his new salary in those locations. Therefore, his new salary – likely to be the veteran minimum of $1.45M – is what future state and local taxing jurisdictions will tax and not the $30M+ owed to him by the Pistons.[3]

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By Jonathan Nehring | Disclaimer

No matter where you stand on the issue, it’s apparent that things are going to be changing in the near future for the NCAA. 

On Friday, Judge U.S. District Judge Claudia Wilken officially published the latest blow to the status quo when she ruled in favor of O'Bannon and other plaintiffs by stating they should have been compensated by the NCAA for the likeness of their image.

While the O’Bannon lawsuit (or other legal actions against the NCAA) is far from over, NCAA athletes “playing” for free (or at least just tuition, room and board) appears to be over. Those athletes will no longer be “student athletes” but are now going to be paid employees for the services they provide their employers. 

With their new status as employees, these athletes will now learn not only what it is like to be a professional on the field, but will face a new challenge off the field – state income taxes.

As we have previously discussed, taxpayers owe state income taxes in each state they earn income. For athletes who are compensated for their services – that means every state in which those athletes play. Until now, this was a headache only for professional athletes and limited to the various 20 states or so that hosted professional sports teams. Now, every state’s income tax policy will become a sales pitch by college recruiters to high school athletes across the country.

So, without further ado, the effect state income tax laws will have on college athletes.

Using potential earning numbers for college athletes and applying those salary figures to the 2013 football and 2013-14 basketball schedules we calculated what a NCAA athlete would owe in state income taxes for each of the major football and basketball conferences’ schools. (Because last year's schedule was used, teams are assigned to the conference they were a member of during the 2013-14 seasons.)

For the next several days, we will put out a team by team breakdown for each conference. Today is an overview of what the average state income taxes owed will be per conference. This is just the average for the conference so, as you will see in the coming days, this may greatly overstate or understate what a team in that conference may owe. 

As can be seen by the graphics above, conferences that once appeared attractive to college athletes now may have to put some extra effort into their recruiting to convince a basketball player their school is worth $13,000 less in annual income or to convince a football player their conference provides enough benefits to outweigh paying double in state income taxes.

Be sure to check back throughout the week to see where each team ranks within their respective conference:

• Later Today: SEC (Football & Basketball)
  
• Tuesday: PAC 12 (Football & Basketball)
  
• Wednesday: Big Ten & Big 12 (Football & Basketball)
  
• Thursday: ACC & American (Football & Basketball)
  
• Friday: MWC & Big East (Basketball) 

(NOTE: Some have misinterpreted this article as an argument against college athletes being compensated for their services. Nothing could be farther from the truth.  Our intention is not to argue for or against college athletes being paid, that is an issue to be resolved by the courts.  This article is purely intended to explain the tax implications once athletes are allowed to be paid.)

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By Jonathan Nehring | Disclaimer

In the final segment of our series on how college athletes would be taxed should they become paid athletes, we look at solely the basketball programs for the Mountain West Conference and Big East Conference. 

The Mountain West Conference (MWC) is very similar to the Pac 12 not only in location but also in the effects they would incur should they pay their basketball stars. Similar to the Pac 12, there is a large disparity among the teams in the conference. Basketball players for San Jose State would make $34,014 less per year than their conference mates at UNLV. Aside from the Pac 12’s gap between Oregon and Washington State, this is the largest difference for state tax bills between conference mates in the entire NCAA.  

The large variations among the MWC is good news for UNLV as they have finished 3rd in the MWC for the past 5 years, usually trailing to either New Mexico or San Diego State. With Nevada’s lack of an income tax, paying MWC basketball players would greatly benefit UNLV as they would be able to offer their players $17,005 more annually than the Lobo’s and $33,518 more than the Aztecs. 

With the recent divorce that split the Big East basketball schools from their former conference mates with football programs, it appears the Big East came out on the wrong end of the deal. Many of their former football programs left for the American Conference which now holds the title as the NCAA conference with the smallest average state income tax bill ($10,049). Contrarily, the average basketball player in the Big East owes the second largest amount ($20,913) in state income tax of all NCAA basketball players. 

Within the conference, Villanova appears to be the greatest benefactor from the change to pay college athletes. Not only is the Wildcats state income bill of $11,688 the least in the Big East, but their stiffest competitors in the conference standings the past few years – Georgetown and Marquette – face the two largest state tax bills among the conference. Excluding the teams who left the Big East and those who just joined this past season, only the Georgetown and Marquette programs have averaged better conference standings than Villanova over the past five years. If college athletes were to get paid, Villanova’s program could likely exceed the Hoyas’ and Golden Eagles’ programs as they could offer their basketball athletes $13,364 and $18,908 more, respectively, than their inner conference foes.

While the $19,000 gap in net income between Villanova and Georgetown seems significant, the Big East is the NCAA conference with the least variation among conference teams. Whether this will make the Big East the most competitive conference is yet to be seen. 

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