Tax Law Special Report: November 2013
When Should A Benefit Not Be Taxable Income?
(Hint: When You’re A Sports Hero)

This month I thought I’d have some fun with a couple of news items that are a little outside of the usual subject matter of both this newsletter and the kinds of advice I usually give to clients.  The items involve events in the sports world that get plenty of attention, but that most people probably never think of in terms of the tax implications.  Thinking about things that way is a disease you get from being around tax law too much, I guess.

An item that appeared in USA Today on November 6 (I found it via the TaxProf Blog) discussed the always timely topic of college football coaches who leave one program for another in the middle of the coach’s contract.  It’s apparently pretty typical for football coaches’ contracts to contain provisions requiring the coach to pay an exorbitant sum to the program for the privilege of leaving in the middle of the contract.  The coach, according to the news item, never pays that sum.  The sum is instead paid by the new employer who induced the coach to leave the former employer.

The only hitch in that setup is an inconvenient federal tax rule that says if an employer pays a personal obligation of an employee, the payment is taxable income to the employee.  That’s pretty inconvenient when the payment is in the high six or low seven figure range, even if you are a big-time football coach.

So what do you do about it if you are the coach who is being taxed on a payment in the neighborhood of a million dollars that you never got?  Well, two tax law professors had a great idea: why not say that the payment is a business obligation, not a personal obligation?  That way, the coach can claim that the payment is a reimbursable business expense, and not taxable income, say the professors.

I thought the most amusing thing in the article was that the two coaches cited as examples of the situation being discussed both coached at the University of Cincinnati, one succeeding the other.  The coach who left Cincinnati owed the program $1.4 million. The replacement coach hired by Cincinnati owed his former employer $943,000.  Based on those figures, the Cincinnati program ended up $457,000 ahead by changing coaches (ignoring any tax liability, of course).

The other news item involves Olympic medalists, and specifically, the prize money that athletes representing the United States receive from the United States Olympic Committee for winning those medals.  TaxProf Blog had a link recently to a law review article in the Texas Review of Entertainment and Sports Law that discusses the proposed Olympic Tax Elimination Act (the “OTEA,” for you acronym mavens).  As the name implies, that law, if passed by Congress and signed by the President, would exempt from income taxation the prize money won by Olympic athletes.

I must admit that my attitude toward the Olympics has changed over time.  Maybe I am just getting cynical in my old age, but the Olympics just seem to me to be a lot less consequential than they were in the past.

Oh, by the way, the tax concept implicated in this discussion is the rule that prizes are usually treated as taxable income to the recipient.  Gifts, on the other hand, are not taxable income to the recipient, but may be taxable to the giver under the federal gift tax.  If you win a prize, such as the lottery, your winnings are taxable income. The check grandma sends you on your birthday is not.

What we have with the OTEA, then, is the suggestion that Olympic prize money is different from, say, Jeopardy winnings, and is therefore entitled to preferential treatment.  Does that statement make it sound like I don’t think the Olympics are that big of a deal?

Of course it does, and I’m not going to apologize for it. Why, exactly, should Olympic athletes get a better deal than game show winners?  Is it because there’s some societal benefit to the United States when one of its athletes wins a medal?  Or is it because winning an Olympic medal is harder than winning on Jeopardy?

And why should Olympic athletes get a better deal than other professional athletes?  Don’t tell me that Olympic athletes aren’t professionals.  That sham was outed a long time ago. Why should Michael Phelps not have to pay tax on his winnings, when a pro football, basketball, baseball, or hockey player who gets a bonus for winning a most valuable player award has to pay tax on it?  Is it harder to win an Olympic medal than to win the American League Most Valuable Player award?  I don’t think so.

Anyway, a lot of Olympic athletes are professional athletes. Take the basketball players, for instance.  You mean to tell me that when NBA players win Olympic medals for playing on the USA basketball team, they should get a tax break on the prize money?

Now that I’m finished ranting, I hope you get the idea.  Whether something is income or not is an elastic concept.  Ultimately, income is whatever Congress says it is.  If Congress wanted to adopt a new tax code provision to clarify that a payment to a college football program on behalf of a departed coach by the coach’s new employer is, or is not, income to the coach, they could do so. If they decide that Olympic prize money is special and shouldn’t be treated as income to the athletes who receive it, then those athletes won’t have to pay income tax on it.

When will the federal tax code get simplified?  Never, if legislation like the OTEA keeps happening.




♠   George Bernard Shaw, Irish dramatist  (1856 – 1950)