Thursday, October 28, 2004
As a diehard Red Sox fan (see here), I looked forward to discussing the Red Sox' glorious win last night with my friends and colleagues. But what was the topic du jour this morning on the Tax Prof Discussion Group? Terry Francona's decision to allow Trot Nixon to swing away on a 3-0 pitch that produced the key 2-run double? Derek Lowe's masterful performance? Curt Schilling's courage? No -- the debate was over the tax consequences of the players' decision to vote Nomar Garciaparra a full share (> $300,000) of the playoff and world series money!
Jim Maule (Villanova) got the discussion started by quoting press reports on Nomar getting a full share of the money and asked: gift or compensation for services? An extended discussion ensued. Mike McIntyre (Wayne State) provided some helpful background and concluded that Nomar has compensation income rather than a gift:
The "share" that the players get is by vote of the players. The pot is from playoff TV contract, etc. The players get to decide who gets what, but no player has any interest in the pot prior to the dividing of it. There are some traditional ways for the pot to be divided, with the guys on the team for the season getting a full share. Various coaches are often given some share, often a fractional share. And players who were added late sometimes get a fractional share --- 1/2 or 1/4 typically..Joseph Dodge (Florida State) agreed:
I see no good basis for constructive receipt by the players voting the shares. It seems more akin to a partnership, where the partners divide up the spoils at the end of the season. Still, there is some disinterested generosity when the players go outside baseball tradition to reward someone. I just don't think that the generosity results in a gift
There's no constructive receipt until you enter into the contract specifying who is paid and when. Of course, constructive receipt is mainly a timing rule, not an inclusion/exclusion rule. In any event, since the practice and culture is to cut others in, it is hard to say that anybody has any "right" to any particular share, especially since the shares are determined (I assume) by some voting mechanism. The voting mechanism alone precludes constructive receipt (eg, 100% shareholder of corporation).Others raised questions about Nomar's state tax liability on his world series share. How do you apportion the state tax among Massachusetts (Red Sox' home), Illinois (Cubs' home), Missouri (Cardinals' home), New York (Yankees' home), and California (Angels' and Nomar's home)?
Turning to assignment of income doctrine, it just doesn't "fit." Nomar is not a relative, and he's probably in a higher bracket than almost all of them. There's no hint of sham or retained control or fruit and tree or reversionary interest or (as in Eubank) a vested right. All the assignment-of-income cases that I know of involve family members, loved ones, or related parties (Bayse). So, it shouldn't fall within the domain of assignment-of-income doctrine, but rather the rule that you can disclaim income, even if it goes to somebody you know. You can disclaim even compensation income under these circumstances.
If the Bosox players are deemed to have some "right" to a given percentage of the pot (which I doubt), you get to the same result under a gift analysis. The gift is of a zero-basis right to compensation. So, Nomar obtains a zero basis and collecting the $$$ is income to Nomar. I don't think it really is a gift: Nomar is seen as having provided services to this "side" venture; moreover, what Nomar gets is determined by vote, not a series of individual gifts. The partnership notion fits better than the gift notion.
As an aside, I'm always somewhat surprised when tax professors invoke "gift" analysis in non-family situations. Outside of families and loved ones, hardly anything is a gift. I have to constantly remind students of this. Students need to devote more energy to finding disguised gifts within families than looking for gifts in commercial settings.