Paul L. Caron

Friday, September 14, 2007

Can Patriots Coach Belichick Deduct His $500,000 Fine?

As a life-long Boston sports fan (here, here, and here), I of course have been following the news about the $500,000 levied by the NFL on Patriots Coach Bill Belichick for videotape spying in last Sunday's game against the New York Jets.  As the sports world debates the appropriateness of the penalty, readers of this blog may be more interested in whether Belichick can deduct the fine.  I asked for the views of the tax professorate on the TaxProf Email Discussion Group, and reprint (with their permission) below the fold the responses of:

  • Jack Bogdanski (Lewis & Clark)
  • Bryan Camp (Texas Tech)
  • Mark Cochran (St. Mary's)
  • Joseph Dodge (Florida State)
  • Myron Grauer (Capital)
  • Calvin Johnson (Texas)
  • Stuart Lazar (Tulane)
  • Jim Maule (Villanova)
  • Mike McIntyre (Wayne State)
  • Marty McMahon (Florida)
  • Robert Nassau (Syracuse)
  • Joel Newman (Wake Forest)

The quick answer:  yes.  (N.B.  Where are the women Tax Prof football fans?  All twelve commentators are men!)

Myron Grauer (Capital):

I actually had an exam question that was somewhat similar in which a hockey player was fined by the NHL for fighting. The answer I was looking for was that the fine was deductible under section 162 because it is “ordinary” (based on the facts I gave) that players get fined by their leagues for rule violations, and fighting is something one comes to expect in the NHL, unlike Gilliam’s extraordinary behavior on an airplane in Gilliam v. Commissioner, 51 T.C.M 515 (1986). Moreover, the statutory denials of deductions in section 162 are intended to be exclusive and override the former “against public policy” rationale for denying a deduction, and section 162(f) merely denies a deduction for a fine paid to a government for the violation of any law. The last time I checked the NFL was not a government, and it’s not against any law I know of to steel another team’s defensive signals. J Thus, a fine paid to the NFL for a violation of NFL Rules is not covered by section 162(f). Because, unfortunately, in this day and age, it probably is “ordinary” for coaches and players in professional sports to cheat and, if caught, to be fined by the league, the fine levied on the Patriots’ coach can be viewed as an ordinary and necessary business expense that is not denied an deduction by one of the denial provisions of section 162. Thus, I believe the fine is deductible.

Robert Nassau (Syracuse):

I agree, and add that it would be a miscellaneous itemized deduction (employee business expense), and therefore subject to the 2% floor and AMT treatment. As a Jets Fan, I think the fine should have been higher.

Jim Maule (Villanova):

The fine was the maximum permitted under the league rules and contracts.

Joel Newman (Wake Forest):

I don’t disagree about Belichick, but I have a different take on Gilliam. By me, you take the taxpayer as you find him. Gilliam was a legitimate artist on a legitimate business trip. If he had been physically handicapped, and needed to bring along a companion, the travel expenses of his companion would have been part of Gilliam’s ordinary business expense. Instead, Gilliam had a mental imbalance. Given his mental condition, it seems to me that his freak-out on the plane was reasonably foreseeable. I know that the Tax Court saw Gilliam as an “ordinary” case. I believe that the proper category for analysis should have been the business trip, not the ensuing freakout. Viewed in that light, I think the trip was ordinary. To me, the more cogent concern was whether or not the origin of the claim was Gilliam’s business trip or his illness. Again, I’d say that the origin was the business trip and the expenses of the freakout should have been deductible.


I do agree with you that the analysis in Gilliam should have been whether the origin of the expense was personal rather than business and that his freak-out on the plane was reasonably foreseeable. However, I have trouble going from that position to the position that his expenses as a result of the freak-out are deductible as a business expense because the freak-out occurred in the course of a business trip. To get to that position, I think you have to take the view that in order to be a successful artist, you must have some mental instability in order to be creative enough to be a successful artist, and therefore all costs related to the mental instability are deductible as ordinary and necessary business expenses. This, of course, leads to the chicken and egg problem of which came first: the mental instability, or the artistic talent that ultimately resulted in producing income ( and the ensuing mental instability caused by the inability to deal with success)? Not wanting to take the position that mental instability is a requirement for artistic talent and thus all expenses of successful artists that arise out of their instability are business expenses, I would argue that the expenses resulting from Gilliam’s freak-out were non-deductible personal expenses.

Marty McMahon (Florida):

A fine paid to a private organization the rules of which govern the taxpayer's conduct as result of violation of the organization's rules is not disallowed as a deduction under § 162(f). Rothner v. Commissioner, TC Memo. 1996-442 (1996), held that fines paid to the Chicago Mercantile Exchange by a member-taxpayer for rules violations were ordinary and necessary. Violations commonly occurred and the taxpayer could not continue in business without paying the fines.


I decided to look closely at this case. In Rothner and in the Belichick matter, the "fine" is imposed by a private organization under contract law, not by a government under a statute. So 162(f) is irrelevant.

As to section162(a): Rothner (et al) and Belichick (and the Patriots) were fined by the organization for violating rules.

Both had previously been warned or, Rothner's case, fined.

Rothner was suspended; Belichick was not (but Rothner had no draft picks to lose).

If Rothner did not pay the fine, he would have been denied the right to trade on the exchange's floor. The exchange would also have the right to forfeit his seat and sell it, using the proceeds to pay the fine. It is unclear what the NFL would do if Belichick does not pay the fine. Presumably he would be suspended but that's a guess.

In Rothner's case, "it was a common occurrence for the [exchange] to fine members for violations of its rules, and a list of persons fined was issued weekly." In 1987, 87 fines were imposed, in 1988, 141, and in 1989, 139. The number of fines imposed by the NFL is something I haven't researched, but it is nowhere near these numbers.

According to the Rothner court, the "'principal function of the term 'ordinary' * * * is to clarify the distinction, often difficult, between those expenses that are currently deductible and those that are * * * capital expenditures". Additionally, the term "ordinary" has been defined as "normal, usual, or customary". Deputy v. DuPont, 308 U.S. 488, 495 (1940). A payment of an expense is "normal" if it arises from an action that is ordinarily to be expected of one in the taxpayer's position. Commissioner v. Heininger, supra at 471. Although an expense may be incurred only once in a taxpayer's lifetime, it is ordinary if the transaction that gives rise to it is "of common or frequent occurrence in the type of business" in which the taxpayer is engaged. Deputy v. DuPont, supra at 495; Welch v. Helvering, 290 U.S. 111, 114 (1933); see also Lilly v. Commissioner, 343 U.S. 90, 93 (1952). *** As respondent concedes that petitioner's payment of the CME fine was not a capital expenditure within the meaning of section 263, we need not further consider that aspect of the term "ordinary". "

The court then concluded that "a private wrongdoing in the course of conducting a business is not extraordinary." How can that be? Whether something is ordinary or extraordinary depends on the facts. The court should have said that "a private wrongdoing in the course of conducting a business is not FOR THAT REASON ALONE extraordinary" --- a conclusion which makes perfect sense. Then the court backs up: "Moreover, even if improper conduct were extraordinary in business, the payment of a settlement or judgment attributable to the conduct is generally expected to be made by the person in the course of whose business the conduct occurred." What happened to the court's statement "it is ordinary if the transaction that gives rise to it is "of common or frequent occurrence in the type of business" in which the taxpayer is engaged." Isn't that the test?

Well, that's the test the court applied. It pointed out that there were 356 disciplinary proceedings that resulted in fines, 53 involving the type of infraction in which Rothner et al engaged. The parties also had stipulated that other exchanges "imposed monetary sanctions on their members for alleged violations of their rules several hundred times per year." So based on these facts, the court concluded that "payments of fines pursuant to disciplinary proceedings by securities and commodities exchanges were a common and frequent occurrence in the type of business in which petitioner was engaged."

So that leaves the question of whether what Belichick did was a transaction "of common or frequent occurrence" in the NFL. I surely hope not. Aside from the Miami Dolphins allegation (which I've read as an allegation BY Miami that New England was intercepting RF signals), all of the reports have been about other infractions by the Patriots (e.g., Pittsburgh, Detroit, and Green Bay). To me, this is the distinction between ordinary ("everybody does it") and extraordinary (Belichick and the Patriots are alone in their transgressions). It's what sank the tax hopes of Trebilcock ... though he wasn't being fined, the transaction giving rise to the expense was not "of common or frequent occurrence" in his business. (Note: the implication is that business pioneers get a bad tax deal but once their ideas catch on, then the deduction ripens.... I'm not sure I like that sort of consequence but until Congress or the courts does something with "ordinary" to change it from how it has been interpreted, it's tough, tax-wise, to be a business pioneer using new approaches, though I guess it's even tougher if the new approach is illegal or a breach of contract.) Belichick and the Patriots stand alone for the type of infraction for which they have been fined, a far cry from 53 fines in a 3-year period (or more, counting the other exchanges). They are among a very very rare (dare I say extraordinary) group of select persons and clubs fined by the NFL generally (perhaps dozens, but surely not the 356 (thousands counting the other exchanges) in a 3-year period.

The Rothner court then explained that an expense was necessary if it met "the minimal requirement that it be appropriate and helpful for the development of the taxpayer's business." I suppose Belichick and the Patriots would argue that breaking the rules was appropriate and helpful. Appropriate? Hmm. Helpful? Of course. If it wasn't helpful to cheat, only the pathological would cheat. I'm not quite ready to label all cheaters as pathological because that would mean we're living in an asylum. Why do I doubt it is appropriate. People don't seem to care if their brokers violate a trading limit on the floor of the exchange. People do care if the NFL's integrity is impugned, and if the reaction has a negative economic impact on the NFL or the Patriots, then Belichick's actions will directly or indirectly HURT --- not help --- the business operated by the New England franchise, and thus would not have been an appropriate thing to do. In other words, for the Patriots, acting honestly had a value that was of a higher order than it has/had for brokers.

My conclusion: Rothner is distinguishable. Someday perhaps it will liose its distinction, but that will be a day when rule infraction and fines are an everyday occurrence in the NFL much as they were (are?) in the exchanges. Pity that day ever arrives.

Calvin Johnson (Texas):

Quite weird to deny a deduction as a penalty for wrong doing. The tax base is supposed to describe standard of living, and determine TP's place in the tax bracket. The big penalties will make a rich man poor.

I like to make the analogy to alimony from an SOB. In the old days, tax rates were 70%. Suppose a philandering SOB makes the then princely sum of $100,000. Court says pay $60,000 to W as punishment for his true wrong doing. If you take the position that the tax system should not ameliorate a penalty, then TP owes $60,000 to W and $70,000 to US, which does not leave him very much after tax.

Run your penalties through a rational penalty system and not through a progressive tax. The deep norm answers the question "Was it Lost?" Amounts not lost should never be deducted (eg housing costs), but amounts lost need to be subtracted to compute income and brackets.

Bryan Camp (Texas Tech):

Hi Cal, I've read the thread to date and it strikes me that your attempt to simplify the question of appropriate deductions to "was it lost" flounders on the very hypo you use to provoke the question.

You give the example of alimony. I counter with the example of child support. Assume the same SOB is required by the domestic relations court to pay the SAME $60,000 per year to W but the order provides that it is for child support. The "punishment" is the same, a forced reduction in standard of living for the SOB TP. The only difference is the use to which the money spent it put.

In both the alimony and the child support hypo the "was it lost" question comes out the same when one references SOLELY the impact of the forced extraction on the TP's standard of living. That is because the "was it lost" question looks only at the TP's side of the transaction.

But Congress certainly saw the "deep norm" when it made the call to allow deductions for alimony but not child support, even though both payments have the same impact on the payor's standard of living.

The "deep norm" in my view is the business/personal distinction. One must look at BOTH sides of the transaction which necessarily requires a determination of why the money was spent, not just whether it was spent. That reflects the capitalist ethic: the money it takes to make money should not count as income b/c we WANT people to spend money in that way. And sometimes Congress revs the engine by pouring tax-equivalent "STP" into the gas tank, aka investment tax credit and 179 modifications. SO it is not the forced nature of the extraction, nor the impact of the extraction on the TP, that matters. Not all forced extractions are "losses" because they are forced for different purposes.

And some expenses, even though strongly connected to a legitimate business purpose, are simply too inherently personal to be allowed as deductions. Cite: Vitale v. Commissioner, T.C. Memo 1999-131. Disentangling the personal from the business is sometimes messy, but always necessary. I think the "was it lost" query does not work because it tries to circumvent that distinction.

But I'm sure Tony Soprano would love it!


I would treat most payments from H's household to W's household the same, even for child support. W's household gets the consumption. If they are poor, and H is rich, this is consumption by the poor household appropriately taxed in zero or low brackets.

But I do concede a countervailing model: H may divorce from W, but he never divorces his kids. Only those H's that support their kids have had their line survive, or at least, those H's who ate their kids died out after one generation. If H is getting kids and survivors, then he has not lost anything with his child support.

Note that "Is it Lost?" is the right question to determine the tax treatment. Once W and H come to hate each other, $ to W is lost. H's sometimes slough the old children as part of the old way of life and then child support really is indistinguishable from alimony.

Even if child support were made deductible in general (and taxable to W), still if it H who pays for the Cyclone or military school directly, then there is no deduction. The model says that W's household is getting the money and she has to have discretion.

You see, deductions are all governed by closing inventory accounting. Deduct it if it out the door or broken in the back room, but if you still have it when the count is made, there is no legitimate deduction. Adjusted basis needs always to describe the fmv of what you have left.


Cal, my take on the Rothner case doesn't turn on whether the payment is or is not a penalty. Trebilcock was denied a deduction for a non-penalty expense to improve employee performance. The decision fits with the definition of "ordinary and necessary" though I'd rather see a different definition because I'd like to see Trebilcock and other pioneers get deductions for their business expenses.

But the law being what it is, as interpreted in Trebilcock and Rothner, Bilichick and the Patriots don't get deductions. If they should, someone needs to change the law. Suppose the NFL did not bar taping, etc. but teams didn't do it because it cost too much (tough to imagine but bear with me here). So the Patriots spend $750,000 to purchase equipment to record audio and visual signals, etc etc. Same result. No deduction. Not because the tax law is being used to punish anyone for anything. Not because the taping violates a contract. Not because a penalty or "fine" has been paid. Simply because in this hypo the Patriots are doing something extraordinary because no one else is doing it.

Mike McIntyre (Wayne State):

I think you just gave a nice hypo that proves (supports) the other side. You really think that if the Patriots paid someone $1,000 to video a game for them, completely within the rules, they lose the decution b/c no one else is doing it? That is not and cannot be the law. Now, of course, there are lots of people who think Trebilcock is wrongly decided, or, at best, limited to its quirky facts. But to take from that case a positive law principle that spending money in a sensible way to make money is not deductible because no one else has thought to do what you are doing is wrong, at best. (I think the tp lost in Trebilcock b/c the court did not believe the business story and didn't want to get into a food fight about it, but I don't really think it matters.)

So, what you did is give a nice hypo (I modified it slightly to take the capitalization issue out of play) that takes the moral issue out of play, and once that is out of play, there is no valid reason for not giving the deduction and no emotional reason to bend the rules to deny the deduction.


Mike, The term ordinary has to have a meaning. If it means "essentially personal" as some have argued, then that takes the meaning out of "trade or business" because if something is trade or business it's not personal and vice versa. Section 162 does not provide a deduction for "all expenses paid or incurred in carrying on a trade or business." It limits them further, requiring that they be ordinary (and necessary).

The Rothner court, quoting and citing precedent, makes it clear that "ordinary" has nothing to do with business or personal but with whether the expense is usual and normal, and then applies a test that examines the frequency of the transaction.

I would take "ordinary" out of section 162 because it discriminates against the pioneers, e.g., in the hypo (and thanks for correcting the capitalization issue though I did inadvertently raise a related section 179 issue but for the Patriots' presumably excessive taxable income), no one else is doing it. Trebilcock did something way ahead of his time. Eventually the industry caught up. What is ordinary today, unless it's existed since the Big Bang, was extraordinary when it first came into use. I think Trebilcock did properly interpret section 162(a) (and I think that provision is flawed, but that's of little comfort when I'm asked to give the Patriots and Belichick an opinion as to what they should do on their respective tax returns vis a vis the fines).

Bottom line: so long as the word "ordinary" is in section 162(a) it must have a meaning, and that meaning is something other than "not personal."


I think it often is nice to read statutes closely. But it is also nice to read them in their historical context. As best I remember, the phrase "o&n" was just a general accounting phrase, indicating a payment the accountants treated as an appropriate deduction in keeping the books. The individual words did not have individual meaning --- it is best to treat the three words as if they were one word.

For a similar example, consider the phrase "permanent establishment." Or "fixed place of business". All phrases from Article 5 of the standard tax treaty. The words are mostly place holders, or at least they were initially. Could the drafters possibly have meant that a diner was not a PE because it used to be part of a RR and could be moved? In my opinion, almost all of the so-called learning on those phrases makes little or no sense.

Now the U.S. courts, which tend to give some notice of purpose at least some of the time, have mostly read "ordinary and necessary" as a placeholder --- substituting for that phrase stuff that means almost nothing, such as "appropriate or helpful". I think those courts got it right. But I would not then make an issue as to whether a deduction should be denied because arguably the conduct was not "appropriate" or turned out not to be "helpful". The point of those phrases was to strip any content from "ordinary and necessary", not to substitute some new standard with content.

You are 99% right when you say that the reading I've given for those phrases makes them mostly irrelevant --- that I'm treating the drafters as if they were not terrific drafters. But I'm actually quite comfortable with the arrangement. That is, I think it is fine to allow deductions generally in a business context but to leave some small scope to the tax authorities (IRS and courts) to knock out deductions that really seem over the top or unacceptable as a deduction for some good reason.

Stuart Lazar (Tulane):

By your theory, then fines and penalties should be deductible. If a bad driver earns $30,000 per year, and runs up $12,000 in speeding tickets and other infractions, why not allow him a deduction? True, we have Section 162(f). But, under your theory, should we?

On the other hand, take the ignorant homeowner who makes $30,000 per year and fails to maintain his property. Passerby walks across the lawn, which has not been cut and hides a rake, and injures himself. Passerby sues and wins $12,000, which is not covered by insurance. No deduction there either, though I hope that you would argue that such a personal expense should not be deductible.

What about Bellichek? If the expense occurs in the course of his business, and is ordinary and necessary (whatever that means), a deduction should be allowed under Section 162. If he acted outside of the ordinary and necessary course of his business, was his action not personal? If so, no deduction should be allowed.

I think that all the posts here are arguing whether or not the expense related to something that was ordinary and necessary. If the wrongdoing does not fall into that category, under what theory are we allowing the deduction?

To require/allow a deduction for all penalties seems irrational. Why make the fisc a co-payor of the penalty by allowing the payment to be made from pre-tax income rather than after-tax income?


No question, the driver with $12,000 in income and $30,000 in fines hits me as someone who has too little left to pay tax. 162(f) is not helping us determine his standard of living. I would repeal section 162(f), and hang him upside down by his toe nails if that is necessary level of punishment.

But theft losses, casualty losses, tort losses, hit me as "losses" as the ordinary language ("losses") properly identifies. Every one gets sloppy at some point, -- prospective perfection is just too hard to maintain -- but that does not make the losses voluntary nor into notloss.

Sometimes I cant make up my mind. Medical expenses might well be loss. Nobody breaks a leg on purpose to collect the insurance. Except that medical expenses react to price quite sensitively which implies you are getting something back for them. If you are getting a quid pro quo then it is not a loss. Still I think "Is it Lost" is the right question to ask.


Under your approach, denial of a deduction for a fine to government also would be wrong. But that denial can be defended. The goal of the fine is to change conduct, and there is some economy in not requiring the government to adjust its fines for the taxpayers tax bracket. Do we really want to force local governments to get the speeder's tax information before levying the fine?

But I do agree with you on a private fine. Lots of stuff that people do is morally repulsive. Is the tax system supposed to get into the mix and determine the morality of what occurred?

No one can seriously argue that breaking a rule is immoral per se --- depends on the rule and the reason for breaking it. Is it immoral for a football team to have 12 men on the field? Do we decide that it becomes immoral if, instead of a 10-yard (or whatever) penalty, we fine the coach $1,000?

As for ordinary and necessary, I think the focus (if we are to take those silly words seriously) should be on the business reason for paying the fine, not for engaging in the conduct that provoked the fine. And we need to step away from the morality issue. It may or may not be immoral to mislead gamblers and opposing coaches by issuing an innacurate injury report. I offer no view. But if there is a fine for filing an inaccurate report, then paying the fine is a business necessity. If a team is fined for having a cheating coach and the team fires the coach and was totally unaware of the cheating, the paying of the fine is properly deductible. It should not matter whether the conduct was common or rare, since paying the fine is what any business executive would do in the circumstances.


Mike, I don't see in your analysis any mention of the commonality or extraordinariness "of the transaction giving rise to the 'fine.'"



Mark Cochran (St, Mary's):

Calvin, If you’re saying that the denial of a business expense deduction for fines is misguided, I’m inclined to agree. If the fine is related to business activity, it’s a cost of doing business. The deduction is not a "benefit" --it’s necessary to measure the taxpayer’s profits accurately. Rather, I’d characterize the denial of the deduction as an additional penalty over and above the fine. In all likelihood, the legislative body that set the fine didn’t consider tax consequences one way or the other. If that’s the case, denying a tax deduction increases the penalty above the amount the legislature thought desirable.


The government is always the co-payer for any deduction. That is really all we are saying when we say something is deductible --- that the receipt out of which the deduction is paid is sheltered from tax.

Now, it sounds worse to make the government the co-payer for a "penalty", since that term seems to have some moral content to it. But the moral content is often not present with "fines" and often is present for other deductible amounts. I certainly understand denying some decutions on moral grounds. A company that pays a hit man to whack the prsident of a competing company should not get a deduction for the payment IMHO. Perhaps I don't have a great theory, but I think the immorality is so clear and so accepted that we should not view the payment as a business expense. Even still, I don't have a good theory, and, for that reason, would not extend the "rule" beyond shocking cases. Getting an unfair advantage in some game is not a shocking case IMHO.


Mike -- I don't disagree with your statement that the government is a co-payor for any deduction. That much is clear.

However, I am not trying to make moral or value judgments about when something is a deductible expense under Section 162. I think that it is clear that we do not allow deductions for (i) expenditures that are capital in nature and (ii) expenses that are personal. True, there are many exceptions to both.

IMHO, Section 162 is trying to weed out both of the above categories in determining whether an expenditure is deductible. With regards to the penalties that we have been discussing (the non-governmental kinds), I believe the issue is whether the action taken was ordinary. If not, maybe it is personal in nature. If a business person takes an action that is so far out of the ordinary, maybe they are not doing it for business reasons, but for personal ones.

Take the basketball player. An on-court altercation that results in an NBA fine may be considered ordinary because it is part of the game. In that case, it is deductible. In the case of a player running into the stands and fighting with a fan, that is not part of the game. In that case, the action might be considered personal (not related to the game). If so, no deduction should be allowed for any fines imposed by the league. I'm not making a value judgment, but looking as to whether the action furthers the business objectives of the game.

In the case of companies that commit actions that result in fines, don't those companies know the rules? If an action that results in a fine is ordinary, a deduction should be allowed. If the action is so outside the mainstream that we would say it is not ordinary, the action is not business related and may be considered personal. In which case, no deduction is allowed to the company. Both moral and immoral actions may be ordinary, or may not, depending on the situation.

With regards to Section 162(f), it seems clear that the government is saying that you are free to violate the law -- but to do so is a personal action. To the extent that fines and penalties are imposed, they should be imposed on an after-tax basis. One who makes the decision to speed is not different than one who purchases 15 pints of Ben & Jerry's ice cream. Both are personal decisions. Income should be measured before those decisions were made, not after.

Whether we should be removing toenails for speeding, Cal, I will defer to you. I have enough trouble matching my socks as is.


I can agree that some fines can be personal. I borrow a book for personal reasons from a university library and pay a fine of $20, I have no deduction. But if the book was for business, I do have a deduction. Same for late fees on renting a video.

The basketball hypo is a good one to test the boundary. I think running up into the stands and pounding on a fan is arguably personal, not business. So, if the player is arrested and hires a lawyer to defend himself, I'd deny a deduction for the legal fees. That said, I still think a team fine for that conduct is business because it is paid for business reasons.

If someone wants to invoke the "ordinary and necessary" mantra, I'd say that it is pretty ordinary for a professional athlete or coach to pay a fine, whether justly or unjustly imposed, for bad conduct on the field or for private misconduct, if the alternative is to be drummed out of the game. In this case, the "origin," if we need to deal with that mantra, is the decision to accept the rules and play the game (or coach in the game).

For a related example, suppose I play on a team and oversleep for personal reasons and have to take a cab to the game, only b/c I'm otherwise late. Ordinarily, I have an easy walk. I think the cab fee is deductible. As Joseph indicated, the "origin" test is not helpful much of the time. If someone wants to insist on that test, I'd say the "origin" of the cab ride was not the all night partying but rather the obligation under the player contract to appear at games.


So if someone who walks to work takes a cab it's deductible? How? There are all sorts of rulings and cases concluding that this isn't deductible, even if walking isn't an alternative. Or are you assuming that the player is at an away game going from the hotel to the stadium? That might work.


Yes, I was not intending to deal with commuting. I meant from the team hotel to the ball park.


Depends upon your base line. Assume we should tax breathable air. It is very valuable. You would pay $100,000 at least if you did not have it and they charged you that to get it. Thus our failure to tax breathable air is a copayment by the government of $35,000. The subsidy is only $10,000 to a 10% bracket TP. Why should a rich man get more subsidy than a poor man.

Now assume we should not tax breathable air. If we do tax breathable air, that is a penalty on someone who has no extra saleable or cash resource. The penalty is $35,000 on a rich man and only $10,000 on a poor one.

Whether any item is a "penalty" or "subsidy" requires an assumption about the base line. You can not use those words without assuming the proper base line.

My assumption is that the tax system taxes standard of living. Items not lost (eg investment, quid pro quo to religious practitioner for service, housing costs) should not be deducted, but reduction in standard of living should be.


I would have to agree with all of the prior statements. However, Marty, I assume that those acts that cause fines that are outside the “ordinary and necessary” category would not be deductible under Section 162. In this day and age, can a coach or an athlete do something so outside the bounds of what is ordinary that Section 162 would apply? Taking Myron’s example, is there a level of force that a player can exert that would be outside the bounds of ordinary such that the penalty would not be deductible under Section 162?


In response to Stuart’s question as to what might activity be outside the bounds of ordinary and thus have the fine be non-deductible, my exam question also included a fact pattern based upon the NBA players who went into the stands and started fighting with the fans, an event which my facts stated had never before happened. I was looking for some analysis similar to what Stuart has just raised: namely, that this behavior by a player was so extraordinary that expenses associated with it should be non-deductible.


But is it necessary? Is fighting in hockey necessary considering the league's concerted effort to wipe it out (whereas in the past it was condoned as a way of increasing ticket sales)? I suppose throwing at a batter is one thing and clubbing someone over the head with a bat is another thing, making the tax treatment of the respective fines different? Or has baseball now tried to eliminate throwing at a batter?

I think it is easy to prove that violating the NFL's "no taping" rule is not necessary. Nor, at least based on known facts, is it ordinary (but if it turns out all or most teams are doing it, that would make the analysis different).


In my class, I use the flip side of the Amos case. I start with the scenario where Dennis Rodman runs out of bounds tripping over a photographer causing an injury. I then escalate the situation to one where Rodman gets so mad after tripping over the guy, that he physically assaults the photographer causing serious injuries. However, as you know, last year, NBA players did enter the stands to fight with fans. I wonder what would be considered outside of the definition of “ordinary” now.


Time really does fly as we age. It was way back in November, 2004, not last year, as you say, that the NBA players entered the stands to fight with the fans. That made it very topical when I placed the deductibility of fines associated with the fight with the fans on my December, 2004 tax final. (Of course, since I teach in Columbus, I made the fighter a coach named “Woody Knight” who lost all control when he saw a fan in the stands wearing a Clemson football jersey and started punching the fan. I guess my students were too freaked out by the question to catch all the allusions or I wouldn’t have survived to tell the story.


I guess the older we get, the quicker time seems to pass. It seems like only last year that I watched that on tv. I guess now it would be fodder for YouTube (or maybe it already was). It seems that those types of incidents should never be deductible as ordinary. Whether or not it is conceivable that a fight such as that one might occur, it is certainly not ordinary as in expected or likely to occur.


I don't think that the acts for which the fine is levied need to meet an objective ordinary and necessary standard as long as the taxpayer committed the acts as means of trying to achieve the ends that he hired to try to achieve. That makes the payment of the fine, which is necessary to continue in employment at pay, ordinary and necessary.


There are cases, though, where the courts have denied deductions on the basis they were not "ordinary and necessary" even though they involved expenses paid or incurred to carry on a trade or business. If the test is simply "acts committed as a means of trying to achieve business purposes" (to paraphrase your suggestion) then what is left of ordinary and necessary that isn't picked up by "paid or incurred in carrying on a trade or business"?


Those cases, which include the likes of Trebilcock v. CIR, 64 TC 852 are largely collected at pp 369-373 of McDaniel, McMahon, Simmons & Abreu, Federal Income Taxation, 5th Ed. under the heading :Unusual Expenditures; Unclear Language and Muddled Reasoning. In large measure, but not universally, the cases involved expenditures that could have been disguised personal consumption. Not so for Belichick.


Trebilcock. for example, involved payments for services desgined to make the employees more productive, certainly something a business owner wants to achieve, and surely something that enhances the trade or business. Ironically, years later, when U.S. companies concerned with the then seemingly imminent domination of commerce by Japanese firms, started adopting Japanese methods some of which involved similar programs for employees, the deductions did not get challenged. What was once extraordinary became ordinary. Someone has to be the pioneer.

So if other NFL coaches decide it's worth the cost (read some of the sports commentary on the Belichick penalties), perhaps what might be considered extraordinary will become ordinary. I happen to think that what Belichick did, violating a rule after being told not to violate it, is extraordinary. Unless the cynic in me prevails and persuades me that cheating is so common that the cost of cheating should be deductible


“Ordinary” was an loose word in its origin in the 1909 tax. The phrase “ordinary and necessary” did not add much except to say that the expense had to be profit- or corporate-business related to be deducted. Any added content, such as “not an investment” is a latter gloss.

Joseph Dodge (Florida State):

I would only allow a deduction for costs that have some connection to producing income for the taxpayer. Thus, for the basketball players in the Detroit affair, I would only allow a deduction for those costs that were aimed to avoid loss of salary or being fined by the NBA. The origin test has to be handled with kid gloves, IMHO, because it can produce screwy results.

"Ordinary" is a silly test, and "necessary" doesn't really mean anything. If Bellichek doesn't pay, he probably will lose his job and be banned from pro football. Also, what he did was trying to win, which is the point. All the correct-outcome ordinary and necessary cases are really ones involving disguised personal benefits and stuff that is pure waste.


Why do you conclude that the payments in Trebilcock were personal? The services were rendered to the business employees, not to the business owner alone. The were rendered on the business premises, not at a person's residence. They were provided at the beginning of the workday with a purpose of motivating the workers. They were not provided after work hours. If I recall correctly, employee attendance was mandatory.

I agree there are all sorts of cases where personal expenses were denied on an ordinary and necessary rationale rather than on the more accurate lack of trade or business purpose rationale. But I think the court in Trebilcock had to rely on ordinary and necessary because it would be laughable to treat the daily morning sessions as personal. As I pointed out, Trebilcock suffered from being a pioneer. Deductions for similar motivational programs were claimed by many companies when Trebilcock's visionary approach became widely accepted after the Japanese allegedly put it to good use in becoming what was then seen as some sort of economic giant.

Now, should "ordinary and necessary" be removed from the Code? Perhaps. But at the moment, it exists, and it must mean something other than "not personal."


The first thing in discussing the tax consequences of the fines, to Belichick ($500,000) and the team ($250,000), is to get the facts right. I'm not claiming I do have all the facts straight, but the following is what I've read.

1. Belichick is accused of violating a rule and has admitted that his prior interpretation of the rule was faulty. Although some people outside the commissioner's office have accused Belichick of "cheating," the commissioner's office has not done do. It simply claims that a rule was violated and enforcement is needed to make for even competition.

2. The press accounts have suggested that Belichick ordered some kind of secret spying. That is inaccurate. He had an individual with a video camera on the sidelines in plain sight. It was his prior position that such taping was consistent with the rules. It was well-known among coaches that he was taping, since that information had been communicated to them by the league last year.

3. The extent of various types of actual "spying" is unclear. Last year, Miami was accused of "stealing" the audio signals of the Patriots, using some kind of parabolic listening device and using the information to their advantage. Apparently some commercial outfit tapes the audio and sells it to teams. This information became public, and the league took no action. There are lots of stories of "secret" taping of lots of stuff, with the cameras hidden in monitors, etc. Hard to judge the accuracy of the stories, but people in a position to know are being quoted.

4. I do not know of any other cases of "open" taping, or of a coach or team being fined for such taping.

In light of the above, I side with those who think the payment is deductible.

Jack Bogdanski (Lewis & Clark):

I'm coming in way late on this, but to me: "Ordinary" means not a capital expenditure. "Necessary" means not personal -- and I don't think that's redundant, because "necessary" signifies a higher causal connection between the expenditure and the trade or business than the word "expenses" by itself would imply.


Jack, Rothner (and the precedents it cites) claims that "ordinary" means both "not capital" (although section 263 would take care of that anyhow) AND "normal, usual, etc." ... it did not focus on the first branch of the definition because the parties stipulated the expense was not capital. If ordinary meant that and nothing more, the court would have had no need to analyze extensively the frequency with which such fines were paid on the exchanges.


If an expenditure is not "normal" in the sense of not recurring, it tends to look more like a capital expenditure. But the notion that a recurring expense is somehow not "ordinary" because no one else does it that way is -- well, a dumb idea.

Not to say that there aren't more than a few cases out there to that effect. But they're wrongly decided.

As for creaky old section 263(a), it is hardly a model of clarity. I wouldn't insist that we give "ordinary" some meaning other than "not capital" on the ground that section 263 clearly states the principle of capitalization. I mean, come on. Just read it. It's clear as mud.

BTW, Gillam rightly lost because his expense was personal. You may be on a business trip, but when you start assaulting the guy next to you on the plane, you've stepped outside the scope of your employment.


Jack, those cases may be bad (and I agree), but they are there. They will remain "there" until something sweeps them away. Legislative changes, or a Supreme Court decision.

So what does a tax advisor tell Belichick and the Patriots (or their return preparers) when asked whether to deduct the amounts paid to the NFL. "Deduct them, and don't worry about the cases to the contrary because they're bad law" ? That's not what I would say. I'd explain the situation and explain the risks. I'd point out that if the IRS pursues the matter and wins, there are a variety of penalties that will apply. The IRS will have authority to cite. The taxpayer will have good arguments to make, but good arguments aren't substantial authority (and in some respects aren't even authority).

We'd find out pretty quickly what sort of risk takers Belichick and the Patriots are. But I'd cover myself, because as sure as the sun rises in the east, if the IRS pursues them and prevails, they'd be looking to put blame elsewhere and if I were the advisor, that would be me, and hence I'd have CYA letters and memos all over the place. Assuming, that is, that I accepted the representation in the first place, which I probably would not. Gotta wonder what else would be lurking sight unseen, future risks wide open, in the files and paperwork of someone who breaks rules and claims that it was simply a difference of opinion. In other words, I wouldn't want a client I couldn't trust.


Jim: Without seriously looking, I'll bet the IRS has lost quite a few "ordinary and necessary" cases that could be construed as good authority -- just as good as those they have won. Indeed, there is no case directly on point (is there? again, apologies for coming into this thread late), and every IRS "ordinary and necessary" victory I've read can probably be distinguished from this one. I doubt that with a little research and analysis, I would be warning these clients not to take the deductions. Sure, I'd explain the risk in any event, but I suspect that I'd ultimately conclude that there was sufficient authority for a penalty-free return position, and (as one must make sure nowadays) that it's more likely than not that the deduction would be sustained if challenged. Of course, actual research could prove me wrong.

Section 162(f) covers fines. It says that if you pay them to a government, they're not deductible. To me, that's a pretty good indication that if you pay them to anyone else in the course of a business, they are.

It's not a personal expense. And given that opposing teams probably change their signals at least annually, it's not a capital expenditure. "Ordinary and necessary" may mean something more, but I wouldn't leave a couple hundred thousand dollars of tax on the table because of concerns about it.

Maybe deduction with disclosure would be a fair compromise, but I doubt greatly that these clients would do anything but deduct without disclosure. They'd take my worry memo and stick it in a drawer -- then perhaps start shopping for a new tax advisor.

Moreover, consider the malpractice exposure that could arise from being too adamant that they *shouldn't* deduct it.


I see no downside to Belichick or the Patriots from taking the deduction for the fine and also disclosing. There is no "dark of night" advantage on something as notorious as this case. So why not just disclose and play it super safe.

I'd give the Patriots close to 100% chance of winning and Belichick something over 90%. In a less publicized case, I probably would feel no great need for disclosure, but I see no downside to disclosure in this case.

Jim may feel he has adequately distinguished Rothner, but that case, if not on all fours, is pretty close. Both involve a fine for legal activity that is prohibited under the rules of their trade group. Jim distinguished on the ground that the trading fraternity is fined more often than football teams, but that distinction is, as they say, a weak reed to rest on (unfortunately, the strained pun on name of Eagles coach, Andy Reid, is intended). Put it this way. I think it is a lot easier for the Patriots to distinguish Trebilcock than it is for the Service to distinguish Rothner.

Trebilcock is a silly case, widely criticized, involving a religious (eccentric --- pick your descriptor) owner hiring an ordained minister "primarily to minister spiritually to petitioner and his employees" (quotation from find of facts in TC opinion). The guy ran prayer groups for the workers and owner, and the owner claimed it was a business expense. Surely we can understand why a court would view such stuff as personal.

I understand that one can dress this case up as a case about an innovative employer finding clever ways to motivate workers. But the basic facts, as found by the Tax Court, are to the contrary. In my view, the court thought the expense was the result of an owner getting spiritual guidance and thus personal, with a phony (questionable --- pick your adjective) claim of business. That characterization might possibly be wrong, but that is the case in the books. It is nearly worthless as authority for denying a deduction for a fine assessed by the taxpayer's trade organization for violating one of the organization's rules in carrying on the tp's business.

Really, the only risk I see for Belichick is that the judge would be an Eagles fan. Fat chance of that IMHO . Anyway, even if the judge turns out to be an Eagles fan, there is a good chance he/she would hate the Eagles for the week of the case.


The risk is if the judge is a Jets fan, a Dolphins fan, a Lions fan, or even a Bills fan. Oh, wait, or a Colts fan. Or perhaps one of those folks who think professional athletes are a bad influence on society and who thinks professional leagues need to be slapped down.

But I doubt the judge would overlook the fact that the Rothner court invested many, many words focusing on the high frequency of fines imposed by the exchanges for cheating. Had that court added the logical dictum "This case would turn out differently had the taxpayers been the only ones fined, or among a very few fined, for this behavior" we'd be arguing about the validity of resting any analysis on the dictum.

Anyhow, the cynic in me thinks that even if the IRS prevailed, Congress would enact some sort of moratorium (and special legislation) for its NFL friends. It's one thing to rail about steroids, because 95% of the population (and 99% of voters) don't use them, wouldn't use them, and think they're bad. But to rail against cheating, goodness, you'd lose more than half the electorate if the surveys are correct.


First about the Patriots. You keep talking about cheating. The issue is breaking a rule, not cheating. The league has NOT accused the Patriots of cheating. Sports writers and others have, but not the league. In any event, even if the Patriots did cheat, which I do not think happened, they were fined for breaking a rule, not for cheating.

Some may say that breaking a rule and cheating are the same. That is wrong. Is it cheating to have too many men in the huddle? To interfere with a receiver or chop block a lineman? No, those are rule violations, not cheating. Filming from the sideline, rather than from the owners box, is a violation of the rules, and properly penalized. But it is not cheating. It provides a convenience but no competitive in-game advantage, although it does present some risk of that, which is why it is banned (and properly so).

The offense committed by the Patriots was filming from the sidelines. There is a rule against it. The Patriots stupidly interpreted th rule in light of its purpose --- to provide film to the coaches during the game. There is no rule aginst filming, except from the sidelines and the coache's booth. Filming is completely legal and commonplace. Filming from the sidelines and coaching booth are banned b/c of worries about certain in-game use, which the Commissioner claims did not occur in the case of the Patriots. And there is no evidence on the public record to suggest that the Commissioner is wrong. And no opponents of the Patriots have claimed that the Patriots got an illegal competitive advantage or had in-game access to the film.

The Patriots will be back filming in the SD game tonight, but obviously not from the sidelines. And SD also will be filming, I assume. Filming, say, from the owners' box is fine under the rules.

The Patriot coaches study the films to find out certain tendencies of the opposing coaches. Does the special teams coach get chatty when there is a trick play coming? Are there other small things that give away plays? Remember, singals from the sidelines are supposed to be seen, and seen from a long way away. There is nothing secret about defensive signals. And it is not cheating to pick up patterns.

In baseball, it is cheating for a team to have a camera in the outfield that reveals the catcher's signals to the other side during a game. but the networks have such camera, and it is not cheating to tape the network broadcast and study the film AFTER the game to pick up patters. Does the catcher spread his legs a bit when he has called for a curve, better to blcok a pitch in the dirt? Stuff like that is picked up and used by opponents. All legal. Filming at footbal games is similar, and similarly legal. But football has prohibited cameras in certain locations for fear of in-game use. Reasonable, and a violation should be punished. But, as long as there was no in-game use and, thus, no unfair advantage, it is a real stretch to call the conduct cheating.

Rothner court. It is possible that a court would make the distinction you have tried to make, based on the Rothner dicta. If that is all you have, and you want to argue for no deduction, then you need to use it. But I think the dicta is highly likely to be dismissed, as it should be IMHO, as just an excess of caution by the court, making clear that even if the rule is that we count the number of fines to detemine their ordinariness, the tp still wins.


OK, this may be off-topic, but perhaps it's tax relevant, because the notion of "cheat" arises in tax. Perhaps there are analogies lurking here.

But what is cheating? I think it is "gaining an unfair advantage by breaking a rule." So trying to injure a player (in contrast to accidentally rolling up on a lineman's legs), or trying to confuse an offense or defense by having too many men in the huddle is cheating. It's an attempt to deceive or hide that violates a rule. Some rules of the game (or of tax law, or of law school administration) are designed to provide fair advantage and preserve integrity but others are designed simply to maintain order or dignity. Thus, all cheating breaks a rule but not all rule-breaking is cheating. Mouthing off at a ref isn't cheating but it breaks a rule. So I agree that breaking a rule does not make for cheating.

Were the Patriots cheating? Yes. They were in the habit of taking film from the sidelines into the locker room at halftime. The incident at the Jets game required the presence of NJ state troopers to assist NFL security in confiscating the tape. Filming from the sidelines is prohibited because it permits access to signals and audio that would not be available if taping from the owner's box or the stands. And, yes, there are folks coming up with statistics with respect to first and second half performance by the Patriots. There also have been allegations of attempts to listen to helmet signals, something also prohibited by rule (and that would be cheating), but if the NFL is investigating these allegations, it's keeping its inquiries quiet. Perhaps for good reason.

The fact that the rule permits after-game analysis of film but not during-game analysis of film suggests that there is a good reason for the distinction. It is to prevent the acquisition of an unfair advantage. "The Patriots stupidly interpreted th rule in light of its purpose --- to provide film to the coaches during the game." Indeed. They have been using, and intended to use the Jets game film, DURING the game. Why? To get an advantage not permitted by the rules. That is cheating.

The Commissioner was careful to limit the accusations. The Commissioner was careful to impose weak penalties. The Commissioner's decision has been widely criticized, with good reason. Some of the suggestions go beyond the Commissioner doing damage control to accusations of favoritism and the power of money. Nonetheless, I would not read into what the Commissioner did not say anything more than I would read into the implications of a plea bargain. It tells us little, if anything.

If the Patriots could demonstrate that other teams have been doing what they have been doing, it would do two things. It would cast the tax analysis in a different light, and it would make the Commissioner's actions a wee bit understandable. Yet the Patriots have said nothing of the sort about other teams, despite more than one team pointing out what they were doing. Wouldn't it be interesting if there were a tax case on the tax issue, and to get within Rothner and away from Trebilcock the Patriots' and Belichick's tax litigators tried to introduce evidence of what other teams were doing. I doubt the NFL would like that, and I'm confident that the Patriots and Belichick will be under great pressure to settle (or cave in) on any tax dispute. Otherwise it might get even uglier.

As for Rothner, the authorities cited by Rothner (which did not invent the "what are others doing?" analysis) also stand for the proposition that frequency of occurrence is a major factor in analyzing the term "ordinary." Carving out personal activities is at the core of what "trade or business" is about.


As I said, the fine was for violating a rule, not for cheating. The Patriots were not accused of cheating by the Commissioner and were not fined for cheating. You may feel that the Patriots did cheat, and you may be right. But as I indicated, the tax issue turns on what they were fined for doing, and they were not fined for cheating. Football rules are broken every game. No professional football game is played without someone breaking the rules. It is expected that people will break the rules, and a penalty system is in place to deal with the situation.

As for in-game use, the Patriots have denied it and the Commissioner's Office has denied it. They may be lying, of course, or intentioanally misleading, or hiding the truth for commercial advantage. But stats showing that the Pats are a good second-half team will not provide any evidence of cheating. Well coached teams are typically good second-half teams. From what we now actually know, this whole episode is another tempest in a teapot. That there is wild speculation about hidden transmitters and stuff is no surprise. All kinds of bar-stool conversation now gets posted to the Internet. If the Patriots are shown to have cheated by getting an in-game advantage, well, then the matter becomes very serious (within the essentially non-serious confines of professional football, or course).

If the Patriots are found guilty of cheating and are fined for it, we will have a someone different tax question. Then we have a major moral issue, and courts are known to bend the rules a bit when they think there is a real public-policy issue at stake. Right now, however, it is like a fine imposed on a GM for criticizing a referee (which I have always assumed is deductible and has no significant moral content).

See also TaxGirl.

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Did I miss any reference to the AMT? If Bill Belichick is an employee, wouldn't this fine be subject to the AMT and taxed at 28% anyway? That is only 7% less than the 35% tax rate he is at. It sounds like the fact that it is deductible may only save him $35,000 or 7% of $500,000.

Big Deal.

Posted by: John Brozowski | Sep 18, 2007 9:40:00 AM

You made the WSJ law blog and Above the Law!

Posted by: EB Guy | Sep 17, 2007 4:40:24 PM