The "Jock Tax" Payback: How Pro Athletes Are Cashing in on CA Worker's Comp

Many readers may be familiar with the fact that most states have their own version of the "Jock Tax".  Essentially, if a pro-athlete and resident of  a neighboring state plays a game your state, your state will be owed an amount of income tax from that athlete since the athlete is essentially conducting business in your state.  Although the average citizen would see this as a blatant maneuver to fill state coffers from wealthy pros, almost all states have enacted their own version of a Jock Tax.

Now it appears the Jocks have a way to fight back--filing worker's comp claims.

Consider this:  A professional football player and resident of Colorado, in the course of his 88 game career ends up playing just 9 games in California.  After retiring he gets awarded a $199,000 injury settlement from the California workers compensation court for his football injuries.  The player.  Terrel Davis, former Super Bowl MVP and Denver Broncos running back.

A recent article in the LA Times gives the details:

Over the last three decades, California's workers' compensation system has awarded millions of dollars in benefits for job-related injuries to thousands of professional athletes. The vast majority worked for out-of-state teams; some played as little as one game in the Golden State.

All states allow professional athletes to claim workers' compensation payments for specific job-related injuries — such as a busted knee, torn tendon or ruptured spinal disc — that happened within their borders. But California is one of the few that provides additional payments for the cumulative effect of injuries that occur over years of playing.

A growing roster of athletes are using this provision in California law to claim benefits. Since the early 1980s, an estimated $747 million has been paid out to about 4,500 players, according to an August study commissioned by major professional sports leagues.

Over-Hyped Sequestration Amounts to One Week's Worth of Spending Cuts

Given the amount of doom and gloom that is reported surrounding the impending sequestration cuts, one may be surprised to learn that the cuts will result in a decrease in projected spending by only 2.3%.  Hardly an unmanageable amount.

Put another way, it would be equivalent to having Federal spending take a week long holiday.

Despite these figures, sequestration has been presented by politicians and the media as the next "cliff" (didn't we just avert one a few weeks ago?).  For instance, just this weekend, the White House released a menacing 7 page memorandum listing all the programs, services and agencies that would be affected.  Obviously, the list is meant to incite emotion and evoke fear.  After all, the document tells us that their will be cuts to food safety inspectors, airport security, national parks, education, amongst many, many more.

As I read through the list, I couldn't help but remember a similar menacing list produced by Governor Jerry Brown in his campaign to pass Proposition 30.  Californians were told that if we didn't vote for increased taxes, key government services would be shut down.  In fact, the Governor even released the names of dozens of state parks that were to be "closed" in the event that Proposition 30 did not pass.  These scare tactics apparently worked and Proposition 30 ultimately passed.  Of course, its passage seemed to only wet the appetite of those who have always sought increased taxes--within weeks the democratic super majority was alluding to other ways to increase revenues.

The pattern is clear.  If you want create the perception that a small decrease in spending will have terrible consequences, you have to place on the chopping block those services that are most near and dear to taxpayers--public safety.  I am not saying that public safety will actually be cut, but the government will publicize "planned" cuts to public safety more than anything else.  I suspect though that sequestration will not result in a drastic drop in public safety as the politicians would lead us to believe.

"Gentle Soul" Shoe Shiner Donates $200K to Charity--But Beware of the Tax Man

From WTAE Pittsburgh:

For 32 years, [Albert] Lexie has been examining his schedule each morning, like a doctor on the clock. But the longtime shoe shiner’s gift isn’t healing, it’s giving back. A shoe shine costs $5, but Lexie said customers have been generous with their tips since he started working at the hospital in 1981.

“Most of them give $6, some of them give $7,” Lexie told Channel 4 Action News anchor Wendy Bell.

And Lexie gives every cent of his tips back to the children.

“I think he does it because he loves the kids,” said Dr. Joseph Carcillo. “He's donated over a third of his lifetime salary to the Children’s Hospital Free Care Fund.”

The money goes to parents of sick children who can’t afford to pay medical costs.

“He's a philanthropist, is what he is,” said Carcillo. “He's an entrepreneur.”

Lexie has donated $200,000 to the cause, bringing in several hundred dollars a week.

No doubt about it.  Mr. Lexie has quietly and consistly done something noble and great by turning over his tips to a worthwhile charity.  However, this raises some very interesting tax implications.  In particular, it is well-settled that amounts received as tips are "income" for income tax purposes and should be reported on a person's tax return.  Now you would hope that the fact Mr. Lexie simply donated these funds to charity would absolve him of any tax liability for those tips, but that isn't necessarily the case.  The reason why is that one's charitable donations are not always 100% deductible.

In this case, it is likely that Mr. Lexie could only deduct these donated tips up to 50% of his adjusted gross income (and remember his AGI would include this tip income).  If, for instance, his donated tips ever exceeded 50% of his AGI, then he would not be able to deduct the full amount of donated tips that year.  While these excess donations can be rolled over for up to 5 years, it doesn't do Mr. Lexie much good if every year he is maxing out this deduction limitation.  On a related not, it is unclear what documentation the hospital has provided Mr. Lexie each year that would enable him to substantiate these deductions, if ever questioned.

In all, Mr. Lexie has done a noble thing...let's just hope the IRS doesn't take notice. 

Is Plastic Surgery Really Tax Deductible?

The February 2013 issue of Plastic Surgery Practice Magazine came out recently and features an article entitled "Is Plastic Surgery Really Tax Deductible".   I was interviewed for the article and provided a brief background on some of the governing rules. 

Medically Necessary Versus Elective?

In the context of cosmetic surgery, the question does not really turn on the distinction between being a medical necessity or being an elective procedure. A different test applies. Under the Internal Revenue Code (“the Code”), a partial deduction is allowed for the expenses paid by a taxpayer for “medical care.”

However, the Code explicitly excludes cosmetic surgery from falling under the definition of medical care unless the surgery is one which can generally be considered corrective. The Code defines “cosmetic surgery” as a procedure which is directed at improving the patient’s appearance and does not meaningfully promote the proper function of the body or prevent or treat illness or disease. For a procedure to be deductible, it must be necessary to ameliorate a deformity arising from or directly related to i) a congenital abnormality, ii) personal injury, or iii) a disfiguring disease.

“Thus, when a woman undergoes breast reconstructive surgery following a mastectomy, the reconstructive surgery, although cosmetic and elective, would be a deductible medical expense. However, a breast augmentation to simply improve one’s appearance would not be deductible,” Callister explains.

In addition, Callister says that there is precedent for deducting the costs of skin removal. Thus, when a patient loses a significant amount of weight, loose-hanging excess skin can be removed and be considered deductible if the skin mass interferes with the patient’s daily life or is prone to infection and disease. Again, as with most things, the exact facts and circumstances factor into this decision.

Will the Chris Dorner $1 Million Reward Ever be Paid Out?

With the charred remains found at the Big Bear cabin being positively identified as Chris Dorner's, the question remains, what is the fate of the promised $1 million reward offered up by L.A. Mayor Antonio Villaraigosa. 

Unlike the initial $100,000 reward that was offered by the L.A. City Council that is subject to clear government code section on the offering and payment of rewards, the $1 million reward offer was more of a "private" cobbling of business and union groups that had pledged funds to satisfy the reward in the event it was ever paid out.  It is my understanding that these various groups made these pledges on different conditions.   Some groups pledged funds under the understanding that it would be applied in the same manner as city rewards, which are paid out only after "capture and conviction."  However, other groups made pledges attached with additional conditions--requiring that the funds not go to Dorner's mother, or to an accomplice. 

In short, each pledgor is under a different obligation to furnish the award funds.  Legally, it appears that there is likely no obligation for the donors to actually transfer funds.  However, politically, it would be difficult for a larger corporation to retain funds in the face of public outcry.

Time will only tell.

Pres. Obama Lectured on the 10% Biblical Tithe and the U.S. Tax System

On Thursday's National Prayer Breakfast, renowned neurosurgeon Dr. Benjamin Carson gave a 25 minute address that lambasted political correctness, proposed changes to Obamacare and urged tax reform.

One of his more interesting discussions delved into "fairness" and the U.S. tax system.

He argued:

"What about our taxation system? So complex there is no one who can possibly comply with every jot and tittle of our tax system. If I wanted to get you, I could get you on a tax issue. That doesn't make any sense. What we need to do is come up with something that is simple.
When I pick up my Bible, you know what I see? I see the fairest individual in the Universe, God, and he's given us a system. It's called tithe. Now we don't necessarily have to do it 10% but it's principle. He didn't say, if your crops fail, don't give me any tithes. He didn't say, if you have a bumper crop, give me triple tithes. So there must be something inherently fair about proportionality. You make $10 Billion dollars you put in a Billion. You make $10 you put in $1 - of course, you gotta get rid of the loopholes, but now now some people say, that's not fair because it doesn't hurt the guy who made $10 Billion dollars as much as the guy who made $10. Where does it say you have to hurt the guy. He's just put in a billion in the pot. We don't need to hurt him.
It's that kind of thinking - it's that kind of thinking that has resulted in 602 banks in the Cayman Islands."

Converting From a For-Proft to a Nonprofit Entity

Under California and Federal law, it is possible for a for-profit corporation to convert to a nonprofit entity.  This conversion really has two components: i) making the change for state law entity purposes, and ii) seeking and obtaining tax exempt status for the now, nonprofit entity.

With respect to legal conversion, there is a unique section in the California Corporation's Code which allows a corporation to convert to a California Nonprofit Public Benefit Corporation, simply by amending its articles of incorporation. (See Cal. Corp. Code Sec. 911.)  Oddly, this provision is not grouped with all the other provisions that deal with corporate conversions but is part of the section of the code that deals with amending articles.  This distinction means that there is no "converting" or "converted" entity or "terminated" and "surviving" entity as is the case under the normal statutory conversion sections.  In essence, a conversion under Sec. 911 means the entity is the same entity as before--it is just a classified differently.

Of course, amending the articles appropriately is only part of the process--the entity must still apply for tax-exempt status at both the state and federal level.  This is done by filling out  IRS form 1023.  Note that if you have converted from a for-profit to a nonprofit, there is a separate Schedule G to the form 1023 that must be filled out where you are to explain why the conversion occurred and what relationships various parties have to the entity.  The biggest question is why would an entity that is making money, apparently for commercial reasons, want to switch to non-profit status?  The IRS will want to ensure that there is no self-dealing or private inurement to certain owners and officers as a result of the conversion.  Assuming the IRS grants tax-exempt status, the entity can easily seek tax exempt status at the state level. 

Curiously, one grey area is whether or not the entity must acquire a new EIN for tax reporting purposes.  The guidance provided by the IRS on this matter is unclear and subject to varying interpretations.  Typically, most entities prefer to retain their own EIN so there is less administrative burden. 

On final aspect are the tax implications that are involved.  In particular, most C corporations prefer to bonus out employees at the end of the year so that there is minimal corporate income (in an effort to minimize corporate level taxes).When a conversion is made, consideration should be given as to the timing of corporate income and expenses so that as much of the corporate expenses are allocated to the time frame when the corporation is a nonprofit. 

Obama Warns of Increasing Taxes...Again

For those who thought that federal tax increases had been settled...think again.

In a statement issued Tuesday morning, President Obama proposed delaying sequestration to craft a compromised budget that would have a mix of some spending cuts and additional tax revenue. Specifically, the President stated that he would be willing to cut spending on social programs so long as they are done “hand-in-hand with a process of tax reform so that the wealthiest individuals and corporations can’t take advantage of loopholes and deductions that aren’t available to most Americans.”

No additional details were provided by the President--which leaves one to wonder what type of "loopholes" might be at risk.  Forbes has reviewed the President's prior unfulfilled tax proposals for the most likely "loopholes" to be changed:

Elimination of “Last in first out” accounting. Under the “last-in, first-out” (LIFO) method of accounting for inventories, it is assumed that the cost of the items of inventory that are sold is equal to the cost of the items of inventory that were most recently purchased or produced. This allows some businesses to artificially lower their tax liability.
Elimination of oil and gas tax preferences. The president’s proposal for corporate tax reform takes aim squarely at the oil and gas industry. This change would repeal the expensing of intangible drilling costs as well as percentage depletion for oil and natural gas wells.
Taxing carried (profits) interests as ordinary income. Currently, in exchange for managing the investments of a private equity fund, fund managers are able to receive allocations of income that are taxed at preferential rates as long-term capital gain and qualified dividends. President Obama has long taken issue with this treatment, and has proposed eliminating the loophole for managers in investment services partnerships and taxing carried interest at ordinary income rates.
Eliminate special depreciation rules for corporate purchases of aircraft. This would eliminate the special depreciation rules that allow owners of non-commercial aircraft to depreciate their aircraft more quickly (over five years) than commercial aircraft (seven years).
Require companies to pay a minimum tax on overseas profits. Income earned by subsidiaries of U.S. corporations operating abroad would be subject to a minimum rate of tax. Thus, foreign income deferred in a low-tax jurisdiction would be subject to immediate U.S. taxation up to the minimum tax rate with a foreign tax credit allowed for income taxes on that income paid to the host country.
Remove tax deductions for moving productions overseas and provide new incentives for bringing production back to the United States. Companies would no longer be allowed to claim tax deductions for moving their operations abroad. At the same time, to help bring jobs home, the President would give a 20 percent income tax credit for the expenses of moving operations back into the United States.

What We Can Learn From the 100th Anniversary of the Federal Income Tax

Just a few days ago marked the 100th anniversary of the ratification of the 16th Amendment, which enabled the establishment of the U.S. federal income tax.

The 16th Amendment has a fascinating political history and the fact that there was popular support for the self-imposition of additional taxes was somewhat unique.  However, the 16th Amendment was never intentioned to be the federal government's main source of revenues.  Indeed, when it was being promoted, it was marketed as "just 1% on the top 1%"--meaning that only the top 1% of earners would be subject to the tax, which rates began at just 1%.  After all, who could be against such a tax? As the House of Representatives Committee Report indicated "all good citizens, it is therefore believed, will willingly and cheerfully support and sustain this, the fairest and cheapest of all taxes".

Over the years, the rates went up and up and the percentage of those actually subject to the income tax increased as well.  What was envisioned as a "soak the rich" tax, ultimately "soaked" the middle class as well. 

California Out of Funds to Disarm 19,700 Felons and Mentally Ill People

I was surprised to find out that California already has laws in place that enable it to confiscate weapons from the mentally ill in addition to convicted felons.  Unfortunately, the State does not apparently have the funds to actually go out and seize the weapons.

From the LA Times:

SACRAMENTO — California authorities are empowered to seize weapons owned by convicted felons and people with mental illness, but staff shortages and funding cuts have left a backlog of more than 19,700 people to disarm, a law enforcement official said Tuesday.

Those gun owners have roughly 39,000 firearms, said Stephen Lindley, chief of the Bureau of Firearms for the state Department of Justice, testifying at a joint legislative hearing. His office lacks enough staff to confiscate all the weapons, which are recorded in the state's Armed Prohibited Persons database, he said.

The gun owners typically acquired the firearms legally, before being convicted of a felony or diagnosed with mental illness. Each year, the state investigates and seizes the guns of about 2,000 people on the Armed Prohibited Persons list, Lindley said, but each year about 3,000 names are added to the list.

"Despite our best efforts, the bureau does not have the funding or resources to keep up with this annual influx," he told the 15 assembled lawmakers.