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A DEDUCTION FOR DENNIS?

December 17, 2003

A taxpayer (we can't very well call him a "lucky" taxpayer under the circumstances) recently won a victory in the Tax Court when he was allowed to exclude from income a portion of a payment received from Dennis Rodman. The $200,000 payment settled a lawsuit filed after Mr. Rodman kicked the taxpayer in the groin during an NBA game.

WHITHER THE RODMAN 1040?

The important question arises: does Mr. Rodman get to deduct the payment?

Surprisingly, examples of fines for athlete mayhem are relatively rare in the tax law. The only case we can find dealing directly with payments by athletes for infractions involves Garnet Bailey, formerly of the Boston Bruins and St. Louis Blues.

Thse Bailey court outlined the hurdles a payment must clear to be deductible for a wayward athlete.

-It must be incurred in the trade or business of the taxpayer. Mr. Rodman's payment would seem to meet this requirement, in that the groin-kicking occured at work.

-It must not be a nondeductible fine or penalty. Code Section 162(f) forbids deductions for fines or penalties paid to a government. As Mr. Rodman paid his victim, not the government, this hurdle is cleared.

-The payment must be "ordinary and necessary" in the taxpayer's trade or business. If anyone could argue that settlements for assault are an ordinary and necessary business expense, it might be Mr. Rodman.

For a payment to be "ordinary," the Supreme Court has said "It is the kind of transaction out of which the obligation arose and its normalcy in the particular business which are crucial and controlling." For an expense to be "necessary," it must be “appropriate and helpful” in the taxpayer's business.

While Mr. Rodman may have felt the payment arose out of what was, to him, an ordinary business occurrence, which he may have even considered appropriate and helpful, one could expect the courts to be sceptical. Mr. Garnet, a hockey player, was unable to win a deduction for his fines paid to the NHL for fighting. If fighting isn't ordinary and necessary for a hockey player, it isn't for anybody.

OTHER OBSTACLES

We also shouldn't overlook the tendency of judges to deny deductions for things that just seem wrong. For example, the Tax Court denied an author certain expenses incurred in researching a book on the grounds that some expenses are just "so personal in nature as to preclude their deductibility." The disallowed expenses were payments to prostitutes made during research for a book about legal brothels in Nevada.

EVEN IF HE WINS, HE LOSES

Were Mr. Rodman to clear all of these hurdles, he still might not get full benefit from his payments. As Mr. Rodman's expense was incurred in the trade or business of being an employee, it would be a "miscellaneous itemized deduction." These provide a tax benefit only to the extent that all such deductions exceed 2% of adjusted gross income. One source puts Mr. Rodman's 1997 salary at about $4,500,000. If this were his only income, his miscellaneous deductions would be deductible only to the extent they exceed $90,000. To add insult to injury, they would not be deductible at all in computing alternative minimum tax.

GARNET BAILEY FOOTNOTE

After his NHL career ended, Garnet Bailey became scouting director for the Los Angeles Kings. He was on United Flight 175 from Boston on September 11, 2001 when it was crashed into the World Trade Center.

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