Sports and Taxes Part 2: Update on Messi trial and Kevin Durant's decision to take less money by signing with the Warriors

First:  as noted in a previous post, Lionel Messi, Argentinian soccer star, and his father ("Messis") were on trial for tax fraud.  Now, as reported in Sports Illustrated, the Messis have been sentenced to 21 months in prison for being found guilty of three counts of tax fraud.  However, because Spain suspends sentences for first time offenders if the sentence is less than two years, the Messis will not serve time in jail.  Instead Messi and his father will have to pay a fine in the amount of € 1.7 million and € 1.3 million, respectively.

The Court determined that the Messis evaded paying more than € 4 million in taxes on Lionel Messi's image rights between 2007-2009 by sending income through Uruguay, Switzerland and Belize to minimize taxes.

Kevin Durant

Kevin Durant

Second: as reported in this SI artcle, NBA superstar Kevin Durant chose the Golden State Warriors and decided to take less money than by staying with Oklahoma City Thunder, or any other suitor.  Why did Durant take less money? Simple answer, state income taxes.  Using the models in the SI article which makes certain assumptions, Durrant would pay $31 million in state income taxes (to California) compared with $0 state income taxes had he signed with the San Antonio Spurs (to Texas) or Miami Heat (to Florida), and compared with $14 million in state income taxes had he re-signed with the Oklahoma City Thunder (to Oklahoma). So why did Durrant choose to take less money? As stated in this SI article, he wanted a more free flowing (ball moving) offense and was frustrated with recurring issues with a now former teammate (Russell Westbrook).

Why are these cases important/interesting?  In the first case (Messis), tax avoidance is not tax evasion, if done properly.  In the second case (Durant), personal desire trumped tax consequences.

MESSI

In the first case, it is interesting that the Messis undertook what in the tax world is known as transfer pricing with the intangible (Messi's image and likeness) and tried, unsuccessfully, to transfer the intangible between Uruguay, Switzerland, and Belize.  This same concept has been utilized by very large US multinational corporations (i.e. Apple, Google, Microsoft, Caterpillar, Medtronic, and others) to transfer their intellectual property ("intangible") to low tax jurisdictions (Puerto Rico, Ireland, Netherlands, Switzerland, etc.) to lower their bills in the U.S.

The simple question is why did it work for Apple, etc. and not Messi? One answer may be that a person's image and likeness are not separable from an individual, whereas the intangibles related to non-living things (i.e. iphones, search data, source code, heavy equipment, medical devices, etc.) can be separated from the individual. Or another possibility is that the U.S. is not attacking transfer pricing with U.S. multinational corporations with as much zeal as Spain.

DURANT

The Durant case is interesting because Kevin Durant chose to pay more state taxes but would be in the type of offense he craved instead of staying in OKC or moving to a tax favorable jurisdiction.  So this raises the question of whether tax motivates people to make a decision or whether it is just an afterthought.  For more information about state taxes and athletes see this Forbes article.  See also this article through Fansided about state taxes and athletes.

If you have specific/credible information about individuals or corporations avoiding the payment of tax through transfer pricing or other methods, you can get involved in preventing/limiting the tax avoidance by filing an IRS tax whistleblower claim.  The IRS pays an award between 15% to 30% of the tax collected to a whistleblower that provides specific and credible information about the taxpayer’s avoidance of tax.   Contact our firm if you want to discuss filing a tax whistleblower claim.

More Accounting Tricks to Avoid Paying Tax by U.S. Multinational Corporations

As noted in this blog, the difference between tax evasion and tax avoidance is a fine line.  To assist in drawing the line properly and legally, corporations and individuals employ tax attorneys and accountants to minimize their tax liabilities.

As previously discussed in this blog, the triumvirate of "legal" tax dodging by U.S. Multinational Corporations ("USMNCs") is Inversions, Transfer Pricing and Earnings Stripping.  Another less publicized tool used by accountants of USMNCs is the "stock option loophole".  As the Citizens for Tax Justice ("CTJ") reports, USMNCs have utilized the "stock option loophole" to reduce their taxable income in the amount of $64.6 billion over the past 5 years.

Notable (Top 5) USMNCs which have utilized the stock option loophole include:

USMNC Stock Option Tax Benefits from 2011-2015
Facebook $5,665,000
Apple $4,673,000
Google $1,951,000
Goldman Sachs Group $1,775,000
J.P. Morgan Chase & Co. $1,666,000

The CTJ list documents 310 other companies that have reduced their federal and state corporate income taxes by a combined $64.6 billion dollars over the last 5 years.

What is the "stock option loophole"?  Simply put, it is an accounting mechanism to "track" stock options and to deduct the expense of stock options.  Why is this a loophole? The simple answer is that there is a disparity between the price the employee pays for the stock option and the price the stock options are worth.  For a more technical explanation see this PricewaterhouseCoopers (Accounting Firm) explanation.  Based on the PWC article, the USMNCs deduct this difference between the exercised price and the price their employees paid for the stock on the corporate taxes in the year that the options are exercised.

CTJ questions why the USMNCs are allowed a deduction fro giving their employees a benefit but in reality does not cost the USMNCs anything.  CTJ also states that reversing this may help to minimize the Tax Gap.

If you have specific and credible information about a company failing to pay its tax liabilities, contact our firm about filing an IRS Whistleblower claim to assist the IRS in holding the company liable for the taxes they should be paying.

Tax Fraud or Tax Avoidance?

Lionel Messi

Lionel Messi

There is a joke among tax practitioners, namely: What's the difference between tax evasion and tax avoidance?  Answer: About $100,000 and a competent tax attorney.  While this may be a party joke, there are real world examples of this joke playing out.

Case 1: Lionel Messi and Tax Fraud Trial.

In the sports/tax news, Lionel Messi, a world renowned soccer player, testified in his tax fraud case before Spanish authorities. See SI article

Messi stated that he didn't know he wasn't paying his taxes, and that he would sign anything his father put in front of him, because he trusted his father.  With respect to tax issues, this blind dependence/trust in a person with the power of preparing your tax returns is known as willful neglect, and unfortunately it will not relieve you of your obligations to file and pay your tax liabilities.

In the United States, Internal Revenue Code Section (I.R.C. §) 6651 imposes an additional penalty for failure to file your tax return, and failure to pay your tax liability as shown on your tax return.  I.R.C. §  6651 contains a reasonable cause exception, but that must be raised by the taxpayer based on the facts and circumstances.  Noteworthy to this discussion, is that Lionel Messi's dependence on his father would not rise to the level of reasonable cause for exempting Lionel Messi from this additional penalties, because merely trusting or depending on someone does not relieve a person from their tax return filing and tax paying obligations.

Willful Neglect is defined by the United States Supreme Court as "a conscious intentional failure or reckless indifference to the filing requirement."  United States v. Boyle, 469 U.S. 241, n.3 (1985)  Ignorance of the filing requirements is not an excuse for failing to file a tax return. 

While Spanish tax laws may be different than the IRS rules and regulations, Messi's case reflects that blind trust in your advisors and/or family members does not eliminate your obligations to file tax returns and to properly structure your business affairs.  Note, the SI article states that Messi and his father are facing three counts of tax fraud and could be sentenced to nearly two years in prison if found guilty of defrauding Spain's tax authority of 4.1 million euros ($4.5 million) from 2007-09. The SI article points out that Messi and his father are not likely to face any jail time but could be fined and made to forfeit possible future tax benefits, and that both deny wrongdoing, and the money owed was already paid back.

Case 2: Donald Trump Tax Avoidance through the use of Delaware entities.

Contrasting Lionel Messi's situation is Donald Trump, the presumptive Republican nomine for President of the United States.  In recent news, Donald Trump has pooled 110 registered or pending trademarks and placed them into a new Delaware based (DTTM Operations LLC).  This Bloomberg article points out that this maneuver would permit Donald Trump to escape other states' income taxes on royalties paid for their use, which would be an income stream worth tens of millions.

Additionally, the article highlights ways that Donald Trump may have reduced his tax rates by utilizing foreign entities by shifting some of the trademarks to Ireland.  The Bloomberg article also provided possible other reasons for the consolidation, including debt financing and estate planning.

The significance of this second case when compared with the first case is that with proper tax planning, what appears to be tax fraud with the Messi case, is likely just proper prudent tax planning in the Donald Trump case.

Not all tax planning is proper, if you have specific and credible evidence of improper tax planning or fraud, contact us to discuss your case.  The IRS pays an award between 15-30% of the collected tax, penalties and interest for substantial and credible information provided by a whistleblower.