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Bill Belichick feels “fine”?

September 14, 2007 · 15 comments

Issuing a stern “cheater, cheater, pumpkin eater” warning to New England Patriots coach Bill Belichick, the NFL handed down a steep fine which will cost the Super Bowl coach $500,000. The Patriots were fined half of that, $250,000, in the same scandal for stealing an opponent’s defensive signals. And adding to the “ouch” factor, NFL Commissioner Roger Goodell has ordered the Pats to give up next year’s first-round draft choice if they reach the playoffs (they will) and second- and third-round picks if they don’t (not a worry).

I don’t know whether a half million dollars out of pocket will hurt Belichick’s wallet or not. I have no experience as a Super Bowl winning coach – though if things don’t look up, I may be volunteering to play on the Eagles special teams squad come this weekend. But I have to think his pride is going to take a hit, even if his wallet doesn’t.

So, you’re wondering, what does any of this have to do with tax? Plenty. This whole thing got me to thinking about the increased crackdowns in the NFL and higher penalties in other leagues – and what it means from a tax perspective. I wondered whether the fine could be written off on Belichick’s taxes as some kind of unreimbursed expense or other deduction. I’ve come to the conclusion that he’s stuck with the fine and no deduction.

It’s clear that you can’t deduct fines, fees or penalties paid to the government for breaking the law (you can find it listed at Pub 529 or check out sec 162(f) of the Code) since it’s as against public policy. However, the NFL, despite how highly it thinks of itself, is not the government. So, deductible?

Putting aside the morality of it for a moment, it seems to be that it’s neither “ordinary” (in fact, this fine was pretty extraordinary) nor “necessary” in Belichick’s line of work. So, from a business expense perspective, I would say no on the deduction front. But while thinking about this and Google-ing up a storm, I found quite a bit of history which illustrates that companies have been doing this kind of thing for years – deducting fees, fines and penalties from civil acts as business expenses.

Hmm. But what about an individual? I couldn’t find anything in the US about this at all. And with the number of fines and penalties in professional sports, you know the issue has to have been raised…

If Belichick lived in Canada, he’d be in the clear. The Canadian tax laws allow for a deduction for fines and penalties “provided the action giving rise to the penalty was done to earn business income.” Oh yeah, a couple of Super Bowl trophies? I’d say the cheating worked out quite well for him. Cheating=winning=more money. So, in Canada, he’d have the benefit of a half million dollar deduction. (Note to self, those involved in immoral yet not necessarily illegal activities should consider a move to Canada.)

But in the US, I’m not so sure. My gut says no. Any thoughts?

{ 13 comments… read them below or add one }

1 Miki September 14, 2007 at 12:58 pm

If the government can’t tax crack profits (http://www.taxgirl.com/crack-dealers-finally-get-a-break/) why can they tax the gains from cheating? Of course, they do, that’s how they finally put away Al Capone.

2 Kelly September 14, 2007 at 4:16 pm

Various tax gurus have come up with all sorts of feedback on this same issue. Most believe it is deductible. Check it out here:
http://taxprof.typepad.com/taxprof_blog/2007/09/can-patriots-co.html

3 Miki September 14, 2007 at 4:41 pm

Well, in all honesty I only scanned the responders, but it seems that it’s considered a business expense, therefore deductible. So, that makes getting caught cheating deductible as long as it’s not the government that catches you.

Did I get that right?

4 Kelly September 14, 2007 at 9:10 pm

More or less. The sad part is that most of those who said yes did so because of the same logic in the Canadian statute… that cheating lead to the wins and therefore the income, so the fine for the cheating is considered part of the cost of doing business. Sigh. What a world.

5 Fred Daily September 15, 2007 at 12:26 pm

I’ll have to side with those who say the fine is deductible–likely a miscellaneous itemized deduction for Mr. Bellechick. IRC 162(f) is clear that the fine must be paid (1) to the government and (2) for the violation of a law. Neither apply to this case, and the tax law is very strictly construed by the federal courts. Frederick Daily, author, “Tax Savvy for Small Business.”

6 Kelly September 15, 2007 at 3:14 pm

Fred – I agree re 162, as mentioned above, but do you think it’s “necessary” and “ordinary” – in other words, is cheating now a legit part of the NFL?

7 Miquela September 15, 2007 at 10:56 pm

Not to sound negative because I’ve racked my brains looking for a loophole but it’s too public. Even if he were to find a loophole (business expense, personal loss or the like) the goverment, I’m sure, has put a red flag on him. Like Mr. Catch-Barry-Bond’s-Baseball. They’re just itching to get their share.

8 David September 17, 2007 at 7:28 pm

It should be deductible since it was incurred in the course of his employment, and it IS a necessary expense in that, if he doesn’t pay it, he will be barred from his livelihood.

9 Fred Daily September 17, 2007 at 8:16 pm

I think David has hit the nail on the deductibility head–it is a “necessary” expense for Bellichick’s livelihood.

And, under the second part of the statute, it may not be an out the “ordinary” expense for someone in the peculiar world of professional sports.
Prediction: This is a game that the coach will win if it ever gets to court.

10 Scott Allen September 18, 2007 at 12:48 pm

Define “ordinary”. Does Bellichick have to pay that particular fine every couple of years? Let’s hope not. Do athletes, coaches and owners as a whole have to pay fines to the leagues frequently as a normal course of doing business? Absolutely. If a player can deduct their $5,000 fine for cussing during a game, then Bellichick can deduct this.

And as others have stated, it’s a requirement of his livelihood. If he didn’t pay it, would he be able to keep coaching an NFL team?

11 Miki September 18, 2007 at 2:18 pm

OK, just want to make sure that I understand this.

It’s OK to cheat and I can deduct any financial penalties from getting caught as long as the fining body isn’t part of the government.

In other words, cheating is OK and a normal part business if it doesn’t involve governmental bodies.

Is that ANY governmental body or only Fed gov’t? Does it apply to foreign gov’t bodies?

Finally, does it mean that Microsoft can deduct the $613 million EU fine from it’s US taxes?

12 Kelly September 18, 2007 at 8:10 pm

Pretty much spot on, Miki. Sad, huh?

I believe the prohibition against deducting fines paid to the government extends to state and local. The cite is 162(f) – I’ll have to check it out.

13 Miki September 23, 2007 at 6:33 pm

Scott, The part I find bizzare isn’t deducting the fine, but that the act of cheating is considered normal business practice.

Kelly, I know you said that you’re looking up state and local gov’ts, but what I really want to know is does it apply to foregin gov’ts? Specifically, the fines being levied by the EU.

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