On February 1, 2015, New England Patriots quarterback Tom Brady took home his fourth Super Bowl ring and his third Super Bowl MVP trophy when the New England Patriots defeated the Seattle Seahawks in a thrilling 28-24 final. That moment should have cemented Brady’s position as one of the all time best football players to ever take the field.
There was, however, something lingering in the background that had the potential to be a game changer. About a week earlier, on January 23, 2015, the National Football League (NFL) announced that it had retained criminal defense attorney Ted Wells and the law firm Paul, Weiss, Rifkind, Wharton & Garrison to conduct an investigation into whether the footballs used by the Patriots during the AFC Championship Game between the Patriots and Colts were manipulated. The Patriots had been accused of playing with balls that were inflated below league requirements, a charge which Brady, Coach Bill Belichick and the Patriots strongly denied. However, an initial inquiry found that 11 of the Patriots’ 12 footballs were under-inflated by two pounds of air (psi) – the 12th football was under-inflated by less than two psi. A more formal investigation – this one spearheaded by Wells – was then launched.
As a criminal defense attorney, Wells has represented his share of high profile clients including “Scooter” Libby, Jr., Senator Robert Torricelli and former New York Governor Eliot Spitzer. Wells is also no stranger to sports matters. After Well’s investigations into the response of Syracuse University to sexual misconduct allegations (report downloads as a pdf) and allegations of conflicts of interest and the potential misuse of funds by NBA players union leadership, the NFL retained Wells at a whopping $1,000 per hour to prepare an investigative report into “a pattern of harassment” in the Miami Dolphins locker room. He was chosen again for the Patriots investigation. Wells is generally well liked and trusted – and it was clear that this investigation was going to be scrutinized by legal and by fans alone.
Why did folks care so much? Likely because this wasn’t the first time that the Patriots were charged with cheating. In 2007, Belichick was fined a whopping $500,000 for stealing an opponent’s defensive signals. The team was fined an additional $250,000 for their role in the “Spygate” scandal. The episode threatened to be a black mark for Belichick. Quarterback Tom Brady made it through the scandal without tarnishing his squeaky clean image. Many expected the same result this time. That’s not what happened.
In a scathing 243 page report (downloads as a pdf), Wells and his team found that:
[I]t is more probable than not that Jim McNally (the Officials Locker Room attendant for the Patriots) and John Jastremski (an equipment assistant for the Patriots) participated in a deliberate effort to release air from Patriots game balls after the balls were examined by the referee.
That’s a very criminal defensive attorney way of saying, “We think they did it.” (You can read some of the text messages between the pair here. Jim and John like the f word but aren’t so big on punctuation. You’ve been warned.)
After that revelation, it seemed like Brady would be okay. Er, not so much. The report went on to say:
Based on the evidence, it also is our view that it is more probable than not that Tom Brady (the quarterback for the Patriots) was at least generally aware of the inappropriate activities of McNally and Jastremski involving the release of air from Patriots game balls.
That’s a very criminal defensive attorney way of saying, “We think they did it – and we think Brady totally knew about it.”
The report found that there was no evidence that any other Patriots player or member of the staff was involved in the scandal. The report also cleared Belichik and team ownership of any wrongdoing related to the underinflation of the footballs.
Brady, of course, has continued to maintain that he did nothing wrong. Whether that might be enough to escape a slap on the wrist is yet to be determined. According to ESPN’s Adam Schefter, the NFL is considering discipline for McNally, Jastremski and Brady.
How harsh could that discipline be? It’s tough to tell. The Patriots, on their own, aren’t planning to do anything: it’s clear from Patriots’ owner Robert Kraft that he doesn’t believe the findings of the report and he has no interest in “extending this debate.” The report has, however, painted NFL Commissioner Roger Goodell into a corner and he simply can’t just let it go. That said, the calls for Brady’s head are over the top. The answer is somewhere in the middle.
As the NFL sorts out what to do, I suspect Brady is already on the phone with his lawyer. And if I had to guess, McNally and Jastremski are also lawyering up. While Kraft has slammed the extraordinary amount of resources spent on the investigation, you can bet on the fact that an incredible amount of resources will also be spent on mitigating any punishment.
There is some good news for McNally, Jastremski and Brady on that front: funds they might shell out on their own will likely be tax deductible.
Generally, legal fees paid for personal reasons aren’t deductible for federal income tax reasons. Money you pay to get a divorce, force your neighbor to cut down that pesky tree or to recover the cost of your damaged car are all considered personal in nature and you can’t claim a deduction for those expenses.
In contrast, you can deduct legal fees that are related to either doing or keeping your job. Those fees would include fees paid to defend against criminal charges arising out of your trade or business (though, to be clear, there are no criminal charges in this matter).
I think we can all agree that Brady isn’t in danger of losing his job. Whether you think he cheated in this instance or not, he’s an amazing quarterback and while this might taint his image, it won’t hurt his chances of continuing his football career (PR and endorsements might be another issue altogether).
That said, the allegations against Brady, like McNally and Jastremski, are clearly related to doing their respective jobs. Defending those charges and mitigating any punishments (to the extent that they are not covered by union lawyers) would therefore be deductible.
That’s good news for McNally and Jastremski – but Brady likely has one more hurdle to jump: the 2% floor.
You deduct certain legal expenses as Job Expenses and Certain Miscellaneous Deductions on Schedule A as itemized deductions at line 23. Expenses must meet certain criteria (including the “ordinary and necessary” rules explained below) and they’re also subject to those pesky AMT (alternative minimum tax) rules.
The total of those expenses – not just legal fees – are subject to the 2% floor. This means that they’re only deductible to extent they exceed 2% of adjusted gross income (“AGI”), similar to the way that you figure the deductions for medical expenses. That’s doable when it comes to those of us who bring home average salaries.
Let’s assume, for example, that you have miscellaneous deductions that total $5,000 and AGI of $50,000. Your total deduction would be $4,000, or $5,000 (total expenses) less $1,000 ($50,000 x 2%).
But we’re not Tom Brady.
According to Forbes, last year Brady took home $31.3 million in salary and winnings plus an additional $7 million in endorsements. (Let’s assume for our example that Brady doesn’t file a joint tax return with his wife, Gisele Bundchen, the world’s highest paid supermodel, who raked in $47 million last year, landing her at #56 on Forbes’ Celebrity 100.)
The same tax rules apply to the über rich as apply to you and me. So let’s look at the same formula as before – this time with Brady’s income. Assuming an AGI of $30 million, the 2% floor for Brady would be $600,000. That means that he could only deduct legal fees which exceed that number. And yes, lawyers are expensive – but that’s really expensive.
Of course, the business of being Tom Brady may mean that he has set up entities to hold rights for his endorsement deals and the like. If that’s true, different rules could apply: if you are a business taxpayer, you can deduct qualifying legal expenses not subject to the 2% floor. It’s a bigger hurdle to clear but also a better result. To be considered a bona fide business expense under 26 USC Sec 162(a), the expense must be “ordinary and necessary… in carrying on any trade or business.” A necessary expense is one that is “helpful and appropriate for your trade or business.”
There are a lot of moving parts in this story. It isn’t simply about deflating a few balls. It’s about image. It’s about business. And it’s about money.
When it comes to tax, the money matters. That’s as true for you and me as it is for Tom Brady. It’s also true that fact and circumstances matter: there’s no one size fits all answer to every situation. You can bet that Tom Brady has a legal and tax team at the ready to help him sort through the details in his personal and business life: you should, too.