Image: Gregg Williams
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New Orleans Saints assistant coach Gregg Williams has been implicated in the NFL's developing "bounty" scandal.
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updated 3/4/2012 1:03:47 PM ET 2012-03-04T18:03:47

Baseball season opened in Clearwater this week but that wasn’t what folks were talking about in the sports world. The focus was on the announcement from the NFL that several players on the New Orleans Saints, as well as at least one assistant coach, Gregg Williams, were found to have maintained a "bounty" program during the 2009, 2010 and 2011 seasons.

And that’s not all. As the news made its way around the country, many football players shrugged off the news as nothing new. A number of players from the Washington Redskins have chimed in that they, too, had a bounty system between 2004 and 2007. Under the system, thousands of dollars were paid to Redskins defenders for plays including “kill shots” which landed opposing players on the sidelines. Compensation range depending on the hit.

Despite the lack of concern from players, it looks bad for the NFL. And as an Eagles fan, I can tell you that takes a lot. Clearly, the league is going to have to take some action. But what? And exactly how much bigger is this thing going to get?

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I think it’s fair to say that there will be fines. Some big fines. And possibly some suspensions. But will the players and the coaches even care? What do those potential fines and suspensions mean for players on the tax side?

You can’t generally claim lost wages as a deduction. This is especially true if the wages were payable based on specific performance of a task. So if I were paid by the hour and I expected to work 20 hours, and I only worked 10 hours, I can’t claim the difference as a deduction. Similarly, if a player’s contract pays by the game, and he is banned from six games without pay, then his paycheck is simply lower. He reports a lesser amount of income than expected and takes no deduction.

If, however, there were an actually penalty or a fine, the result could be different. In that case, assuming that the payment of the fine or penalty could be considered an “ordinary and necessary” expense, the affected player might be able to take a tax deduction.

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It would appear that, from all of the press coming out about the behavior, it was a lot more “ordinary” that we thought. According to the IRS, an ordinary expense is one that is common and accepted in your trade or business. Despite the public outcry and the NFL positioning on the matter, the practice seems to be a lot more common and accepted than it first appeared. If an argument can be made that it is, in fact, common and accepted, then the first hurdle is cleared.

The IRS defines a necessary expense is “one that is helpful and appropriate for your trade or business.” I think the players and the coaches involved in the behavior would argue that the incentives were both helpful and appropriate. If the goal was to prevent the opposing team from scoring, then knocking them out of the game would do it. Was that the only way to accomplish that goal? It doesn’t matter. The IRS has clarified that an expense does not have to be indispensable to be considered necessary.

And of course, if a player is fined and then doesn’t pay the fine or penalty, he can’t continue to play in the NFL and thus, continue to generate income from the business of simply being him — in that way, paying it is arguably a business expense.

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Interestingly, if this were the Canadian Football League (there is such a thing, eh?), the answer would be a lot more 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.” Note to self: those involved in potentially immoral yet not necessarily illegal activities should consider a move to Canada.

It’s worth noting that if behavior is found to be a criminal act and the player is required to a pay a fine to the government, the result would be different: that would not be deductible. You cannot take a deduction for fines, fees or penalties paid to the government as a consequence of breaking the law. That’s clear under sec 162(f) of the IRC which says:

“No deduction shall be allowed… for any fine or similar penalty paid to a government for the violation of any law.

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There are, as yet, no criminal charges. And as I’ve said before, the NFL, despite how highly it thinks of itself, is not the government. So for now, those players are in the clear on that score.

And finally, what about those payments for knocking out opponents? What does the receipt of those mean to the players? Amounts paid to players are income and should have been reported when received. Allowable or not by the NFL, legal or not, income is income.

Assuming that they’ve reported income properly and otherwise can claim any fines as related deductions, maybe the coaches and players won’t care so much about the fallout from this scandal. Will the fans?

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© 2012 Forbes.com

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