Curt Schilling’s Investment Failure Represents the Latest Example of the Unique Financial and Tax Implications Facing Professional Athletes
Curt Shilling pitched 20 years in the major leagues and recorded 216 wins, two World Series titles, and millions of dollars in total earnings. Earlier this month, it was announced Schilling lost a majority of his savings. Turns out he owned 83% of 38 Studio, a video game company that filed for Chapter 7 bankruptcy protection in Delaware, listing nearly $151 million in liabilities and only $21.7 million in assets. Reuters reported the bankruptcy may cost Schilling his entire baseball fortune.
With the National Hockey League (NHL) and National Basketball Association (NBA) entry drafts being held at the end of June, over 270 promising individuals will be selected to potentially play in their respective leagues. Nearly all of these young athletes have visions of successful professional careers with financial security. However, even for those few who actually make it to the NHL or the NBA, financial security is not guaranteed as they face a multitude of financial and tax issues that put them in a high risk category.
Schilling, along with former NBA standout Allen Iverson who has reported financial difficulty and former Major League Baseball (MLB) All-Star Darryl Strawberry who owes substantial back taxes, penalties and interest, all represent a cautionary tale for professional athletes. A March 2009, Sports Illustrated article, “How and Why Athletes Go Broke,” states that by time NFL players have been retired two years, 78% have gone bankrupt or are under financial stress because of joblessness or divorce–and within five years, an estimated 60% of former NBA players are broke.
This article addresses the unique financial and tax pitfalls athletes face and presents strategies to protect athletes from financial disaster.
One of the biggest concerns for financial advisors is the large signing bonuses and base salaries athletes receive at young ages. Unlike other professions, where people have a lifetime to become accustomed to the wealth their careers generate, professional athletes earn the majority of their wealth early in their lives over a relatively short period of time.
Additionally, athletes face misguided influences from family, friends, and financial advisors who do not have qualified backgrounds. According to the NFL Players Association, at least 78 players lost a total of more than $42 million between 1999 and 2002 because they trusted money to financial advisors with questionable backgrounds.
Many athletes are so focused on the present that they fail to consider their financial futures. This lack of financial planning is especially detrimental in a profession whose life expectancy is substantially shorter than all other careers. According to QuantHockey.com, “Over half of all NHL players play less than 100 games during their career and for approximately 5 percent of players, their first NHL game is also their last.”
Also, as in the case of Schilling, athletes take unnecessary risk with private investment deals. In the same March 2009, Sports Illustrated article, Steven Baker, an agent who represents 20 NFL players noted that, “Disreputable people see athletes’ money as very easy to get to.” In May 2007 former quarterbacks Drew Bledsoe and Rick Mirer and five other NFL retirees invested at least $100,000 apiece in a now-defunct start-up called Pay By Touch—which touted “biometric authentication” technology that would help replace credit cards with fingerprints—even as the company was wracked by lawsuits and internal dissent.
Brian Katz, a wealth management advisor with Merrill Lynch who works closely with professional athletes, notes that athletes risk losing their wealth if they don’t invest in themselves outside of their athletic careers. This includes carefully screening all professional advisors, staying involved in decisions, understanding the parts of each professional’s job, and being realistic about the lifestyle they live during and post career.
Katz stresses he always assumes the current contract is the last one and asks each client: “if this is all the money you ever make from your career, what are the priorities?” From the beginning, he works with athletes to plan for the transition out of sports and into another profession. He also finds that if athletes take time to understand the “whys” of what is being recommended, they are more likely to stay focused on the big picture.
Because athletes perform services in multiple jurisdictions, they are susceptible to many potential hazards when it comes to complying with international, federal and state income tax regulations. As government agencies strive to increase their tax revenue, many have focused on the ‘jock tax,’ which taxes nonresident athletes earning income within their jurisdictions. Although states that tax non-residents must also provide tax credits to their own residents for non-resident tax payment, this practice still remains profitable. In a 2006 study I conducted, which was published in the Marquette Sports Law Review, I determined that 12 of the 14 states that tax non-resident MLB players profited by implementing the ‘jock tax,’ increasing their overall tax revenue by 11%.
In addition to exposure to non-resident taxation, athletes and their advisors should be aware of resident taxation issues on both the international and state levels. In many cases, an athlete will perform services in a country or state where residency may be determined differently than in their home country or state. When this occurs, the opportunity for double taxation also occurs.
Another threat facing athletes is that many do not understand what constitutes income and allowable deductions. Income received from bonuses, endorsements, memorabilia and appearances is taxable at the marginal tax rate. If the income is received from a source other than the player’s team and with no taxes withheld, it must be claimed as miscellaneous income and the athlete must pay federal, state, and self-employment tax on it. Although miscellaneous income is taxed at the marginal tax rate and is subject to self-employment tax, there are ways to minimize an athlete’s liability on this income. For example, athletes may deduct expenses that are directly related to the income, which lowers the taxable income by the same amount as the expense.
Athletes are prime targets for tax audits, so they should seek professional advice before filing their tax returns. Under the Internal Revenue Code §6501, the IRS can audit a return filed within the last three years, however if a substantial error has occurred (such as the omission of additional income), the IRS may go back six years, and if a fraudulent return or no return was filed, they can go back forever. In many cases, a professional tax consultant can show athletes tax strategies that will minimize their tax liabilities. Darryl Strawberry, Pete Rose and Mike Tyson all learned the hard way: proper tax guidance today can prevent disastrous tax consequences tomorrow.
In conclusion, athletes at all levels face these same issues and need financial and tax guidance from an individual who is well educated and has specific knowledge and experience working with professional athletes. Athletes: seek out qualified individuals for guidance and double check their credentials. Don’t be afraid to ask who they have advised in the past and to outline a game plan for your finances and your tax exposure. Trusting a one-stop-shop that offers representation, financial management and tax preparation may be convenient, but it doesn’t give legitimate check and balances between the three. You face many obstacles on the playing field, be sure you put forth the same diligence when selecting your tax and financial advisors.
For more information on athletes’ unique financial and tax requirements, please contact me at 585-705-3405.
ALAN POGROSZEWSKI is an Assistant Professor of Sports Studies at St. John Fisher College and the President of his own tax consulting business whose clientele include professional athletes performing services on three separate continents. Prior to accepting his position at St. John Fisher College, Mr. Pogroszewski was the Vice President of Business Operations for Sports Consulting Group, a firm that specializes in the representation of professional hockey players. Mr. Pogroszewski received his M.B.A. from Rochester Institute of Technology in 1996 and his M.S. in Taxation from St. John Fisher in 2003