The Cautionary tale of Darryl Strawberry’s Battle with the IRS
Darryl Strawberry’s tax and financial troubles tell a cautionary tale about how professional athletes can become prime targets for the IRS. Strawberry, whose career ran from 1983 to 1999, is still battling the IRS, according to a Notice of Levy reportedly sent to HarperCollins Publishing for $405,522 in back taxes, penalties and interest. These tax issues came to light when Tracy Strawberry, Darryl’s third wife, filed a lawsuit in federal court against the IRS claiming they wrongly grabbed $50,000 from HarperCollins for Darryl’s 2009 autobiography, Straw, Finding my Way. Tracy claims the salary advancement should have been paid to her company, Straw Marketing LLC. At the heart of this story are two very interesting tax issues.
1. How is income from bonuses, endorsements, memorabilia sales and appearances reported to the IRS?
2. Does the IRS have the right to secure payment from a third party?
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. At the height of Darryl Strawberry’s career, his salary put him in the highest marginal tax rate of 35% with a self employment tax rate of 13.3% (10.4% Medicare and 2.9% Social Security). So every $1 earned from these sources was taxed at nearly 50%. When you include state taxes and penalties and interest for failure to pay taxes, you see the enormity of Darryl’s situation.How could proper guidance have prevented this scenario? 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. Of course, to be considered a deduction, the expense must be ordinary and necessary to the profession and the player must show proof of payment. If Darryl Strawberry had reported his self employment income but offset it with expenses, he would have been in compliance with tax law and would have also lowered his tax burden at the same time. Onto the next issue: does the IRS have the right to place a tax lien on the income earned from Strawberry’s autobiography when the salary advancement was paid to a third party—that is, Straw Marketing, his wife’s company? The practice of shifting income to avoid taxes is not new and there has been plenty of litigation in this area. As a result, the Strawberrys face several questions about Tracy Strawberry’s firm. As stated in the Supreme Court’s 1941 ruling in Harrison v. Schaffner, “One vested with the right to receive income did not escape the tax by any kind of anticipatory arrangement, however skillfully devised, by which he procures payment of it to another, since, by the exercise of his power to command the income, he enjoys the benefit of the income on which the tax is paid.”
So the Strawberrys must prove that Straw Marketing LLC is a legitimate business venture separate from Darryl Strawberry. To this end, Tracy Strawberry must prove that she and not Darryl had power over the proceeds earned from his book. If she can’t prove this, the IRS may place the lien on the proceeds from HarperCollins Publishing for Darryl Strawberry’s book. Whatever the outcome, it is clear that all professional athletes would benefit from proper tax guidance—especially when it comes to complying with federal and state tax regulations. Athletes are prime targets for tax audits, so they should seek professional advice before filing their tax returns. In many cases, a professional tax consultant can show the athlete tax strategies to minimize his tax liabilities. Darryl Strawberry, Pete Rose and Mike Tyson all learned the hard way: proper tax guidance today can prevent disastrous tax consequences tomorrow.
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