Tax Court did not err in denying taxpayers’ $10.7 million deduction for deferred compensation that it owed to two of its NBA basketball players at close of its 2012 tax year. Under 26 USC section 404(a)(5), accrual-based taxpayers, such as instant taxpayers, can only deduct deferred compensation expenses in tax years when they pay their employers such compensation or contribute to certain qualified plans. Record showed that taxpayers sold Vancouver Grizzlies basketball team in 2012 under circumstances where it still owed deferred compensation to two of its players, and where new owners assumed taxpayers’ $10.7 million deferred compensation liability. Taxpayers viewed $10.7 million amount as “deemed payment” to new owners to compensate them for assuming deferred compensation obligation, and that Treasury Reg. 1.461-4(d)(5)(i) allowed them to treat new owners’ assumption of $10.7 million deferred compensation liability as ordinary business deduction at time of 2012 sale. Ct. of Appeals, though, found that section 404(a)(5) of Tax Code, as more specific statute, barred taxpayers from claiming instant deduction for deferred compensation in 2012 tax year, because taxpayers had not paid basketball players their deferred compensation during that year.
Federal 7th Circuit Court
Civil Court
Income Tax