The Boss and the Estate Tax

From Paul Caron, my source for all things tax-and-sports, comes this discussion of whether George Steinbrenner, who died today at 80, saved his heirs $ 600 million in estate taxes by dying in 2010.

Have a look.

Five Thoughts on Dan Gilbert's Letter

After LeBron James announced that he will be signing with the Miami Heat, Cleveland Cavaliers owner Dan Gilbert responded by posting a furious letter on nba.com/cavaliers, an NBA website for the Cavaliers. Here are some excerpts from the letter, in its comic sans font:

Dear Cleveland, All Of Northeast Ohio and Cleveland Cavaliers Supporters Wherever You May Be Tonight;

As you now know, our former hero, who grew up in the very region that he deserted this evening, is no longer a Cleveland Cavalier. . . . You simply don't deserve this kind of cowardly betrayal. . . . In the meantime, I want to make one statement to you tonight:

"I PERSONALLY GUARANTEE THAT THE CLEVELAND CAVALIERS WILL WIN AN NBA CHAMPIONSHIP BEFORE THE SELF-TITLED FORMER ‘KING’ WINS ONE"

. . . I can tell you that this shameful display of selfishness and betrayal by one of our very own has shifted our "motivation" to previously unknown and previously never experienced levels. Some people think they should go to heaven but NOT have to die to get there. Sorry, but that's simply not how it works.

This shocking act of disloyalty from our home grown "chosen one" sends the exact opposite lesson of what we would want our children to learn. And "who" we would want them to grow-up to become. . . ,



Dan Gilbert
Majority Owner
Cleveland Cavaliers

There's a lot to digest here. First, the letter reads more like a high school break-up letter, or a tongue-in-cheek diatribe found in pro wrestling, or maybe even a piece we'd find on The Onion, than one seriously penned by a 48-year-old attorney and successful businessperson whose actions and words reflect not only himself, but also his franchise and the NBA. Using inflammatory words like "cowardly" and "betrayal" to describe a contractual decision by a person who's unquestionably abiding by the law and following NBA rules is both amusing and odd. I recognize the letter is partly an attempt by Gilbert to direct blame away from himself for losing Lebron, and on some level I applaud Gilbert for not hiding his true feelings, but he clearly could have accomplished those goals more graciously and effectively. If anything, the letter is counterproductive, since it makes Lebron seem like the rational, deliberative one.

Second, Gilbert's emphasis on loyalty is misplaced and hypocritical. LeBron James was a free agent whose contract had expired with a team -- a team, by the way, that he had clearly invested his heart and soul in for the last 7 years. The days of the reserve clause, which enabled teams to re-sign players to one-year contracts for as long as teams wanted, have long since ended; Lebron had every right to sign with any team. If Gilbert doesn't like athletes taking advantage of free agency, he shouldn't have bought an NBA franchise.

Also, if Gilbert truly cared so much about loyalty, why did he just try to persuade Tom Izzo to leave Michigan State, which Izzo's coached for the last 14 years, to coach the Cavs? In fact, why would the Cavaliers pursue any coach or player whose associated with another organization when the Cavs would be causing a breach of loyalty, an act of "betrayal"? Or is loyalty only a one-way street with the Cavs?

Third, if Gilbert is going to badmouth Lebron -- he's apparently told the Associated Press that Lebron quit on the Cavs in the 2010 playoffs series against the Celtics -- don't be shocked to see him hit with a slander lawsuit. Sure, slander is hard to show, especially with public figures and especially if the comments are more opinion than fact, but if Gilbert starts making specific claims that are exaggerations or fabrications, Lebron, like anyone in that situation, might be tempted to turn to the law.

Fourth, what NBA free agent is now going to want to sign with the Cavs when if they later leave they could be savaged by the owner (who only seems to care about loyalty when people leave, as opposed to join, the Cavs)?

Fifth, and lastly, where is the NBA on this? The Cavs' website is part of NBA.com. I understand that NBA teams have primary, though not exclusive, control over website content, but if the NBA is a single entity (as it claimed in its American Needle amicus brief), shouldn't it try to seize control over this situation, as the Cavs would just be a department of the NBA? Then again, maybe the league loves the drama and the fact that everyone's talking about it. But I could see at least some NBA owners finding the letter to be bad form, and we know from NHL v. MSG that leagues can exercise control over team pages on league websites.

Lebron James and his Big Decision: Thoughts on Role of Endorsement Income Potential and State Income Taxes

At 9 p.m. tonight we’ll find out where Lebron James – who at age 25 has already made $68 million in NBA salary and around $200 million in endorsement deals – will play for the next five or six years. It seems that he’ll select from one of four teams: the Miami Heat, the New York Knicks, the Chicago Bulls or his current team, the Cleveland Cavaliers.

What factors could be motivating his decision? A supposedly leading reason for James to sign with the Knicks is that he would attract better endorsement opportunities there than if he stayed in Cleveland or signed with Chicago or Miami. Is that true? Even if it is, do differences in state income taxes prove more valuable than differences in potential endorsement income?

As a starting point, it's safe to say that endorsement income is not as geographically contingent as it used to be. In fact, with the bevy of technologically contingent ways that we now follow sports – TV, websites, blogs, PDAs, video games, fantasy sports, etc. – it may not even matter which city one plays in.

James seems to illustrate this point. He earns at least $28 million a year in endorsements while playing in Cleveland, the mere 18th largest media market. Despite what would seem like a geographic disadvantage, James earns more in endorsement income than any other NBA player. Also, his most lucrative deals are with “A List” companies, including Nike, Sprite, McDonald's, State Farm, and Upper Deck.

To be sure, he would have attracted that same caliber of endorsement opportunities had he been playing for the Knicks or Lakers for the last 7 years. You might also argue that he would have had more local endorsement opportunities in New York City or Los Angeles. Fair enough.

Then again, there’s only so many endorsement deals that a player can enter into before the value of his endorsement becomes too non-exclusive or non-special. Besides, it isn’t like we haven’t been able to watch James whenever we want while he’s been in Cleveland; we're not in 1980 anymore with no internet/cable etc.

Geography might matter more in another way: state income taxes, which vary a great deal. Some states, like Florida and Texas, have no state income tax, while others, like New York and California, impose relatively heavy tax burdens, especially on high-earners. Signing with a team that plays in an income-tax free state does not mean the player completely avoids paying state income taxes. Taxes are generally allocated based on where games are played, so when a player plays a road game in a state that has an income tax, he would be obligated to pay a state income tax for income related to that game. Still, he would not pay income taxes for all of his home games or games in other states which lack a state income tax.

While state income tax rates are probably not at the top of the list of deciding factors for James, they are meaningful in a financial sense. In Florida, James would not pay a state income tax for his home games; in Illinois, he would pay a 3.0% state income tax, in New York, he would pay an 8.97% state income tax. Assuming, for the sake of argument, that James earns about $16.8 million in 2010-11 in a max free agent contract, about half of that income – the income for home games – would be subject to state income taxes should he sign with the Knicks or Bulls. More specifically, he would pay $753,480 to the New York state treasury if he signs with the Knicks or $252,000 to the Illinois state treasury if he signs with the Bulls. He would keep his money, at least from the hands of state government, if he instead signs with the Heat.

Or James could decide to stay with the Cavaliers. In that case, he would earn more in a contract (about $20 million in 2010-11) because teams can re-sign their players for more than other teams can sign them. He would, however, be subject to a 6.24% Ohio state income tax on about half of his income, meaning his state income tax burden would be about $624,000.

Actual income tax calculations would of course be much more complicated than depicted above, especially when factoring in playoff games, road games in states without an income tax, deductions and other forms of state and local taxes, which are on the rise in most states, most acutely in New York. And no matter where James plays, he’ll be paying the federal government to the tune of a 35% marginal tax rate.

Nevertheless, the impact of state income taxes is real, and should James take less to sign with the Heat over the Knicks, a reduction in salary may be offset by the lack of Florida state income tax. It's also not clear that going to the biggest media market means better endorsement opportunities, at least not now-a-days. Plus, if James joins Dwayne Wade and Chris Bosh in Miami, and proceeds to win 75 regular season games and an NBA title possibly every year they're together, I'm sure there would be plenty of endorsement opportunities.

My thanks to my Vermont Law School colleague and good friend Jason Czarnezki, with whom I had a fun discussion about this topic the other day and whose comments were very insightful. Jason co-runs a great blog called Czarnezki.com.

Update: Paul Caron at TaxProf Blog has a good post discussing detailed numbers compiled by Kyle Gillis of the Business & Media Institute for the likely tax consequences. The take-away from Professor Caron:

Here are the projected state and local taxes on a five-year, $96 million contract:

• $12.34m: New York Knicks
• $10.32m: New Jersey Nets
• $5.69m: Cleveland Cavaliers
• $2.85m: Chicago Bulls
• 0: Miami Heat

Interesting stuff, though the numbers don't tell the whole story for a few reasons.

First, James would be able to sign for about $25 million more with the Cavaliers on a 5-year contract because the NBA pay scale provides large financial incentives for free agents to stay with teams.

Second, if James, as expected, signs with the Heat, he'll have to sign for something of a discount in order for he, Wade, and Bosh to have contracts with the Heat that stay under the NBA's salary cap.

And third, the Florida tax break would only enable him to avoid paying taxes for Heat games played in Florida; road games in other states would still be taxed under those states' income taxes. Still, the Heat contract would likely be in the neighborhood of $90 million, and with the Florida tax break still partially benefiting him, he would probably still end up making more with the Heat than if he were to sign with the Knicks.

Update 2: Professor Edward Zelinsky, a tax law expert at Cardozo Law School and contributor to the Oxford University Press blog, lets me know of an added tax wrinkle to Lebron's Choice:

[It's] potentially even more complicated. Suppose that LeBron plays in Miami but maintains his residence in Ohio. In that case, Ohio still taxes his entire income, giving credit for taxes paid to other states. If, however, LeBron becomes a Florida resident, he also benefits from state tax-free treatment of his investment income.

If there's a law student out there looking for a law review/journal note topic, the dynamics of an NBA superstar free agent contract might be a good one. Between the coordination of individual free agents (Wade, Bosh, and James seemingly collaborating) and the tax and economic considerations, there would be a lot to write about and it would be new ground for sports law scholarship.

Update on Kobayashi's Contract Issue

Calorielab.com has just posted a new piece on the contract issues between Kobayashi and Major League Eating (MLE). The article gives more details on the potential contract issues involved, raising issues that test the legality of the arrangements. To get a background, read my earlier piece here.

The article sums up the contracts signed between competitions and an MLE-related organization, the World League of Competitive Eating (WLOCE). They restricted any competitive eater from appearing in non-sanctioned events (no surprise there), but also requires that the sanctioning body be appointed the competitor's agent with regarding to any paid appearances, endorsements or merchandising, giving the WLOCE 20 percent of the gross for any such activities. Additionally his image can only be licensed by the WLOCE.

If this is true (and we do not know for sure), I would be counting the days before litigation begins.

Competitive Eating and Uncompetitive Contracts

The arrest of competitive eater Takeru Kobayashi for apparently entering the stage after the conclusion of the annual July 4th Nathan's Hot Dog Eating Contest at Coney Island received considerable coverage in the mainstream press. Kobayashi, a world-class competitive eater and former Hot Dog Eating Champion was not eligible to compete because of a "contract dispute" between him and Major League Eating ("MLE"), the governing body of the sport.

I won't focus on the arrest and the charges filed, but the contract dispute intrigues me. Based on reports here and in Japan, Kobayashi claimed that the MLE sought to change its contract restrictions regarding out-of-competition income. According to CalorieLab.com, which has covered the story here and here, Kobayashi, who has earned endorsement income from deals with MasterCard, Coors Light and Western Canadian Lottery claimed that the revised contract prohibits him from earning any outside endorsement income, while prior agreements only limited his right to compete in non-MLE sanctioned earning contests in the United States and Canada.

Despite not having access to the particular contract terms [if anyone has a copy, please upload a link], Kobayashi has a legitimate argument that the agreement is anti-competitive if it strips him of the right to earn endorsement monies. The question is how restrictive it is. I think a court would allow a restriction on companies that directly compete with MLE sponsors, but if it precludes any endorsements because of the possibility of a conflict, then it is severely restrictive. I do not see how this would fall the rule of reason test, especially in a sport which does not pay winning contestants large amounts of money. Also, a good case can be made that the MLE is the "relevant market" for competitive eating (as the major league of the sport). If it would go to trial, I think it's a good bet that a court and a jury would look skeptically at such restrictions. In fact, another well-known competitive eater, Sonia Thomas, has to work as a manager at a Burger King because her earnings from competitions are not enough to sustain a living.

I would even find some question under traditional contract law. Given that Kobayashi popularized the hot dog eating event from a unknown localized stunt years ago to an ESPN-covered staple of July 4th, with tens of thousands braving the heat to attend, MLE may have utilized economic duress (threatening to prevent him from competing in the leading eating competitions) to force him to accept a one-sided restriction, thereby ending his claim to fame and much of his livelihood. Unconscionable perhaps? A tough order, I realize, but an argument that merits at least some consideration.

I'll be watching this case and if I find a copy of the proposed contract I will update the post.

Theo Epstein, Juris Doctorate, Best GM in Baseball

Thirty years ago, Red Sox general manager Theo Epstein probably wouldn't have had the chance of becoming a big league GM. That may even have been true 20 years ago.

He never played or coached professional baseball, college baseball, or even high school baseball, was never an agent, and he got his break while an undergraduate student at Yale University (where he served as sports editor of the Yale Daily News) when he snagged a press internship with the Baltimore Orioles.

That doesn't seem like a likely path to becoming a big league GM, especially by the age of 29, but Epstein -- who also completed his law degree at the University of San Diego School of Law while simultaneously serving as Director of Baseball Operations for the San Diego Padres -- managed to pull it off.

In fact, not only did he become a GM, but two World Series championships later, he's emerged as one of the best. According to an anonymous poll of 12 GMs conducted by Buster Olney, Epstein is the best GM in baseball. Here's the excerpt:

IF YOU NEEDED A GM, WHOM WOULD YOU HIRE? - Epstein (8 out of 12 votes) "Theo's career has been helped by being in Boston, but I think that if you had put him in Kansas City five years ago, they'd be pretty good right now. If you were an owner, it would be hard to find someone better."

If its true that earning the respect of one's peers is the best measure of one's success, then Epstein's done extremely well. While it's hard to know if Epstein's legal training has helped him as a GM, I would venture a guess that it has. As anyone who attends or has attended law school knows, law school is extremely challenging and it forces people to be specific, use logic, and avoid reaching conclusions without explaining one's reasoning. I imagine when thinking about trades and player contracts, and drafting players, those are helpful attributes, even if they might make people occasionally seem less decisive.

Hopefully we'll see other law school grads who lack personal athletic achievement enter and excel in the professional sports world in management positions. Epstein of course isn't the only law school grad who's achieved success in team management -- Celtics Assistant GM Mike Zarren, a 2005 graduate of Harvard Law School, is one that immediately comes to mind, as does Sacramento Kings Assistant GM Jason Levien -- but he's probably had the most success, at least so far.

Did Kagan bury the umpire analogy? Maybe

As Mike notes, Elena Kagan took on the judge-as-umpire/ball-and-strike meme yesterday in response to a question from Sen. Klobuchar and knocked it out almost as successfully as she could. No transcripts to be found, but here is the video and some thoughts after the jump.

1) Kagan said it was apt in saying that judges, like umpires, should not have a "team in the game," should not come onto the field rooting for one team over another.

OK answer, although she lost points for not using the Twins in her hypo in response to a question from a Senator from Minnesota.

As I have argued before, to the extent this is what the metaphor means, it does no work. No one believes a judge should be "rooting" for one party over another and we don't need an analogy to baseball to drive the point home. Besides, no one seriously believes an umpire "roots" for one team or that a judge "roots" for one party.

But there's more something going on here, tied to the complexity of law and the fact that different judges can reach different conclusions (which Kagan talks about later). An umpire may not be rooting for a particular team, but an umpire who interprets and enforces certain rules a certain way may benefit one team over another. An ump with a wider strike zone will make calls more to the benefit of a team with control pitchers who work the outside corner; an ump with a narrower zone benefits teams with patient hitters who work counts. Similarly, I would not say that Justice Scalia "roots" for the government in a challenge to abortion laws. But given that his reading of the relevant (far-less-determinate) rule is that Due Process does not provide a liberty to obtain an abortion, he is likely to find for the government in any challenge to a restriction on abortion. That does not mean Scalia is biased towards the government any more than it means Umpire X is biased towards the team with patient hitters. And it does not make their approach to law illegitimate. But the nature of the legal rules is such that one party always will benefit from that person's legal views. This is why you cannot evaluate anything solely based on outcomes.

2) Kagan also said the metaphor is right (and she believes this is what Roberts meant) in saying that judges must understand that they, like umpires, are not the most important people in the game. Policymakers (Congress and the Executive) are the more important players in the game, with judges playing the limited role of policing the constitutional boundaries of congressional and executive action and conduct.

I did not like this part of the answer, in part because it could give the metaphor new, different life. Neither courts nor umpires play a limited role. Umpires necessarily are involved in every single play--not one pitch is thrown in a baseball game that does not result in at least one pro forma call on the play. Moreover, I never read Roberts as using the analogy to say that judges should not vigorously exercise the power to police the constitutional boundaries; certainly his behavior on the Court does not indicate a belief in according great deference to the elected branches. So I hope the metaphor does not become a catchphrase for more constrained judicial review.

Plus, it's just wrong. Umpires don't "decide" the game--who wins and loses. That is done by the players who throw the ball, catch the ball, and hit the ball. So, sure, umpires are secondary to the players on the field. But judges (at least in non-jury cases) do decide the case; it is their job to determine who wins and who loses in litigation that has been brought before the court. So judges, of necessity, are a major player in litigation. As I argued in my LSA panel on the metaphor: We could have a baseball game without umpires and we would understand it to be baseball, but we could not have litigation or adjudication without judges.

3) The metaphor fails at the task for which many Senators and others (not clear if Roberts falls in this group) have put it: Making judging appear simplistic and law clearly determinate such that any judgment is unnecessary and, in fact, bad. Quoting in full:

 [T]he metaphor might suggest to some people that law is a kind of robotic enterprise. That there's a kind of automatic quality to it. That it's easy. That we just sort of stand there, and we go "ball" and "strike" and everything is clear cut, and . . . there's no judgment in the process. And I do think that that's not right, and it's especially not right at the Supreme Court level, where the hardest cases go, and the cases that have been the subject of the most dispute go. . . . Judges do in many of these cases have to exercise judgment. They're not easy calls. . . . But we do know that not every case is decided 9-0 and that's not because anyone is acting in bad faith. It's because those legal judgments are ones in which reasonable people can reasonably disagree sometimes. . . . [L]aw does require a kind of judgment, a kind of wisdom.

It would have been nice if she also acknowledged that even umpires do not just go "'ball' and 'strike'" and that they exercise interpretation and judgment as well. Thus the broader point is that no decisionmaking is robotic or automatic and we should stop acting as if it ever is. Part of what always has bothered me about the metaphor is that it is based in the first instance on a misunderstanding of what umpires do.

Otherwise, this answer was spot-on in explaining why the metaphor does not work--rules always must be interpreted and judgment exercised. Stop pretending the rules are easy, mindless, or clear, obvious, and determinate. And stop acting as if a decision with which you disagree was illegitimate or based on person preferences (that accusation was a recurring theme towards any justice or decision with which a questioning Senator disagreed).

Is the metaphor gone forever? I doubt it. I expect to hear it repeated in the committee and floor debates on Kagan, as well as in the hearings on Obama's next nominee. But Kagan started to lay out a pretty good map of how to attack the analogy--certainly as much as is possible in the current (unfortunate) political context.