Editor: Could you please describe your practice and client base at Amper, Politziner & Mattia, LLP?
Raiola: Our Sports and Entertainment Group practice focuses on the needs of high-net-worth individuals in these industries who have a demanding work life and require professional help in maintaining their finances. We provide tax services including multi-state, international and cross-border transactions; financial services; wealth planning; and life management services such as assistance in making significant purchases, for example, real estate or vehicles.
Most of our clients are individual athletes - both established professionals and up-and-coming players - across the four major sports leagues. Our client base also includes those on the management side, such as team executives and coaches, and other professionals in the industry, such as broadcasters and publicists.
We act as financial quarterbacks by overseeing both our clients' day-to-day financial activities and long-term financial goals. Our clients can focus on their job on the field knowing they are taken care of off the field. The joke is that "NFL" stands for "Not For Long" rather than "National Football League." All athletes, not just football players, need to realize that one day their careers will end. As part of our practice, it is our responsibility to make sure they are financially prepared for that day and all of the days that come after.
Editor: Many of our supporting law firms have sports law practices. How do you interact with the lawyers at the firms who represent the players that you represent?
Raiola: Many sports agents are lawyers, so I work with them as a team to serve our mutual clients. We provide our respective expertise separately and then work together where our professional experience intersects. I do not negotiate contracts, for example, but I am often called upon to analyze the tax aspects of a contract. For instance, a baseball player hired by the Yankees this off-season received a large contract. Income taxes may increase in 2010, but will they increase in 2009? Should the taxpayer accelerate income recognition with some of the money in 2008 or 2009? These are questions we raise about the tax implications, and we offer guidance on the contract language needed to address them. I also work with lawyers on pre-nuptial agreements, personal legal matters and things of that nature for my clients.
Editor: Could you discuss what tax guidance you provide the athletes generally, such as bunching itemized deductions?
Raiola: Tax compliance and planning are a key part of our services. We always look at ways to minimize taxes. For our sports clients, paying agent fees basically every other year of a multi-year contract is an example. Employee business expenses, such as agent fees, need to exceed two percent of adjusted gross income, so if an athlete signs a million-dollar contract, his miscellaneous expenses need to be greater than $20,000 to be deductible. Therefore - assuming an agent and a player agree - if a player has a two-year deal of a million dollars each year and the agent fee is $50,000 annually, he would receive greater benefit by "bunching" these deductions and paying the whole agent fee at once, in this case $100,000 in either year as opposed to $50,000 each year.
With the severe economic crunch and revenue shortfall that many states are experiencing, a hot area for us with our clients is minimizing state taxes while adhering to all the different state laws. If you or I were to travel to California on business, technically we would be responsible for paying taxes on our income in California. But we are not as high profile, highly paid and easy to identify as the professional athletes, so while California may not pursue us to ensure we paid the proper income tax, they may, like several states do, pursue these athletes. California and New York seem to be taking the lead on this.
Editor: Along the same lines, could you discuss the tax issues that arise when an athlete resides in a different state than where his or her team is domiciled?
Raiola: Take a professional baseball player who is a resident of South Carolina and plays for the Arizona Diamondbacks. We look at facts and circumstances to determine where he is a resident. Is he a resident of Arizona where the team plays, or is he a resident of South Carolina, where he may have a home and a driver's license and is registered to vote? Most states have a rule about the number of days that you spend in state as part of the way to determine residency. For example, New York's rule states if you spend more than 183 days and maintain a place of abode in New York, you are deemed to have a New York domicile for tax purposes and therefore are a New York resident even if your home is somewhere else. This may result in dual residence status and significant tax implications. Obviously, everybody hears that there are ways to minimize taxes by residing in a no personal income tax state such as Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Additionally, New Hampshire and Tennessee limit their state income taxes to interest and dividend income only. It is not just having a residence but indeed having your true home there.
Another complex issue that arises with our clients is how to take tax credits from state to state. For example, if an athlete resides in South Carolina but plays games in 15 different states, most of the taxes he pays would be creditable to South Carolina where there is a seven percent rate. However, a state like California has a higher tax rate, so even though, say, as much as 10.3 percent could be paid to California, he would only get a credit of seven percent in South Carolina.
Editor: Athletes and entertainers sometimes set up charitable foundations. Please describe the pros and cons of their doing so.
Raiola: In addition to giving back to the community, a pro in setting up a charitable foundation realizes a tax benefit through the charitable deduction. An athlete with a windfall income of 20 million dollars could donate a million dollars to a foundation he set up as a 501(c)(3) charity and receive a deduction for that, even if the foundation has not yet decided which organizations will receive a donation. Athletes or entertainers can donate the money to their foundation and get an immediate write-off. They do not have to give the money out in year one to get the deduction. The foundation also provides a central point for the athlete's charitable giving so that he or she won't have to field solicitations from multiple charities.
Our client's desire to build a legacy is understandable but the drawbacks of a foundation need to be considered too. For example, the foundation's books and records are subject to inspection by anyone at any time. Therefore, the foundation's funding and staffing need to be properly handled so that the organization can sustain its charitable mission and not come under negative scrutiny. Some athletes think a foundation will allow them to assign positions to family and friends. However, while we encourage charitable giving and applaud their generous intentions, we look at all options. Often our clients can still give back and achieve the same charitable benefit tax-wise by donating money directly to existing, worthy charities, and then we can discuss other ways to assist their loved ones financially.
Editor: What general long-term financial advice do you provide athletes who will certainly live many years beyond their active sports careers?
Raiola: I often use a cliché: a failure to plan is a plan to fail. If you do not properly plan, you may not be able to sustain your desired lifestyle post retirement. We advise our clients to live within their means and follow a budget. Sports careers are generally short-lived so athletes must plan for what they want to do after they retire. They have to realize their best investment vehicles, even in today's economy, may well be stocks and bonds rather than a Porsche and a Ferrari.
Editor: What are some ways in which athletes may earn collateral income, such as endorsements, licenses, personal appearances, etc.?
Raiola: In this economy, the endorsement market has dried up significantly, except for perhaps some smaller local or regional deals. Only a small pool of players in each sport makes a significant number of endorsements. Some players look to shelter their endorsement income by setting up a corporation. However, this process is often not worth it because they are not generating a lot of endorsement income. Instead, we will set up a Loan-Out corporation for the client where the athlete "loans" his or her services to his own corporation. The outside world conducts business with the athlete's corporation, and then the corporation pays the athlete's "salary." The athlete must be sure to comply with all the tax requirements and be certain that there's a Loan-Out agreement in place between the athlete and his corporation for services rendered.
Editor: What are the greatest challenges you find in working with sports clients?
Raiola: It is a huge challenge to convince clients to monitor their finances from the start, protect themselves now and plan for their second career. Our athlete clients are highly competitive, highly confident and highly compensated, and they almost believe they are invincible. We give them a reality check so they realize the paychecks and signing bonuses won't be there forever. We work with them closely to curb their desire to overextend themselves financially, especially when it comes to loved ones, and to ensure they live within their means. In addition, we guide them on proper insurance protection for their assets, possessions and most importantly, themselves. For example, for athletes entering a professional sports draft, we recommend they look into purchasing disability coverage from the beginning of their last amateur season through their signing of a professional contract. Once a client enters into a long-term contract with a team where the money is guaranteed, we would work with them to determine what coverage may be needed.
The initial challenges in persuading clients to understand the benefits of our approach are easy to overcome because they quickly realize we are dedicated to working in their best interest. All of our Sports and Entertainment Group's services are geared toward helping them reap the rewards of their success now while managing their finances for the future.