In Uncategorized on 02/23/2022 at 18:04

I haven’t followed pro basketball since Clyde Frazier and Dave DeBusschere, but today Judge Nega follows the careers of Zach Randolph and Michael Conley, two millionaires whose untaxed millions are cause for the jumpball between IRS and Hoops, LP, Heisley Member, Inc., Tax Matters Partner, T. C. Memo. 2022-9, filed 2/23/22.

Hoops formerly owned the Memphis (ex-Vancouver) Grizzlies of the National Basketball Association, whose principal activity was once described as “every twenty-four seconds ten millionaires jump in the air.” Messrs. Randolph and Conley were, prior to and in the year at issue, employed by Hoops under the terms of the NBA Uniform Player Contract.

In that same year, Hoops sold out, owing Messrs. Randolph and Conley deferred compensation (all fully-earned and not subject to substantial forfeiture, but unpaid) of some $12.6 million, but discounted to present value at year of sale of $10.673 million. The buyer assumed all the obligations of Hoops, including, but in no way diminishing, limiting, or abridging the generality of the foregoing, the aforesaid $12.6 due the gentlemen aforesaid.

Hoops filed its Form 1065 for year at issue without deducting the $10.673 as wages. They amended to do so, whereupon IRS whanged them with a FPAA. Hoops claims asymmetry: they have to pay tax on the COD for the $10.673 (Hoops is off the hook for the $12.6 ultimate payoff), but that was wages to Messrs. Randolph and Conley.

Despite some really ingenious argy-bargy by their trusty attorneys, whose shoes pass the Mark 9:3 test, Judge Nega and Section 404(a)(5) are too much.

Section 404(a) says if deferred compensation would be deductible (like wages), same can only be deductible subject to the limitations of Section 404(a).

“Section 404(a)(5) provides that, in a case of a nonqualified plan, a deduction for deferred compensation paid or accrued is allowable for the taxable year for which an amount attributable to the contribution is includible in the gross income of the employees participating in the plan.” T. C. Memo. 2022-9, at p. 8. Everyone agrees that the NBA plan is nonqualified.

Of course Hoops is an accrual-basis taxpayer, thus bringing in Section 461.

Ascertainable amount (check), there is in fact a liability (check), and economic performance has taken place (all-events: check). So there would be a recognizable tax event.


“The regulations under section 461, however, further instruct that if, as here, the taxpayer uses an accrual method of accounting, ‘[a]pplicable provisions of the Code, the Income Tax Regulations, and other guidance published by the Secretary prescribe the manner in which a liability that has been incurred is taken into account.’ Treas. Reg. §§ 1.461-1(a)(2)(i), 1.446-1(c)(1)(ii)(A). Thus, under the regulations,  the initial question is whether another provision of the Code or the Regulations prescribes the manner in which the deferred compensation liability is taken into account.” T. C. Memo. 2022-9, at p.10. (Citations omitted).

Enter Section 404(a(5).

“… section 404(a)(5) is the applicable Code provision that governs the deductibility of and prescribes the manner in which a deferred compensation liability is taken into account. Under the plain text of section 404(a)(5), a deduction for deferred compensation is taken into account only for the taxable year in which an amount attributable to the contribution is includible in the gross income of the employee and then only to the extent allowable under section 404(a). See Treas. Reg. § 1.404(a)-12(b)(1). T. C. Memo. 2022-9, at p. 10.

The statute aims to match payment (and deduction thereof) by the employer with receipt by (and payment of tax by) the employee.

Hoops was let off the obligation to pay Messrs. Randolph and Conley, so that’s part of the gain on the sale.


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