SQUEEZE PLAY

Professional athletes have become easy targets for tax auditors. And some pro players are challenging the way Illinois calculates the income taxes they owe
by Mark Brown
Illustration by Mike Cramer
G reg Maddux won 20 games as a pitcher for the Chicago Cubs in 1992 and promptly skipped town as a free agent to make more money. In the years since, Maddux has nearly tripled his salary while haunting the Cubs and their fans by piling up World Series appearances and Cy Young Awards for his new team, the Atlanta Braves. Every October, Cubs fans are forced to watch Maddux compete in the postseason while their own boys in blue have long since gone home to practice their golf swings. But for those who believe in the saying that revenge is a dish best served cold, take heart: Maddux is still being hounded by the Illinois Department of Revenue over how much he owes in income taxes from his days as a Cub.

Maddux is among 45 professional athletes involved in disputes with the revenue department over their income taxes. Nearly all of them are former members of Chicago sports teams. Maddux’s former Cubs teammate Andre Dawson has brought a case, as have at least two former members of the Bulls’ championship squads, Dennis Rodman and Ron Harper. The ballplayers are challenging the unique method this state uses to calculate income taxes for athletes who play for Illinois teams but maintain primary residences in other states. For some athletes, the system results in double taxation — being taxed by two states on the same income.

Few have sympathy for professional athletes on matters involving money, and Greg Maddux isn’t likely to be adopted by the Illinois General Assembly as a poster child for tax reform. But hard feelings over highly paid free agents aside, Illinois’ system of taxing pro athletes deserves a second look by the legislature, considering the way it meshes, or doesn’t mesh, with athlete taxation in other states.

The underlying problem is that in the past decade athletes have become easy targets for tax auditors across the country. As sports salaries soared, nearly every state with a professional team — and some cities — decided to collect a “jock tax”— an income tax on visiting athletes. The practice has become so ingrained that the city of Pittsburgh is financing a new sports stadium partly with the cash flow from its jock tax.

Jock taxes rely on a well-established legal principle that states may tax nonresidents on income received for services performed within their borders. This rarely is called into question for the typical taxpaying businessperson who makes a few out-of- state work trips a year. Going after that money isn’t always practical for the states. Taxing visiting athletes, on the other hand, has proved a fairly simple way to garner substantial sums of money because there isn’t a lot of investigation needed to figure out how much is owed.

Players’ salaries are published regularly in the newspaper along with the team schedules. The schedules allow state tax auditors to calculate fairly simply the number of “duty days” an athlete spends working in their state. The athletes are then taxed on the portion of their total salary earned in that state. Auditors can just run the raw information through a computer and send out a bill. As a result, athletes found themselves paying income taxes in a dozen or more states or cities, depending on their sport. Teams were soon required to withhold the money from the players’ paychecks.

The controversy cropped up in Illinois when the legislature set out to exact retribution, not on Maddux or any of his cohorts, but on the state of California and its pesky tax bureaucrats. After the Chicago Bulls won their first world championship in 1991, it was publicly reported that California had dunned the Bulls’ play-ers for a portion of their earnings. In response, Illinois officials approved a law in 1992 that became known infor-mally as “Michael Jordan’s Revenge.” The law was purely retaliatory in that it applied only to players from states that taxed visiting athletes. In effect, the legislature said: “If you tax our guys, we’ll tax yours.”

In and of itself, Jordan’s Revenge wasn’t much of a problem for Illinois

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No other state follows this proce-dure, a distinction that doesn't deter Illinois officials. They argue they're the only ones taking a sensible approach. Their argument is that other states should simply adopt Illinois' method and tax their own athletes and leave the visitors alone, dispensing with the costly and confus-ing system in which every state takes its own piece of everybody's paycheck.

There is certainly some theoretical merit to Illinois' argument.

"Actually, it really is a solution to the problem, but unfortunately, Illinois is the only state doing it that way," says Fred Marcus, a Chicago tax attorney who is working with the issue on behalf of the Major League Base-ball Players Association. A few years ago, the players' union and a major accounting firm got nowhere when they tried to convince other states to adopt a uniform system for taxing athletes that approximated the Illinois approach. The politics of getting everyone else to give up their jock tax proved totally impractical. "You 'll never see that happen," Marcus says. That leaves Illinois as the stubborn lone wolf, aware of the athletes' situation but not particularly sympathetic.

"I understand what they're saying, but I think we are enforcing the law the way it is written right now," says Keith Staats, the revenue department's chief counsel. "That's what the law says. I think we're enforcing it in a correct fashion. I think we have a fundamental difference of opinion here."

So what do people do when they have a fundamental difference of opinion? Go to court, of course. With the backing of the baseball players' union, former White Sox relief pitcher Scott Radinsky filed suit against the department in Cook County Circuit Court in 1996 to provide a test case for Illinois' inter-pretation of the law. Radinsky's lawyers contend Illinois' approach is unconstitutional under the commerce clause and the due process clause, among others. Although it has pro-ceeded slowly, lawyers for both sides say the case may be decided by the end of the year. Any ruling is likely to be appealed.

The other 44 athletes have adminis-trative review cases pending with the department, all but one of which is on hold while waiting for a court ruling on Radinsky. Information from those cases is not a matter of public record unless they reach the courts. The only case that is advancing at the department level involves Dave Smith, a former Cubs reliever who received a signing bonus and termination payment, creating legal issues not addressed by the facts in the Radinsky case.

Radinsky, currently seeking to make a comeback with the St. Louis Cardinals, was a resident of California when he played for the Sox in 1992. That made his salary subject to California's 9.3 percent tax rate. Then, to his chagrin, Illinois came

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Radinsky was a relatively low-paid newcomer to the big leagues in 1992, and the taxes in dispute in his case are accordingly nominal. But the amounts at stake can be sizable for other athletes. The state is asking one former Chicago player to cough up an additional $195,000 in tax pay-ments, while another player is seeking a refund of $120,000 that he contends he was overcharged. A Chicago ath-lete earning $3 million a year while making California his residence can expect to pay about $49,000 more a year in income taxes because of Illinois’ overbite. A young ballplayer in the prime of his earning potential may not miss the $49,000, but a tax bill of that size arriving in the mail can stun a retired athlete whose big money days are in the past.

One of the wrinkles in all this is that not every Illinois nonresident taxpayer/Chicago athlete makes his home in a relatively high tax state like California. Many reside in warm weather states with no income tax, like Texas and Florida. Illinois’ approach to taxing athletes seems to include an unspoken decision that double-taxing some individuals is worth it if the system captures others who are using their choice of official residence to try to beat the tax man.

Some athletes view the issue philo-sophically. “It’s the price of being an entertainer, I guess,” says Sox catcher Brook Fordyce, who was born and raised in Florida and still maintains his home there. Like most athletes, though, Fordyce doesn’t really understand the particulars of the legal issues, only that it’s costing him money. The athletes have lawyers and accountants to sort it all out, which is probably another reason not to feel too sorry for them.

Still, this doesn’t seem to be quite where the legislature was trying to go when it set out to retaliate against Pat Riley’s Lakers in 1992. Did they really want to punish players on the Cubs, Sox, Bears, Bulls and Blackhawks just because they could afford a home someplace else, like the other members of their profession? Revenue officials insist athletes aren’t being singled out. “This doesn’t work any different for professional athletes than for anybody else,” says Staats. But officials are always stumped when asked to name another profession that involves high-paid salaried employees who work for an employer in one state, often make their home in another and travel around the country with each place visited claiming a share of their income. If there are sales reps that fit that category, it seems doubtful that any state taxing body can as easily trace their whereabouts on a given summer’s afternoon as they can a member of the Chicago Cubs. Some assume that entertainers face a similar problem, but the law allows them to be taxed only by the state in which they performed and were paid.

Paul Barger, a Chicago attorney who authored an article in the law journal, State Tax Notes, outlining the tax problems faced by profession-al athletes, called on Congress to intervene and establish a uniform allocation method for athlete taxation. But nobody thinks there’s much chance of that happening either. That would seem to leave it up to the state legislature, which could probably find better ways to use its time but often doesn’t. If nothing else, the subject could make for an interesting committee hearing during the summer recess for sports fans seeking re-election. The only problem will be holding the hearing early enough to make it out to Wrigley Field for a 2:20 start. 

Mark Brown is a reporter who covers sports business issues for the Chicago Sun-Times.

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