Another case of a powerful exemption that is so obscurely phrased as to be meaningless to everyone—except to those who count—is a provision that reads: "Treatment of Certain Amounts Paid To or For the Benefit of Certain Institutions of Higher Education." That bit of opaque prose was cooked up by two powerful politicians, Texas Democratic Congressman J.J. Pickle and Louisiana Democratic Senator Russell Long, and masks two exemptions they wrote for their alma maters, the University of Texas and LSU, respectively. The exemptions free the universities from the IRS ruling that states that when big financial givers get special seats at athletic events in return for their generosity, they can't deduct the value of those tickets from their taxes.
The IRS ruling caused an uproar among booster clubs, and with good reason. Clemson, for example, raises some 30% of its athletic budget from big contributors, who in turn get special seating, preferential parking and the like. At USC, "Cardinal and Gold" contributors cough up about $1.3 million a year—and get prime seats for their munificence. "Our goal is to endow 24 starting positions including punter and kicker," says associate athletic director Donald L. Winston.
In trying to get the 1984 ruling scuttled, lobbyists argued that alumni gifts underwrote not only big-time sports but also less visible women's and intramural programs, as well as such sports as skiing, soccer, swimming and lacrosse that don't normally earn money from TV and gate receipts.
When the news broke that LSU and Texas were exempted, rivals pelted their representatives with letters worrying that these two athletic powers would now corner all the talent by offering thicker steaks at the training tables, shinier weight machines and fancier statues outside the jock dorms. But nobody in Congress expects the exemptions to stand as is; most congressional observers accept Pickle and Long's explanation that their parliamentary maneuver was simply intended to open the door for further debate on the IRS ruling, which the two lawmakers found objectionable. As Pickle, reacting to the furor, said, "I just wanted to make the record plain that I think this should apply to all the schools involved anywhere in the country."
The new tax law, with its lowered rate for individuals, probably means even more take-home pay for most of the highest-paid professional athletes. The new maximum tax rate drops from 50% in 1986 to 38.5% in 1987 and, finally, 28% (or 33% in certain cases) in 1988. "In the past it was probably best for players to get as much money as soon as possible," says Larry Fleisher, a player agent who is also director of the NBA Players Association. "Now it's probably better to get a deferral until the rates go down." Mike Trainer, Sugar Ray Leonard's attorney, says that tax considerations didn't figure directly in the timing of his client's comeback fight against Marvin Hagler, but adds, "Obviously, '87 is a lot better year to have the event than '86."
Some money managers anticipate that the fact that the new law will likely allow many athletes to keep more of their gross income may be used by management in order to try to pay lower salaries. "It's a bargaining chip on the side of the payer," says Lester Marks of Ernst & Whinney, a big accounting firm retained by both players and teams.
The new law abolishes income averaging, which hits hardest at young rising stars. A baseball player, for example, may spend several years in the minors, earning as little as $3,500 in a season. Then when he makes it to the big leagues, his annual salary might jump to several hundred thousand or more. Under the old law he could average his highest and lowest income for a five-year period and pay taxes on that figure; now, however, each year's earnings will be taxed individually.
Many of the more questionable tax shelters, which were used by some highly paid athletes to create paper losses for tax reasons, are abolished under the new law. Good riddance, assert most legitimate money managers. "Ray never got involved because I never felt comfortable having him own cattle and apartment houses," says Trainer.
"The promoters tried to make these kids, who are mostly unsophisticated, think all they had to do was not pay taxes," says Fleisher. "Elimination of these is a boon to the average player."
Depreciation, a kind of tax shelter that benefits franchises by reducing their tax bite, has been sharply curtailed. Sports teams now have to depreciate equipment and facilities over a longer period, which means a smaller deduction than before.