Friday, February 06, 2015

Of Super Bowl Trucks and Gift Taxes: Even the Silliest Anti-Tax Arguments Can Remind Us of Some Useful Lessons

-- Posted by Neil H. Buchanan

[Update: An espn.com article now reports that Chevrolet is going to honor Brady's wishes and give the truck to Butler, not to Brady.  The article claims that this will mean that Brady will not pay income tax on the truck, that Butler will pay income tax, and that Brady will pay no gift tax.  That analysis might NOT be true, because of the doctrine of constructive receipt; but that topic is far afield from this post.]


Many people go crazy over sports.  Far too many people also become unhinged about taxes.  Put the two together, and we occasionally see some truly entertaining nonsense.  Back during the 2012 Summer Olympics, for example, we were treated to the spectacle of prominent politicians (including President Obama, along with never-will-be-President Marco Rubio) seriously entertaining the idea that prize money for Olympians should be exempt from taxation.  As I noted in a Dorf on Law post at the time, this argument was ridiculous on multiple levels, but it was truly offensive in comparing Olympic athletes to soldiers, saying that because we do not tax the latter while they are deployed in a combat zone, we should not tax the former.

Nothing so disgusting to report here, thankfully, but the latest story is still entertaining.  It has to do with last Sunday's Super Bowl, won in shocking fashion by the Patriots.  New England's superstar quarterback, Tom Brady, won the game's Most Valuable Player award, a gas-guzzling pickup truck.  Brady announced that he planned to give the truck to his teammate Malcolm Butler, a rookie defensive back who made the game-winning interception on the goal line.  A feel-good story, right?  Brady, the golden boy and future Hall of Famer, shares some of the limelight with a previously unknown teammate.  And we all lived happily ever after.

Of course not.  Because large gifts are subject to federal gift taxes, a political columnist for one of the business magazines wrote a story carrying this headline: "IRS Is Coming After Tom Brady's Super Bowl MVP Truck."  As it turns out, the IRS is doing nothing of the kind.  Even by the columnist's telling of the tale, the only matter at issue is how much Brady will pay in taxes.

The gift itself might not, in fact, be taxable.  As the author concedes, there is an exemption from the gift tax, and if Brady's total gifts fall below that exemption, he would pay no tax upon giving the truck to Butler.  Notably, the column originally stated that the gift tax exemption is $1 million.  "Assuming Brady has made at least $1 million of taxable gifts up to this point in his life (a safe bet), he will owe a 40 percent gift tax on this $20,000 taxable gift."  Remember, this is a column that purports to be exposing the truth about the tax code to its readers, but the author somehow missed the memo that the gift tax exemption amount was dramatically increased more than two years ago, as part of the misnamed "fiscal cliff" negotiations when the Bush Tax Cuts were set to expire.  The new "unified" exemption was set at $5.25 million per spouse for 2013, and that amount is annually adjusted for inflation.

As of this morning, the column has been edited with "
$1 million $5.25 million" now appearing where "$1 million" appeared in the sentence that I quoted above.  But that number is also wrong, because the exemption has been adjusted upward for inflation twice since it was enacted, first to $5.34 million, and then to $5.43 million this year.  If those differences seem small, note that the difference between $5.43 million and $5.25 million is $210,000, and we are talking about a taxable gift of only $20,000.

Note also that the exemption is per spouse, and because Tom Brady is Tom Brady, the whole world knows that he is married to a former supermodel named Gisele Bundchen.  That gives them $10.86 million in untaxed gifts and/or bequests between them.  So the blithe comment that it is "a safe bet" that the Bundchen-Brady bunch has maxed out on their gifts is a bit riskier than it might seem.

[Update: As a commenter on this post noted, even the $20,000 figure is wrong, because the annual gift tax exemption is also available to both spouses, meaning that both Tom and Gisele can give Butler up to $14,000 tax free each year.  So, even if they give him full ownership in a $34,000 truck in 2015, the gift tax would apply only to $34,000 minus $28,000, or $6,000, not $20,000.  Partial gifts over two years could reduce the tax to zero.]

All of which is to say that hacks should at least get the basic facts right.  The more important point, however, is that this is all a big "so what?"  Because the column is pure tax-bashing nonsense, the author cannot even stick to his story, which is whether or not Brady's gift would be taxable.  The column tries to make it all seem oh-so-horrible, by pointing out that Brady will pay taxes on his compensation from playing the game, including his $97,000 game check.  A guy who gets paid almost a hundred grand for playing one game (an amount, by the way, that is a tiny fraction of his overall pay, which averages more than $10 million per year) pays taxes at the top rate?  Boy, how unfair!

Of course, the truck is also part of Brady's taxable compensation, and the column helpfully estimates that the truck will add $13,500 to the quarterback's income tax.  But again, so what?  The IRS is not "coming after Tom Brady's Super Bowl MVP truck," even figuratively.  Brady has the choice of keeping the truck and paying the income tax on it, or (within certain limits) refusing the award (because he probably has all of his transportation needs covered), or accepting the award but giving it to charity, or accepting the truck and giving it to a teammate.  If Brady does not like the gift tax consequences of that last choice, he does not have to give the truck away.  Similarly, if he wanted to give Butler cash instead of a truck, Brady would take into account gift tax and choose whether to go forward with the gift.

The overall tone of this type of column is simply to try to say, "Look at all these taxes people pay!  Wouldn't it be great if we didn't have to pay taxes?"  Pointing to the highest earners as examples is especially useful for this kind of screed, because the numbers will be bigger for people in the top income levels.

If we are really supposed to be upset by all of this, it would be helpful to know what is supposed to happen next.  As I tell my students at the beginning of every semester of Federal Income Taxation, it is easy to look at any tax in isolation and complain about it.  What is difficult is deciding what to do next.  Should we eliminate the gift tax, so that people like Tom Brady can give away things tax-free?  That raises three possibilities:

(1) We will have to increase other taxes, to make up for the money that we would have collected from the gift tax.

(2) We will have to find some spending program to cut, in order to make up for the lost gift tax revenue.  Are we going to further reduce support for school lunches for poor children?  Cut cancer research funds?  If those examples seem unfairly loaded, then remember that any examples of spending that should be cut simply free up money that could be spent on something that is currently being starved for funds.  For example, finding $10 billion in wasted tax subsidies for oil drilling does not mean that the $10 billion is "free money," because devoting that money to funding a repeal of the gift tax prevents us from using the money for good spending, or for better tax cuts.  As Rep. Lloyd Doggett put it at a recent hearing regarding some terrible tax cutting ideas from Republicans: "Their package eliminates enough revenue to fund life-saving medical research through the National Institutes for Health for more than two years."

(3) We could increase the deficit.  Regular readers of this blog know that I oppose balanced-budget rules, because there is no reason why the deficit should be zero.  That does not mean, however, that it can be infinite, or that it should be increased every time something catches our attention.  Moreover, the same logic from point (2) above applies here: If we really do think that the deficit can be allowed to go up, why are we privileging Tom Brady's gift-giving decisions as the best use of those borrowed funds?  Maybe fixing the roads and bridges on which those oversize trucks will be driven would be a better reason to increase the deficit.  Or maybe universal pre-K.  Or infant nutrition programs.  Or ...

As a last gasp, maybe the argument is, "Wait, I'm not saying that we should repeal the whole gift tax, but this just seems like a situation in which the tax ought to be waived.  What's the big deal about a few thousand dollars for one truck?"  And thus is born the Internal Revenue Code, in all its glorious complexity.  Another unprincipled carve-out, piled on top of a zillion other unprincipled carve-outs, undermines the legitimacy of the entire system.  But, hey, maybe that is really the idea behind all of these silly arguments.