In Shakespeare's archetypal tragedy Romeo and Juliet, the star-crossed lovers bemoan the feud between their families that keeps them apart. In Act II, Scene II, Juliet gazes out her window and wonders, "What's in a name?" The answer, according to a Chicago jury: $8.9 million tax-deductible dollars!
Dominick's Finer Foods was a Chicago-area supermarket chain that wound up closing its doors after an ill-fated acquisition by Safeway. Back in 2009, probably watching their own clock run down to the buzzer, Dominick's took out an ad in a commemorative issue of Sports Illustrated congratulating Chicago Bulls basketball legend Michael Jordan on his induction into the NBA Hall of Fame. The ad declared, "Congratulations, Michael Jordan, you are a cut above," and included a coupon for $2 off on steaks. (Coincidentally, just two shoppers actually took the store up on their offer!)
A lesser athlete might have just been flattered. But Air Jordan isn't just the most accomplished basketball player of all time. He's also the most effectively marketed b-baller ever. (Forbes magazine estimates his net worth at $1.1 billion, and reports he earned more than $100 million from Nike last year.) And good marketing means protecting your name. So MJ did the same thing any athlete accused of, say, letting the air out of some footballs would do. He sued, claiming Dominick's had used his name without permission.
The jury agreed that Dominick's had fouled Jordan. That left them with the challenge of deciding how much that foul had cost him — in other words, how much Jordan's name was worth. Jordan lined up for $10 million, while Safeway's attorney's blocked with $126,900. The jury clearly thought Dominick's misuse was more than just a technical, and awarded the hardwood legend an $8.9 million bucket hit.
Here's where the IRS comes in. They don't. $8.9 million is probably real money to you, but it's pocket change for a billionaire like Jordan. So "His Airness" declared, even before his lawyers laced up their wingtips, that he would donate any award to local charities. He'll report it as "other income" on Page One of his form 1040, then deduct an identical amount as "Gifts to Charity" on his Schedule A.
Jordan probably feels lucky for lots of reasons. (A billion dollars and six NBA championship rings should do that.) But he's also lucky that he makes enough to dribble around one important limit on charitable gifts. Code Section 170(b)(1)(A) limits gifts to 50% of your adjusted gross income, but lets any excess "travel" forward for up to five years. The upshot? As far as the IRS is concerned, it's a free throw for Jordan.
Here's the lesson for us. It's not just how you make your money, or even how much of it you make. It's also when you make it. Choices like timing business or bonus income, deferring tax on retirement savings, and deciding when to recognize investment winners and losers all play a part in your overall game plan. But if you don't have a plan, you won't know when to lay up, and when to shoot for three. So call us when you're ready for a plan, and let us help you take it down the lane past the IRS guards!