UEBERROTH’S PLAN NOT AS SEVERE : Tax Benefit Will Take Some Sting Out of Drug Penalties : Players Get Break: Charitable Donations Are Deductible
When Peter Ueberroth announced Feb. 28 that the New York Mets’ Keith Hernandez and six other major league ballplayers would have to donate 10% of their 1986 salaries to drug-prevention programs, submit to random drug testing and work in community service if they wanted to play baseball again, it was considered strong action by a strong commissioner.
But apparently those donations imposed by Ueberroth pack less financial punch than was first thought.
According to a tax report commissioned by The Times, it appears that the seven players classified as the most serious offenders, and thus subject to the harshest penalties, will realize substantial tax deductions, as much as 50% of the money involved, because Ueberroth’s edict calls for donations rather than fines.
The same report, which uses Hernandez as an example of the financial impact of those donations, also seems to indicate that four other players told by Ueberroth to donate 5% of their 1986 salaries to drug-prevention programs will get tax breaks, too.
The report was prepared by Craig C. Mullins of the Atlanta-based firm of certified public accountants, Hyatt, Imler, Ott & Blount. Among Mullins’ clients is catcher Bruce Benedict of the Atlanta Braves.
Under the wording of Ueberroth’s plan, Hernandez, Jeff Leonard of the San Francisco Giants, Dave Parker of the Cincinnati Reds, Lonnie Smith of the Kansas City Royals, Enos Cabell of the Dodgers, Dale Berra of the New York Yankees and Joaquin Andujar of the Oakland A’s must donate 10% of their 1986 salaries.
The report says that such donations would become charitable contributions, allowing those players to deduct certain portions on their 1986 tax returns. Deductions are not allowed for fines and penalties paid for violating federal and state laws and regulations. It would be against public policy to diminish the taxpayer’s penalty because of a tax deduction allowance.
Hernandez is used in the report simply because his 1986 annual salary of $1.35 million is the highest of the 11 players who must make charitable contributions. The report does not represent Hernandez’s exact financial standing but does give an accurate picture of the effects of Ueberroth’s plan.
It also makes several assumptions based on figures available concerning medical, tax, charitable and interest deductions and adjustments.
For example, the average charitable contribution for households with incomes between $100,000-$200,000 is about $5,000. Although the exact contribution for a household earning $1.35 million is unknown, the report says that $20,000 would be a fair estimate.
In Hernandez’s case, medical deductions, tax, interest and other deductions and adjustments--tax shelters, union dues, investment advice, state tax, interest expense on home, property taxes, etc.--would be about $400,000.
Add the donation imposed by Ueberroth, $135,000, to the $20,000 allowed for other donations and the total deduction increases to $555,000.
Because of that writeoff, Hernandez’s tax liability becomes $385,619 instead of $453,119. That’s a saving of $67,500, or 50% of the original donation.
In effect, the report says, the player’s punishment is diminished. His net worth is higher--more cash remains in the bank and not with the Internal Revenue Service--because of the deduction.
The report also makes allowances for deferred payments. A reported $500,000 of Hernandez’s salary in 1986 is deferred. Since Ueberroth has not publicly outlined the specifics of his plan--Does it include deferred money? Is the levy paid in lump sum or installments?--two charts using an $850,000 base salary were provided in the report.
Using the same formula with appropriate figures, Hernandez would pay $281,619 in taxes if the $85,000 charitable contribution to a drug-prevention program was not allowed. If allowed, the tax liability decreases to $239,119, a saving of $42,500.
Either way, deferred or not, Hernandez ultimately won’t have to give up a full 10% of his salary.
The six other players in Hernandez’s group earn from $450,000 to $1.15 million and it is expected they, too, will reap tax benefits.
The same should hold true for the four players who must donate 5% of their salaries.
Al Holland of the New York Yankees, who is now pitching with Columbus in the International League, earns $600,000; Lee Lacy of the Baltimore Orioles earns $600,000, and Claudell Washington of the Atlanta Braves makes $750,000.
Lary Sorensen, who was released by the Chicago Cubs during spring training, was to have earned $200,000. A reported $50,000 of Sorensen’s contract is guaranteed. His status and responsibility concerning Ueberroth’s levy is uncertain.
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