A Taxing Matter: New York State v. Derek Jeter

Tuesday, a subscription-only Wall Street Journal editorial commented on the tax “troubles” of baseball’s Derek Jeter:

The Empire State claims Mr. Jeter dodged income taxes for 2001 to 2003 and that it’s owed millions, plus interest. Number 2 says he lives most of the year at his primary home in Tampa, Florida, and that he snowbirds in New York to play ball.

Who can blame him? Florida has no personal income tax, while New York’s rate for the top bracket is 6.8%, rising to 12.15% in New York City (including temporary surtaxes that expired in 2005; the combined rate is now 10.5%). That makes for one of the worst tax burdens in America — and politicians are proud of it. Mayor Michael Bloomberg boasts that his city is a “luxury good” for which everyone should happily pay higher taxes.

….. New York doesn’t claim that Mr. Jeter has avoided taxes on the salary he’s earned in-state — i.e., his 10-year, $189 million Yankee contract. New York’s complaint is in pursuit of the additional millions a megastar like Mr. Jeter makes from endorsement deals and the like, as well as from his investments.

….. According to court filings, state auditors don’t dispute that his primary residence was in Florida before 2001 or after 2003, or even that he spent most of the year down south over the target period. Rather, they’re employing the more subjective “domicilery (sic) test.” They point to Mr. Jeter’s Manhattan apartment, his “numerous public statements professing his love for New York,” and allege he has “immersed himself in the New York community.” Gosh.

There is a five-pronged test for domicilary, according to this law firm web site:

1. maintenance of a home
2. active business involvement
3. time spent in the state (which is supposed to be independent of the so-called “183-day rule” but, in reality, auditors usually do a day count similar to the 183-day rule)
4. location of near and dear items (auditors look for items of significant value as well as items with sentimental value)
5. location of family

Point by point, as I see it:

1. Jeter’s primary home is in Florida (it is likely that this Wiki reference to his living in New York is false). Though he does have a Trump Tower residence in Gotham, he has had the Florida home much longer. Apparent advantage to Jeter.
2. Jeter’s professed “immersion” in the community is likely charitable (Turn 2 Foundation), doesn’t involve business, and is mostly handled by other people. Advantage Jeter.
3. Jeter surely has knowledgeable advisers, and presumably knows better than to spend too much time physically in the state. Advantage Jeter — but if I’m wrong on time spent, throw the book at him.
4. Most “near and dear” items are probably in Florida, even though the NY Daily News reports that the taxman disagrees (uh, how would they know?). The “sentimental value” provision could tilt the conclusion. Advantage unclear.
5. Jeter is single, and I believe his parents and siblings still live outside of New York. Not relevant.

Obviously, I don’t have all the facts, but it seems that the state and city are attempting to intimidate Jeter into ponying up big bucks with bad PR — because the shortstop’s defense, as on the ball field, looks pretty good. The original New York Daily News article about this says he’s “cheating.” The appearance of an article like that doesn’t just happen, and the characterization is probably wrong. If Jeter really is in the Empire State less than 183 days a year, this is a legitimate disagreement on a matter of law, and even if he loses, it will not mean that he was “cheating” — he was, as is his right, taking a position based on his and his advisers’ interpretation of New York State tax law. But I think the state will strike out on this one.

The better question in all of this is why the state and city don’t lower their income tax rates so that “evil rich people” like Jeter might want to live where they work, and spend more of their money in the local economy.