Supreme Court to Coollusion Back Tax Case

High Court to Hear Back-Pay, Tax Dispute on Collusion Payments

Case derives from 1980s retractive settlements

Washington, October 25, 2000 -- The Supreme Court agreed to settle a back-pay and taxes dispute involving Major League Baseball players that could affect the way taxes are paid on all kinds of labor settlements.

In 1990 Major League Baseball Players Association (MLBPA) claimed that Major League Baseball Clubs (the clubs) breached the Collective Bargaining Agreement (CBA) with respect to free agency rights of the baseball players in 1986, 1987 and 1988. After an arbitration panel issued a series of rulings adverse to the clubs, the parties settled their grievances on December 21, 1990. The settlement required the clubs to contribute $280 million to a custodial account for distribution to affected players.

The Cleveland Indians Baseball Company's (Indians) share of the settlement fund was approximately $2 million for the 1986 and 1987 season. The Indians received the funds in 1994 and distributed those funds to the affected players -- eight players who were employed in 1986 and fifteen players employed in 1987. Unsure as to the tax treatment of these distributions, the Indians paid taxes on the total funds as if the payments were wages for services rendered in 1994. None of the affected players, however, performed services for the Indians in 1994. Subsequently, the Indians filed an action seeking reimbursement of the excess taxes paid to the United States.

The Indians argued that they should have paid taxes at the 1986 and 1987 tax rates when the services were rendered. The government contends that back wages are subject to tax in the year in which payment is made and not in which the services were rendered. The issue presented to the court is which tax year rates to apply to these back-wage payments made in 1994 for services rendered in the 1986 and 1987 baseball seasons.

The district court followed earlier precedent, Bowman v. United States, and held that the back wages should be taxed in the year they were earned rather than the year they were paid. The 6th circuit court of Appeals rejected the governments position and affirmed [click here to read the decision]. The Supreme Court will now hear oral arguments to decide the issue.

Michele L. A. Rollins