Tax Court in Brief | Hoops, LP v. Commissioner: Deductibility of Deferred Compensation

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The Tax Court in Brief – February 21 – 25th 2022

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Tax Litigation:  The Week of February 21, 2022, through February 25, 2022

Hoops, LP v. Comm’r, T.C. Memo. 2022-9 | February 23, 2022  | Nega, J. | Dkt. No. 11308-18


Short Summary: Hoops, LP owned the Memphis Grizzlies, an NBA franchise. In 2012, Hoops sold substantially all its assets, and assigned its liabilities to a buyer. The liabilities included two NBA player contracts and deferred compensation that earned by the players but not due to be paid by Hoops until after the 2012 sale. In computing its gain on the 2012 sale, Hoops claimed $10,673,327 (total deferred compensation discounted by 3%) as a deduction on Hoops’ 2012 return. The IRS issued a notice of final partnership administrative adjustment (FPAA) for the 2012 tax year, disallowing the deduction. Heisley Member, Inc., the tax matters partner of Hoops, filed a petition for readjustment. By the parties’ concessions, the case focuses on Section 404(a)(5) of the Internal Revenue Code and the deductibility of compensation that is earned but payable in a later year under a nonqualified plan of deferred compensation.

Primary Holdings: 

Key Points of Law:  

Insights: When a taxpayer, as part of the sale of a business, assigns to the buyer, liabilities for earned compensation that is payable in a later tax year pursuant to a nonqualified deferred compensation plan, the taxpayer should take into account and closely evaluate Section 404 of the Code and its effect on the proper account of gain to be realized from the sale of the business. As shown in Hoops, L.P., and under the special rules for deductions set forth in Section 404, if an employer on the accrual basis defers paying any compensation to the employee until a later year or years, the employer will not be allowed a deduction until the year in which the compensation is paid, even if the compensation would otherwise be deductible under Section 162.