NEW WAY TO BEAT THE TAX MAN

By Murray Chass

February 10, 2011

If Albert Pujols is serious about his deadline, he and the St. Louis Cardinals are closing in on their moment of truth. Pujols, the best hitter playing baseball today, is scheduled to report to spring training Feb. 16 and begin working out the next day.

According to Pujols, if he is not signed to a contract extension by the day he reports, he will cut off further talks and become a free agent after the season.Albert Pujols 225

St. Louis position players have a Feb. 18 reporting date with the first workout the next day, but Pujols apparently plans to be early. Usually it’s the union that challenges a team’s effort to have players report earlier than the scheduled reporting date, but in this instance the team might want to tell Albert he can’t report until the scheduled date.

Not that the Cardinals would do anything to annoy their superstar, but telling Pujols to stay home an extra two days would give them an extra two days to try to negotiate a new contract to succeed the 8-year, $111 million deal that ends this year.

It’s my guess that Pujols’ plan to report early is just another way to tighten the screws on the Cardinals, just as setting any deadline is a negotiating ploy. Pujols has said he set the deadline because he doesn’t want the distraction of having his agent, Dan Lozano, negotiating a contract while he is playing.

ESPN.com has noted that Pujols has taken that stance “throughout his career,” but there is little history there to bolster that claim. The last time Pujols agreed to a new contract was Feb. 19, 2004, when he had been in the major leagues for three years and was eligible for salary arbitration the first time.

Nevertheless, Pujols is running the show now, and if he sets a deadline of next Wednesday the Cardinals have to take it seriously. Does that mean if the Cardinals offer $30 million a year for 10 years next Thursday Pujols will ignore it?

The Cardinals have tried diligently to forge an agreement with the first baseman’s agent, but Pujols apparently seeks far more money than the Cardinals are prepared to pay.

That 10-year, $300 million proposal has been mentioned as Pujols’ price, but so have 5 years and $250 million. I heard that figure from someone who heard it from a fellow who lives in St. Louis and is well-connected with the team’s owners.

The two sides have agreed not to discuss their negotiations publicly, and they have done an unusually good job of adhering to that pledge so it’s not known what the Cardinals have offered and what Pujols has sought. You can be sure, though, that whatever figure they’re talking about it’s a lot of money.

The biggest contract ever signed is the 10-year, $275 million package the Yankees gave Alex Rodriguez in 2007 to get him to stay after he opted out of the 10-year, $252 million contract he signed with Texas in 2000.

We are talking here about ungodly amounts of money, more than entire offices or residential blocks of people earn in their lifetimes. When Player X rejects $18 million a year and says he wants $20 million, we ask why does he need the extra $2 million? Isn’t $18 million enough?

The answer is it’s not that $18 million isn’t enough; it’s that Player Y earns $20 million, and it would be embarrassing for Player X if he earned “only” $18 million. Ego plays a large part in these negotiations.

Does Pujols want to be the highest paid player in the game? He hasn’t said so publicly, but with his achievements in his 10-year career he very likely believes he has earned that status.

Pujols has been the National League most valuable player three times (in a five-year period), and he has led the N.L. in hitting, home runs and runs batted in the past decade.

He has the highest batting average in the majors in that time, according to the Elias Sports Bureau, .3314 to Ichiro Suzuki’s .3310, and he is second to Rodriguez in homers (408 to 424) and r.b.i. (1,230 to 1,236).

Fay Vincent NYU 225He is the only player in history to hit 30 or more runs in each of his first 10 seasons, and he is one of only two players (Al Simmons is the other) to have 10 straight 100-r.b.i. seasons at the start of his career.

Taking all of this into account plus the fact that he just turned 31 last month, would you give Pujols $30 million a year for 10 years, would you give him $50 million a year for 5 years or would you give him some other outrageous amount of money?

Fay Vincent wouldn’t, and he doesn’t think Pujols should take that kind of money. The former baseball commissioner has an idea about player salaries that makes a lot of economic sense for both clubs and players but is probably too revolutionary to be accepted.

Instead of paying a Pujols $30 million or $50 million a year, Vincent proposes paying the player a smaller salary and giving him equity in the club to make up the rest of his pay. He raised this idea at a panel discussion he led for a New York University lecture series last October and subsequently wrote about it in an op-ed piece in the Wall Street Journal.

In brief, Vincent believes players would be ahead of the game financially because by having a piece of the club or something similar to it, when a player sold his share he would pay capital gains tax at a much lower rate than he has to pay in income tax on his salary. The club wouldn’t be affected either way, and it wouldn’t have to pay out as much money during the life of the contract.

“Down the road I believe there will be a partnership of sorts between owners and players,” Vincent said, introducing the idea. “Why do I think that? Because it’s happened in every other business. The sports business is unique. We are still living with the 19th century model of capital unionized employees with a battle every number of years.”

Vincent said the Miami Heat’s signing last year of LeBron James, Chris Bosh and Dwyane Wade prompted him to think about the idea.

“I saw three basketball players get together and make a terrific deal for themselves away from the union,” Vincent said. “What didn’t they do? They didn’t end up with a piece of ownership of the team. In any other business that would be remarkable.”

Before he got into baseball, Vincent was the chief executive of Columbia Pictures and experienced the type of compensation for movie stars that he was talking about for baseball players.

“I come from the movie business,” he said, “and I watched as the entertainers Dustin Hoffman and Robert Redford understood the great trick was to own a piece of the film. It wasn’t just enough to get paid for your time or your energy in making a film. It was to own a piece, and when you owned it, down the road Columbia, in my case, might buy it.”

“Dustin Hoffman owns a piece of Tootsie, and it’s an enormously valuable asset. When he sells it, he sells it on a capital gains basis. He’s been paid the ordinary income for his time working on the movie and has an asset and when he sells it the tax rate is 15 percent, going to 20.”

The top Federal income tax rate, which players have to pay with their huge salaries is 35 percent, and then there are state and local taxes so Vincent speaks of a roughly 50 percent rate that highly paid players have to pay, more than twice the capital gains tax rate.NYU Lecture 225

Vincent said he sees the time coming when baseball players will become owners. “And why will that happen?” he asked. “Because of the tax laws among other things.”

“Put yourself in the position of Albert Pujols,” he said. “His contract is up. The Cardinals are going to want him to stay. I am Mr. Pujols and I say I’d like to stay and the cash I would want is in the range of $35 million, something north of 30, which is what Mr. Rodriguez and what other players of my ilk are going to be getting. But I don’t think it makes sense to be getting 35 or 40 million of ordinary income because under the laws of this country that income is taxed at a very high rate.”

Worse to come, Vincent added, if predictions turn out to be accurate about the tax laws, “the rate will go up well over 50 percent in both state and Federal income.”

“Anyone who is sophisticated will say the trick to generating wealth is to convert ordinary income into capital gains,” the former commissioner said. He then suggested a scenario with Pujols and the Cardinals, with Pujols doing all of the talking:

“I’d like 10 percent of the Cardinals. You might not want to give me the ownership, but you give me a piece of paper in which my economic interest is measured as if I owned 10 percent of the Cardinals so down the road when I cash it in, the difference between the value you put on it today and the value you put on it 30 years from now, when I’m an older man, that value will be taxed at capital gains rate, at a preferred rate.”

I tried reaching Lozano, Pujols’ agent, to see if he knew or had thought of Vincent’s idea and if so, had he pursued it. But he did not return any of several telephone calls.

Bill DeWitt Jr., the Cardinals’ chairman and chief executive officer, returned a call but had nothing to say on the subject.

“We’ve decided with Pujols not to discuss the nature of our negotiations,” DeWitt said. “Any comment along those lines might jeopardize that.” He also declined to discuss the Vincent idea generally, not tying it to Pujols.

Michael Weiner 225“We’d like clarity one way or the other,” Dewitt acknowledged. “But whatever I said might be interpreted in a way that I could be seen as discussing the negotiations and I don’t want to do that.”

However, an interested participant in the Vincent panel discussion was Michael Weiner, head of the players union.

“Traditionally it’s not in the union’s portfolio to help players with their money after they get it,” Weiner said. “It doesn’t mean it has to stay that way.

“The idea that a player like Albert would have leverage to go to the Cardinals and ask for a piece of the business – that’s something the existing collective bargaining agreement contemplates.

“Major league rules permit a player to own a piece of the club for which he plays, but if he’s traded he has to divest himself of that interest. It happens automatically.”

All right then, baseball has had player-managers; will Albert Pujols become a player-owner?

Comments? Please send email to comments@murraychass.com.