Wherever you stand on the issue, Lance Armstrong’s sudden and complete fall from grace seems like just about the worst thing that could happen to the man. Perhaps not, according to a recent article by Forbes.
For illustrative purposes, let’s look to Armstrong’s most notable achievement: his consecutive Tour titles spanning from 1999 to 2005. During this run of dominance, Armstrong received bonuses from Tour officials for each stage win, each day he wore the leader’s yellow jersey, and of course, each overall victory. These payments are rumored to have totaled nearly $5 million over the seven-year period.
Armstrong’s compensation wasn’t limited to race winnings, however. Tailwind Sports, the owner of Armstrong’s team sponsor during each of his tour victories, had procured insurance contracts that paid Armstrong over $12 million in performance bonuses during that span. Particularly worthy of note was a $5 million reward Tailwind agreed to pay Armstrong upon winning his fifth consecutive title in 2004. The payment was covered by a policy Tailwind had taken out with Texas-based insurer SCA Promotions, who initially balked at paying the bonus amidst rumors that Armstrong’s victories had been fueled by drug use. The case eventually went to arbitration, where SCA was forced to pay $7.5 million to Armstrong, representing the original $5 million bonus and $2.5 million in interest and attorney fees.
Now that Armstrong’s titles have been officially vacated, it’s extremely likely that Tour officials are placing hurried calls to their legal department to start the process of recovering the $5 million in winnings previously paid to Armstrong. For its part, SCA Promotions will quickly stake their place in line, as they were angered during the arbitration process by what they viewed to be arrogant, dismissive behavior by the cyclist’s legal team.
Should all of these claims come to fruition, Armstrong may be cutting a lot of checks in 2013. Which begs the question: What will be the tax consequence if Armstrong repays race winnings and bonus amounts that were previously included in his taxable income as compensation?
The issue is not one of deductibility. Because the bonuses were originally earned in Armstrong’s trade or business of being a cyclist, any repaid compensation should be deductible as an ordinary and necessary business expense. Rather, the problem Armstrong faces is one of tax benefit.
If the doomsday predictions surrounding Armstrong’s future income stream are to be believed, it’s possible Armstrong may pay out more in bonus restitution during 2013 than he takes in as income. As a result, he may not be able to reap the full tax benefit of the deductions related to his repayments. And even in the event Armstrong is able to fully utilize his deductions in the current year, he may have been subject to a higher tax rate when the bonuses were originally earned — particularly during the pre-Bush tax cut years of 1999-2001 — than he is today. In either scenario, Armstrong would likely enjoy a larger tax benefit if he could travel back in time, exclude the bonus payments from income in the year they were received, and redetermine his prior years’ tax liability.
Stay tuned, as it appears the difficulties for Mr. Armstrong may be just beginning.