Traded Marlins Affected By More Than Tax Rates

The Marlins and Blue Jays agreed to a blockbuster trade earlier this week that sent Jose Reyes, Mark Buehrle and Josh Johnson to Toronto. There are clear tax ramifications for everyone involved in the trade, and as an accountant who works in this field and consults with players and agents, I find it very interesting on a number levels.

However, what makes it more interesting than the average trade isn’t simply the tax rates of the countries, states and cities involved. Nor is it the effective state and city tax rates each team will experience — based on where they play spring training, the rates of their home states and cities, the rates of all other jurisdictions in which they will play and the amount of time spent in these jurisdictions. Per the effective rates, the difference between Florida and Ontario is reduced, but still substantial, since Florida has no state tax.

As I’ve explained here before, the specific state and city tax rates matter to an extent, but because of how the jock tax works, the effective rate is more telling. It’s for this reason that the AL West may soon become a big area of interest among free agents: it now features three teams without state or local taxes in the Astros, Rangers and Mariners. The Astros also spend spring training in the non-taxed state of Florida.

Even with the state and provincial tax ramifications, what piqued my interest the most with this deal is how Canada disallows certain allowable deductions in the United States.

There are numerous types of deductions available to athletes, on expenses ordinarily incurred based on their profession, that are deductible on an individual tax return. Many of these expenses are deductible as a miscellaneous itemized deduction subject to a 2% floor of adjusted gross income. Some of the expenses are deducted elsewhere, as an adjustment to income, or as a charitable contribution.

These include moving expenses, penalties and fines, agent fees, clubhouse dues, union dues, conditioning expense and, in cases where the player takes an insurance policy out on himself, insurance expense.

Certain moving expenses are deductible in both the United States and Canada if a few tests are met. These generally relate to the distance of the move and time spent working at the new job. Qualified expenses in this area — the cost of traveling to the new location and packing and shipping goods and belongings — are shown as an adjustment to income rather than an itemized deduction from adjusted gross income. The player has to actually move to a new residence, instead of merely renting a place for a couple of months, which occurs albeit infrequently.

Penalties and fines represent somewhat of a gray area but are rather frequently accepted by the IRS and the Canada Revenue Agency as ordinary and necessary in the course of business. Though penalties and fines can get itemized, subject to a 2% floor, they can also get deducted as a charitable contribution if the payment goes directly to a charity. This is often the case with team-imposed penalties and fines.

Players can also deduct agent fees and clubhouse and union dues in the United States. However, according to the Canada Revenue Agency’s ruling several years ago, agent’s commissions are not deductible. This is a big deal, considering that players tend to pay their agents 3-5% of their salaries in commissions.

While Canada allows a deduction for “legal expenses incurred by the taxpayer to collect or establish a right to salary or wages owed to the taxpayer by the employer or former employer of the taxpayer,” the revenue agency does not consider agent fees or commissions to fall under this definition.

In an audit of Florida Panthers defenseman Michael Caruso’s 2008 tax return, the revenue agency ruled that Caruso’s agent’s services did not establish a right to salary or wages, but were rather for the negotiation of the contract itself. Therefore, there was no right to the salary or wages until after the agreement was signed, which is after the agent did his work. By this logic, they disallowed agent fees as a deductible expense.

Clubhouse dues, which are basically tips paid by players and coaches to a clubhouse manager, are also disallowed in Canada, even though they are ordinary in the course of business and paid by members of every team. One major league player I spoke to said that everyone on his team paid $70/day in clubhouse dues, not including tips, which vary among players primarily based on their salaries. With tips included, dues vary among players but can quickly add up, and disallowing deductions ranging anywhere from $15,000-$40,000 — if not more — is significant.

These are just two examples of the tax code differences of both countries but they illustrate how tax rates aren’t the only material concern for athletes getting traded to, or considering signing with, a Canadian-based team.

The difference between the federal tax rates in Canada and the United States, as well as the effective state and city tax rates of the Marlins and Blue Jays for the upcoming season — we’ll discuss this more for the entire league over the next couple weeks — means that the players involved in the trade will now face a much different tax situation.

However, rates alone aren’t the only aspect of their tax situation impacted. Reyes, Johnson and Buehrle will all pay more tax this year, even with the foreign tax credit taken into account for the income U.S. residents earn in Canada. Not getting to deduct certain material expenses compounds the issue and sheds light on the differences in athlete taxation between the United States and Canada.




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Eric is an accountant and statistical analyst from Philadelphia. He also covers the Phillies at Phillies Nation and can be found here on Twitter.


59 Responses to “Traded Marlins Affected By More Than Tax Rates”

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  1. Slats says:

    Jeffrey Loria is just running a ponzi scheme.

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  2. RichW says:

    The Agent for Johnson brushed aside the tax implications, saying something to the effect of. “it’s not as if Josh is making $75000 and paying $10000 more tax”.

    Was he downplaying the issue because he was on Toronto radio?

    BTW Paul Beeston is also an an accountant. The Jays for a long time have hinted that they have some sort of package that lessens the bite for players that may be concerned.

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    • Eric Seidman says:

      I would bet Beeston has something for sure. However, from my personal experience and those of some colleagues in mine and other fields, Toronto is still a tough sell in sports for this reason. The Jays might have something through Beeston, but the Raptors and Leaves experience the same problems.

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      • Alex says:

        Did you really say Leaves..

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      • bluejays49 says:

        The Leafs* don’t have any problem with FAs, as Toronto is kinda the hockey capital of the world. Brian Burke just doesn’t like tying himself up with free agent contracts, which is another issue.

        The Raptors definitely do have trouble attracting free agents. A larger percentage of basketball players are American than in baseball and hockey, so you have that a heightened preference to stay in the states.

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      • RichW says:

        Is the calculation below correct? If so I find it hard to believe that 4% of gross salary is enough to say no. There must be other factors that probably apply to cities in the US that a particular player may not want to play in.

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      • David says:

        I think the problem the Raptors have with top free agents is that the team is bad and has no winning tradition. With new contracts, the NBA has a sort of Canada Clause that allows all teams to bonus out 15% of the total dollar value up front so only Canadian withholding tax is applied. That withholding is much smaller than the top income tax rate. Presumably the player has to make up the difference to his combined federal/state tax level.

        According to Raptors officials, this renders the tax difference a non-issue. For trades, that’s another matter.

        And of course, there is also the question of revenue opportunities outside of the contract, endorsements, appearance fees, which can be put paid to a personal corporation. the Toronto market has almost no major stars these days, so some lucky athlete is going to cash in because this is North America’s fifth largest market and one that has seen hardly any impact from the Great Recession as witnessed by the number of construction cranes downtown.

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    • Ryan says:

      If nothing else, Johnson’s agent probably realizes there’s nothing to be gained by publicly complaining about his millionaire client’s new tax problems. It’s not going to get much sympathy.

      It may be a completely different story behind closed doors.

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  3. Vegemitch says:

    These high dollar players are losing millions by virtue of this deal. I’d be pretty pissed.

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    • RichW says:

      Millions? Care to substantiate that claim?

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      • Vegemitch says:

        The aggregate taxes for living in Toronto is just above 50%. Canadian taxes are a fair bit more complicated and include many surtaxes on high incomes.
        http://www.taxtips.ca/taxrates/on.htm
        Aggregate taxes for living in Florida is 35%. (These numbers account for the top rate only, the only relevant rate in this case.) Not all money the player makes will be taxed at these aggregate rates given that they are “making” their money in many states and cities. But this accounts for the lion’s share of it. Add in the apparent difficulty with deductions in Canada which chips in a fair amount over what they’d pay in the US and you have a monumental difference. Over the life of the traded contracts the additional tax toll will easily be into 8 figures.

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      • B N says:

        Reyes has about $96m in remaining salary. If he lost 4% of that, it would be over $3m. Not that he WILL lose that much (so long as he has a half-way decent accountant) but that would constitute “millions.” Not per-anum, but in total (assuming the player stayed in Toronto for the duration of the contract).

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    • Detroit Michael says:

      Reyes and Buerhle at least signed multi-million dollar free agent contracts where they had plenty of clout and hired top-notch advisors. They had plenty of opportunity to insist on a tax equilization clause in their contract to protect their after-tax income from the financial hit of moving to a higher tax jurisdiction or they could choose to take the risk of being traded (and presumably earn more cash up front than if they had insisted on a tax equalization clause).

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  4. joser says:

    I don’t know about folks in those rarefied tax brackets, but the biggest difference I see between my American and Canadian friends is that mortgage interest is deductible in the US but not in Canada. Which is I suspect at least as much a reason as the warm weather why these guys hang onto houses in places like Florida and Arizona.

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    • Eric Seidman says:

      The expiration of the Bush Tax Cuts would also mark the return of a phase-out of certain itemized deductions — including mortgage interest — that could wipe away up to 80% of the deduction for high-income taxpayers in the USA.

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      • Matt says:

        I’ve heard this too, but I can’t imagine law makers will let the mortgage interest deduction to go away. If it does, you might as well get rid of all itemized deductions. Unless you believe in the traditional tithe system, there are very few instances where you would get over your standard deduction without mortgage interest.

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      • maguro says:

        The mortgage interest deduction stays, absolutley. I’m not actually sure I understand the connection, the mortgage interest deduction predates the Bush Tax Cuts by many years.

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      • Eric Seidman says:

        Prior to the Bush Tax Cuts, there was a phaseout on itemized deductions for high-income taxpayers. The Bush Tax Cuts got rid of that phaseout. So it isn’t as if those tax cuts created the deduction, but rather, as I said above, that the expiration of those cuts will mark the return of the phaseout. Which would then mean that high-income taxpayers, like baseball players, might not be able to take the full mortgage interest deduction. Most likely, this would result in itemized deductions reduced by 3% for income over around 170K next year, up to a maximum reduction of 80%.

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      • Tom says:

        The longtime mortgage interest deduction has nothing to do with the 2003 Bush Tax Cuts. It’s not going away if the Bush Cuts are allowed to expire at the end of 2012.

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      • Eric Seidman says:

        Tom, read what I wrote above your comment. Bush Tax Cuts didn’t create the mortgage interest deduction. Nobody said that. However, the Bush Tax Cuts eliminated the phaseout on itemized deductions that was in effect before they were implemented. When the Tax Cuts expire, that phaseout returns, and the phaseout applies to various itemized deductions, including mortgage interest. Maybe the term phaseout has been confusing. Whereas I use it to mean that high-income taxpayers won’t get to take the full deduction because their income is over a certain threshold, maybe others are taking it to mean it’s going to go away entirely. Either way, I’ve said nothing down here except that the expiration of the tax cuts will mark the return of the phaseout of certain itemized deductions. Phaseout doesn’t mean elimination. The deduction will still be there, but someone making a whole lot of money isn’t going to get to take the full deduction if the tax cuts expire.

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  5. RichW says:

    I find it strange you consider moving expenses. Most players “don’t move” as you and I would for a job so they wouldn’t be able to claim anything in either country. I’d guess that very few players in MLB actually “live” as in having their principal residence in the city they play in. Most temporarily live in or around the team city and take off for home as soon as the season ends. The current CBA has a section on moving expenses but for any significant reimbursement a player must actually move to the city of his new team.

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  6. Andrew says:

    For what it’s worth, the effective state/province+federal rates these players will face on the vast majority of their income are 0+35% =35% in Florida and 11.2%+29%=40.2% in Ontario.

    That’s an upper limit, though, because most places on the road from Florida have higher than 0% state tax, and most places on the road from Toronto have less than 11.2% state tax. Before deductions, an upper bound then is 5.2%, so for Johnson (13.75m) he’s looking at no more than $715,000 extra in tax!

    If you assume each team plays road games in the same places, in terms of tax, then that halves the number to $357,500. Factoring in Toronto doing Spring Training in Florida, and the length of spring training relative to the season brings it down to about $300,000.

    To get a final number as a rough approximation, add 40.2% of whatever deductions you can count in Florida but can’t count in Ontario. If we assume it’s mainly the agent, at 4% of gross salary, that brings the total bill to about $520,000.

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    • Eric Seidman says:

      Sounds like you’ll be a fan of the jock tax post I put out each year that does the actual calculation based on applicable rates and the actual major league schedule. Nerds, unite.

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    • Bob says:

      What about other things like tax shelters and such. Do they work differently in each country? What about things like RCA’s (retirement compensation arrangements) or other tax planning initiatives? What things can a team like Toronto can do to mitigate adverse tax issues?

      Has anyone done a study to show that which team is taxed the most after you look at their full 162 game schedules after taking the unbalanced schedule into consideration? Teams play 18 games vs divisional opponents compared to 12 or fewer vs other teams.

      I am curious to know just how large a difference there really is once everything is factored in.

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      • Eric Seidman says:

        Bob – I’ve done work in these areas, especially the unbalanced schedule from a state/city tax perspective. I have a couple of posts here and at Baseball Prospectus on that subject.

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    • Vegemitch says:

      Your tax rate for Toronto, Ontario is too low. Ontario has created a new higher tax bracket for above $500k incomes, and has increased it’s top tax rate to 13.16% beginning in 2013, and is indexed for inflation so increases are apparently built in. A variety of surtaxes chip that rate up also, such as the Ontario Health Premium that tacks on an extra 1.2%. The aggregate is above 50%!

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  7. Derek says:

    At what price would a lesser contract offered by the Mets result in more money after tax, for Jose Reyes?

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  8. Bob says:

    Hi Eric

    Thanks for your response. Could you post a link to them for me if possible?

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  9. Josh Klein says:

    I heard Keith law mention on a Baseball Today Podcast, that it isn’t true that players don’t want to play in Toronto it is just that the Jays have to pay a premium over the next best offer because of taxes.

    This, of course, also means that the jays are getting Reyes and Beurle cheaper than they would have if they signed them last year.

    It wasn’t so long ago that the Jays were not only troubled by the effective tax rate but by the weak Canadian Dollar. That changed.

    Two trends to watch that are seemingly in the Jays favour going forward.

    1. The Bush Tax cuts.
    2. Canadian Dollar significantly overtaking the US dollar in value.

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    • RichW says:

      If the US economy even partially recovers the $CA will head to its natural state of .85-.95 $US.

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      • Coach says:

        Don’t think Stevie-Boy will just let the US take all the oil producing fun – The Canadian Petrodollar will continue to push it far above what it should be for the entirety of the Country, sans Alberta

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      • Llewdor says:

        When the US stops printing money at a nonsensical rate, the currencies will adjust, yes.

        Is that happening anytime soon?

        And before that happens, we’ll likely see the Bank of Canada raise interest rates, thus further driving up the Canadian dollar.

        Incidentally, there is little evidence that the Canadian dollar is behaving as a petrocurrency. Perhaps 20% of its rise against the US dollar is attributable to that. Most of the change is a result of the US dollar falling, not the Canadian dollar rising. If you measure the Canadian dollar’s change against an average of major currencies, you see a much smaller swing than if you compare to the US dollar alone.

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    • Gerry says:

      If the bush tax cuts expire, would the effective rate in Ontario actually be lower than the effective rate in the average US state (say 5%)? I’m not sure how much I buy into the idea that players want to play in places like Florida or Arizona- the teams there haven’t traditionally been big spenders and if they did stand to benefit from player preference they would enjoy a comparable advantage in that area, making it advantageous for them to spend.

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      • Pumpkin says:

        No, even if the upper bracket rates were to go higher there would still likely be far too many deductions and loopholes available to bring the effective rate below Canada’s.

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      • Llewdor says:

        Though Canada’s lower corporate tax rates might make owning a team in Canada awfully appealing.

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  10. Chris says:

    Curious, couldn’t the players just live in Buffalo and commute to Toronto?

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    • Matt says:

      It’s worth the extra tax not to have to live in Buffalo (sorry, couldn’t resist!)

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    • Vegemitch says:

      They “make” their money in Toronto.

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    • Antonio bananas says:

      I assume most players don’t actually live where they play. You get taxed based on place of employment. It’s a way for the city to recoup some of the benefits of having millionaires. Otherwise you might fund 700 million for a new stadium to entice millionaire players who spend most of that money elsewhere.

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  11. Bohr says:

    So are players taxed differently on income they receive when they’re in Spring Training (in Florida, for instance) vs when they’re in their home city vs on the road?

    Good article, btw.

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  12. Scott Boras says:

    Now you know why I don’t send any of my players to Toronto!

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  13. Hurtlockertwo says:

    In my graduate school accounting class the professor always said “what do you want it to be?”. I suspect these guys will hire someone to find them deductions.

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  14. Bill says:

    Who cares what they pay in taxes? They’re rich so they should pay to support people who, God bless them, just don’t feel like working.

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  15. Llewdor says:

    The Marlin player perhaps most affected is Mark Buehrle.

    Mark Buehrle has a Pit Bull. He’s been very vocal about how he can’t live in Miami-Dade County because they have a ban on pit bulls.

    Ontario has a ban on pit bulls.

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  16. David says:

    There is a difference tax-wise between a playing being traded to Toronto and one signing a new deal in Toronto. A number of measures exist, including deferred payments and bonuses. Bonuses paid to a player upfront in a new contract are subject to Canadian withholding only, which is a lot less than the full tax rate. If there is a basis for incorporation, if only for a player’s off-field revenues, the player can benefit from Canada’s much lower corporate tax rate. Incorporation is quite common, even among professionals and freelancers. And corporations can deduct some of those agent and other fees that individuals can’t.

    Even for players on existing contracts, all Canadian teams limit the number of days players spent in Canada to limit the tax bite. The Jays not only train in Florida, every player leaves town the minute the season is over, so their total number of days spent in Canada, including perhaps a day or two for off-season promotional functions, is no more than 30% of the 365 day calendar year.

    Furthermore, Toronto/Ontario have no visiting jock tax so players on Toronto teams are not subject to the reciprocal taxes levied in some US cities. I believe, correct me if I am wrong, but Chicago’s jock tax applies only to players on teams whose cities applies one to visiting teams. As for clubhouse and other “fees”, they may apply in baseball, but I have never heard of similar in the NBA and NHL.

    So while I expect everything Eric has written is true or close to it, it’s not the entire story. The entire story seems to vary from player to player.

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  17. mike says:

    Eric, though accurate, your comments about mortgage interest deductions in USA vs. Canada speak only to the American perspective. In Canada there is no capital gains tax on the sale of a primary residence. The homeowner cannot deduct mortgage interest but keeps the capital gains when the home is sold. It’s a trade, no mortgage interest deduction in exchange for the untaxed capital gain Canadians are pleased to make.

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    • Eric Seidman says:

      Good info — though I don’t think I said anything about USA vs. Canada with that. I just mentioned in the comments that some taxpayers in the US may be phased out of it moving forward, in response to someone saying the deduction isn’t allowed in Canada.

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  18. mike says:

    To be sure the players are leaving the U.S. and specifically Florida with it’s tax structure for another country so naturally the discussion flows from there.
    Things are different in Canada. Absent the mortgage interest deduction Canadian mortgage payments are higher than in the U.S. Not to overdo it but there is a bit of a butterfly effect from this one difference in policy. A $35,000 bungalow purchased in 1973 is now $350,000 minimum in Canada–probably over $500,000 in Toronto. One of the reasons is that the non deductible mortgage interest is ‘in’ the price. Also, despite intense lobbying Canadian banks were not allowed to securitize mortgages and join the predatory lending party that destroyed housing markets and economies in Europe and the U.S. They were told that because a house is the single best investment that most Canadians will make loosening lending requirements in an era of low interest rates would lead to a speculative bubble.
    A $35,000 bungalow purchased in the U.S. in 1973 will not now be worth anything close to its’ Canadian counterpart.
    Mark Buehrle and Jose Reyes need advisers that understand this history and will explain that even with the tax hit in moving to Canada they get a lot for their money namely a housing market that will protect their investment. All because, among other things, they can’t deduct their mortgage interest from their taxes. It’s a small price to pay.

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  19. AA says:

    Reading the interestingly complex issue with agents makes it seem to me like having someone like Scott Boras or another lawyer as one’s agent is an advantage for the ballplayer, especially in Canada. They can argue, as was done successfully with pre-draft players and the NCAA, that this is an attorney-client relationship and not an agent-client relationship.

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