State Controller Asks Congress To Change Law To Block Shohei Ohtani’s Avoidance Of $100 Million California Tax By Deferring $680 Million Of His Dodgers Salary For 10 Years

Following up on my previous post, Shohei Ohtani’s Contract Could Save Him $100 Million In Taxes — And Start A Silicon Valley Tax Planning Trend:  Robert W. Wood (Forbes), California Seeks Tax Law Change For Ohtani $700 Million Baseball Contract:

Baseball star Shohei Ohtani’s record-breaking $700 million contract with the Los Angeles Dodgers is in the news again, and this time it is all about taxes. The baseball phenom and his advisers appear to have lawfully steered clear of California taxes for most of the outsize pay deal—for now.

Ohtani reportedly deferred most of his salary under his 10-year contract with the Dodgers. It may cleverly avoid California’s 14.4% state income tax as long as he moves out before the big money starts rolling in. But California’s Controller Malia M. Cohen wants Congress to change the tax code to cap deferred payments, a change that could ensure the state gets a hefty cut.

California has been known to change the law to send tax revenues its way, sometimes even retroactively, such as the 2023 law to retroactively tax certain trusts. But a change to get a piece of deferred pay deals like Ohtani’s would have to be made to federal tax law, not just California. The California Controller asked for Congress to step in over the $700 million Dodgers player contract that awards the start pitcher-slugger just $20 million for ten years of play. The whopping $680 million payout kicks in for 2034 through 2043 to nicely escape California tax, as long as Ohtani moves out by 2034.

Even without a change in the law, it is possible that California could attack the pay deal as unrealistic for Ohtani’s services and as artificially back-loaded. But the Controller seems to agree with Ohtani’s tax lawyers that the $680 million may slip through California’s tax net. The Controller’s statement said that “The absence of reasonable caps on deferral for the wealthiest individuals exacerbates income inequality and hinders the fair distribution of taxes. I would urge Congress to take immediate and decisive action to rectify this imbalance.”

Paul Jones (Tax Notes), Ohtani's Dodgers Contract Draws California Controller's Ire:

The controller’s comments come after the contract has been scrutinized by the sports, business, and tax press for its unusual and apparently tax-planning-focused structure. The report by the California Center for Jobs and the Economy analyzed the contract partly in the context of California’s highly progressive income tax structure, of which the business roundtable is a critic [California Strikes Out on Ohtani’s Blockbuster Dodger Deal: Tax Analysis of Shohei Ohtani’s Salary Deferral].

According to the report, “If paid up front, the full $70 million would be subject to California’s highest-in-the-nation 13.3 percent income tax rate” and the 1.1 percent California State Disability Insurance tax rate. Lawmakers modified that tax in 2022 so that it now applies to all of a taxpayer’s wages, rather than the previously capped amount.

“While the federal tax savings of $27.4 million a year will eventually have to be paid once the deferred payments start kicking in . . . the California share of the tax take likely can be avoided altogether” if Ohtani is no longer residing in California at that point, the report said. “Deferring the income potentially saves Ohtani an additional $9.8 million annually in taxes, or $98 million over the life of his contract.”

California State Controller Press Release, Statement Regarding Ohtani Contract:

State Controller Malia M. Cohen released the following statement following last month’s announcement that the L.A. Dodgers signed a 10-year, $700 million contract with pitcher Shohei Ohtani. The contract is structured so that Ohtani will receive $2 million per year and defer the balance approximately 10 years, when he could potentially return to Japan and escape payment of California state income taxes on the deferred amount:

“The current tax system allows for unlimited deferrals for those fortunate enough to be in the highest tax brackets, creating a significant imbalance in the tax structure.” said Cohen. “The absence of reasonable caps on deferral for the wealthiest individuals exacerbates income inequality and hinders the fair distribution of taxes. I would urge Congress to take immediate and decisive action to rectify this imbalance.”

“Introducing limits on deductions and exemptions for high-income earners promotes social responsibility and contributes to a tax system that is just and beneficial for all. This action would not only create a more equitable tax system, but also generate additional revenue that can be directed towards addressing pressing important social issues and fostering economic stability,” Cohen stated.