California Legislation Would Ask Congress To Close Shohei Ohtani Tax Loophole

Following up on my previous posts (links below):  The Athletic, California Lawmaker Seeks to Close Shohei Ohtani Tax Loophole: ‘It’s a Massive Hidden Ball Trick’

Shohei Ohtani will avoid paying an estimated $90 million in California state income taxes as a result of deferring nearly all of his record-setting $700 million contract with the Los Angeles Dodgers. Now California lawmakers are pushing to change the federal tax code to prevent Ohtani’s contract structure from becoming standardized among high earners in baseball and beyond.

State Senator Josh Becker introduced legislation on Wednesday that urges the U.S. Congress “to establish a reasonable cap on deferred compensation.” Senate Joint Resolution No. 14 passed a Revenue and Tax Committee vote 6-1. The next step for the resolution, which was sponsored by State Controller Malia Cohen, will be discussion and a vote on the State Senate floor in the coming weeks.

“Ultimately, this is about fairness,” Becker said in a phone interview. “This is earned income. This is not retirement income. This is income that is earned here and should be taxed here. It wasn’t what the federal tax code was meant to contemplate. It’s a massive hidden-ball trick.”

Ohtani is accepting annual payments of just $2 million from the Dodgers over the life of his 10-year contract, a structure that Ohtani and his representatives said they proposed because it gives the club greater financial flexibility to continue to make major investments in other star players. But deferring $680 million of his $700 million contract also sets up Ohtani to avoid paying state taxes on the deferred amounts if he no longer resides in the state of California. Ohtani presumably would return to Japan upon the conclusion of his contract.

The federal tax code was altered in 1996 when Congress passed legislation that bars states from taxing deferred compensation on out-of-state residents when their payments are made in equal periodic amounts over at least 10 years. Those laws were designed to protect pension income, Becker said.

“The amounts being discussed were $30,000, then $100,000, and at some point, it became unlimited,” Becker said.

Ohtani’s contract structure is viewed as unique and not likely to be duplicated across the industry because the two-way star’s income streams from endorsements are unrivaled among major league players. For high earners outside baseball, though, the contract sets a potential precedent in a state whose top tax rate of 13.3 percent is among the highest in the nation.

Prior TaxProf Blog coverage:

• Shohei Ohtani’s Contract Could Save Him $100 Million In Taxes — And Start A Silicon Valley Tax Planning Trend  (Dec. 22, 2023)
• 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 (Jan. 16, 2024)