Athletes and Taxes, Part II: The Ohtani Case with Tax Expert Robert Raiola

00;00;14;09 - 00;01;04;13
Mark Conrad
Hello and welcome to the Sports Business Podcast with Prof. C, the podcast that explores the world of professional, collegiate, amateur and Olympic sports. I’m Mark Conrad or Prof. C from Fordham University’s Gabelli School of Business, where I serve as Professor of Law and Ethics and the Director of the Sports Business Initiative. On a recent podcast, we discussed taxes with Robert Raiola, an expert in this field who has worked with over 100 professional athletes in the five major sports to give us some of the ins and outs dealing with the numbers, rates and different types and scales of taxes that athletes pay.

00;01;04;15 - 00;01;36;03
Mark Conrad
As some of you may recall, Mr. Raiola is the director of the Sports and Entertainment Group in the firm of PKF O'Connor Davies in Cranford, New Jersey. He has more than 20 years of experience in both the public and private sector. That episode was recorded before Shohei Ohtani signed a ten year deferred $700 million contract with the Los Angeles Dodgers.

00;01;36;05 - 00;01;49;19
Mark Conrad
Mr. Raiola has graciously agreed to join us again to discuss the tax implications of Ohtani’s unusual contract. Robert, welcome back to the Sports Business Podcast.

00;01;49;21 - 00;01;52;06
Robert Raiola
Thank you for having me, Professor.

00;01;52;09 - 00;02;10;07
Mark Conrad
Okay, let's let's review this contract between Ohtani and the Dodgers, a ten year contract totaling $700 million, but how the money is paid is what makes it unusual. Could you explain what makes this so unusual?

00;02;10;09 - 00;02;43;25
Robert Raiola
Sure. This contract is most unusual because of the amount of deferred compensation in the deal without having any interest paid on the deferred money. So the total deal, as Walker alluded to, will be with $700 million for ten years in the...from 2024 to 2033, Ohtani will receive $2 million per year. From 34, from 2034 to 2043. He will receive a whopping $68 million a year for each of those years.

00;02;44;02 - 00;03;06;19
Robert Raiola
He does not receive any signing bonus, but the whole [...] here for him is that it is entirely possible that the deferred money he would not have to pay California tax on. So California has asked the IRS to help them out with changing some coding in their law in order to get this income to not to be taxable in California.

00;03;06;22 - 00;03;13;28
Mark Conrad
Now, do you think that that was a factor in the negotiations for this kind of deferred compensation deal?

00;03;14;00 - 00;03;42;16
Robert Raiola
I think what happened, Mark, they’re trying to get around for the team, around the the luxury tax. And by taking only $2 million a year, let's not feel bad for him - he's making 230 million endorsement money - so he can afford to live on the $2 million a year because in fact, he's got a lot more endorsement income. So I think that they knew what they were doing and they had a really good accountant who figured out this might work for them.

00;03;42;19 - 00;03;54;10
Mark Conrad
Well, let's talk about California's tax rate now. It's up to 14.4%. And that would be an awful lot of money if he was getting paid the 70 million every year.

00;03;54;13 - 00;04;29;15
Robert Raiola
Yes. What it is, Mark, is the the first couple of years is 2 million, and on the side, whatever he gets in endorsements, too, it's not really a factor. And then he gets the $68 million a year. So it wouldn't be 70. He'd be getting $68 million a year deferred. Most unusual that there's no interest here. But if he could, if the law as it was just now, would say that if he became a nonresident after the deferral period, he would pay no tax to California, which obviously, as you alluded to, is huge because the rate now on wages is up to 14.4%.

00;04;29;18 - 00;04;34;08
Mark Conrad
But what is the Internal Revenue Service or Internal Revenue Code say about this issue?

00;04;34;11 - 00;04;52;14
Robert Raiola
They say if it's a retirement income and deferred comp meets that, that he would be able to exclude it from income as long as the payments were over a certain myriad of time. And I think that they said to the effect that the payments are equal in renumeration that he would receive.

00;04;52;16 - 00;05;14;21
Mark Conrad
But is it really retirement income? It's deferred income. So it's not the same as a pension where someone moves to Florida and say, okay, they're not in California anymore, but it's really part of his employment contract. So couldn't California say simply say like, look, it's part of your payment, your compensation. We're delaying it.

00;05;14;24 - 00;05;26;00
Robert Raiola
They could. And, you know, I can tell you this, that in ten years from now, there'll be a battle between California and Ohtani's representatives as to which way they should go.

00;05;26;03 - 00;05;34;04
Mark Conrad
And do you think that'd be possible to amend the law on California's side, either through Congress or through Sacramento?

00;05;34;06 - 00;05;48;02
Robert Raiola
It's possible you hit the nail on the head that they would have to go to Congress to change the law. But it's a lot of money to California's court rules. And I you you can bet your bottom dollar that they're going to go after this and try to recapture this one.

00;05;48;04 - 00;06;08;26
Mark Conrad
So let's say Ohtani plays ten years with the Dodgers and quote unquote, doesn't play anymore or may go to another team, in fact, and resides in Florida, which has no state income tax. So the position that Ohtani would say is that, you know what, I don't have to pay tax on $0.01 of the $68 million in the next ten years.

00;06;08;26 - 00;06;09;22
Mark Conrad
Is that correct?

00;06;09;25 - 00;06;11;07
Robert Raiola
That is correct, Mark.

00;06;11;10 - 00;06;23;11
Mark Conrad
And then what happens if he goes to live in Japan? Or let's let me ask first the question, does he still have a residence in Japan? You know, does Japanese tax law have anything to do with this at this point?

00;06;23;14 - 00;06;52;14
Robert Raiola
We believe that he is he's gotten he’s dotted his “I”s and crossed his “T”s in, I guess in a number of years he was with the Anaheim Angels that he’s faced this issue and resolved it by getting out of Japan. The problem with Japan is that they have a 35% tax rate plus a 10% consumption tax, so he'd pay 45% over there, whereas over here he'd only be paying the 37%, especially if he is able to get the money not taxed in California.

00;06;52;21 - 00;07;02;04
Robert Raiola
But for purposes of what we did in an article, we figured that he would not be subject to any tax in Japan at all. all.

00;07;02;07 - 00;07;05;12
Mark Conrad
Now, is there a tax treaty between Japan and the United States?

00;07;05;15 - 00;07;07;02
Robert Raiola
Yes, there is.

00;07;07;04 - 00;07;14;25
Mark Conrad
And what does [...] say that there is an exclusion for taxes earned in the United States by a Japanese national?

00;07;14;28 - 00;07;31;15
Robert Raiola
I'm not sure as it alludes to that. Well, like I said, we're on the phone with our Japanese office and we asked them and they said the feeling was that he wouldn't be a Japanese resident for purposes of this tax situation. [...]

00;07;31;18 - 00;07;38;27
Mark Conrad
So even if he moves back to Japan, the position would be that he may not have to pay any taxes in Japan.

00;07;39;00 - 00;07;44;07
Robert Raiola
That's a possibility. I think he'd be better off staying in the U.S. and occasionally visit Japan.

00;07;44;10 - 00;07;52;24
Mark Conrad
So now let's say he wants to stay in California. If he stays in California during those ten years, then there's really no issue. He would pay it anyway. Correct?

00;07;52;24 - 00;07;53;24
Robert Raiola
That is correct.

00;07;53;27 - 00;08;02;21
Mark Conrad
So what do you think motivated him to have so much deferred income? You know, the endorsements only last so long.

00;08;02;24 - 00;08;26;05
Robert Raiola
That's a great question, Mark. I mean, I could see him wanting the Dodgers to get other really good players and opening up some more money to spend in free agency, which they did by getting Yakamoto. They signed him after subsequently signing Ohtani. But that's an awful lot and without interest to say I guess he's living off those endorsements, like you said, that could dry up.

00;08;26;07 - 00;08;33;17
Robert Raiola
But if that's what he chose, his people chose to do. I don't think he had to do it to that extremity. But he went ahead and did that.

00;08;33;19 - 00;08;45;14
Mark Conrad
Well, does this create a precedent for other players to do something like this? Because in baseball, obviously, it's allowed. So do you think this could be a attractive to some other players in the future?

00;08;45;17 - 00;09;03;22
Robert Raiola
No doubt about it. You know, if he was to get the money equally over the ten years would be a lot more than 2 million a year. But the players are going to look at this and say, if Ohtani did it and he's at the end of the day, he's getting $700 million, no matter how he gets the money, it would be 700 million.

00;09;03;28 - 00;09;14;18
Robert Raiola
But if he was to get equal payments over the ten years, the present value of the contract would be a lot more than it is the way he structured it now because he would have [...]

00;09;14;20 - 00;09;23;24
Mark Conrad
Right, and that's it with inflation and other things. So he’s in a sense sacrificing money he could earn right now for banking on the future.

00;09;23;26 - 00;09;40;25
Robert Raiola
Right. And again, I'm not saying that he did it only for the Dodgers benefit. Obviously, he got a lot of money, but the Dodgers will benefit. And they did benefit by saying signing Yakamoto and they had the money to play with the luxury tax because Ohtani took less money in the first ten years.

00;09;40;28 - 00;10;01;05
Mark Conrad
But from the Dodgers point of view, the team has the luxury, if you will, of creating a deal like that that some poorer teams may not. You know, just for listeners who may not know, the Dodgers have a very lucrative cable deal that extends for many, many years and that could fund this sort of thing. But say the Milwaukee Brewers may not be able to do that.

00;10;01;05 - 00;10;09;00
Mark Conrad
So is this technique or tactic going to be limited to the few wealthy teams in baseball?

00;10;09;02 - 00;10;29;20
Robert Raiola
That's a good point. It could be limited, but they could always try to take some [...] compensation structure and, you know, try to iron it out that would work for them, maybe not to the extreme that Ohtani got, but maybe on a smaller scale, it would it would work for the team. They like the fact that there's no interest on the payments.

00;10;29;22 - 00;10;41;24
Mark Conrad
And you would say that's a concession by Ohtani because of the [...] rate and that the Dodgers could be arguably. So arguably by today's dollars it's not 700 million, it's maybe 500 million.

00;10;41;26 - 00;10;52;22
Robert Raiola
Right. I agree with your point. Let's not feel too bad for Ohtani because with the endorsement income and the 700 million, he's in great shape no matter how he decided to take the money.

00;10;52;25 - 00;11;07;08
Mark Conrad
Well, I think that's true. Most of the people would feel like even the $2 million a year would be fine. And he's certainly made good amounts of money when he was with the Angels, too. You know, we can't forget that. So indeed. But anything else that struck you about this deal?

00;11;07;10 - 00;11;18;18
Robert Raiola
I find it extremely fascinating. And the next player - Yakamoto - when he signed his deal, he got a signing bonus upfront, but he didn't play any games with the deferred comp.

00;11;18;21 - 00;11;26;14
Mark Conrad
Okay. Well, thank you very much for coming back to the podcast and look forward to seeing you in the future sometime.

00;11;26;16 - 00;11;30;15
Robert Raiola
Thank you very much, Mark, and thank you, Victoria, for your assistance as well.

00;11;30;18 - 00;11;58;25
Mark Conrad
You're very welcome. Thank you for joining. On that note, on behalf of Fordham University, the Gabelli School of Business, and the Sports Business Initiative, thanks to Robert Raiola for coming back on the Sports Business podcast with Prof. C. And thanks to my producer, Victoria Ilano, for her great work. And thanks to all of you for listening in. For the Sports Business Podcast at Fordham's Gabelli School of Business,

00;11;58;27 - 00;12;02;24
Mark Conrad
I’m Mark Conrad or Prof. C. Have a great day.