Do NFL Signing Bonuses Carry a Substantial Risk of Forfeiture within the Meaning of Section 83 of the Internal Revenue Code?

Abstract:     
Imagine a recently graduated collegiate football superstar who is drafted by and signs a lucrative contract with a National Football League team. The contract is for five years and includes a $10million dollar signing bonus. During his rookie season, war breaks out, and the United States is involved. A patriot on the order of Pat Tillman, our star retires from football after only one season, joins the military and departs for the war theater. Unfortunately, he is injured during his tour of duty and is unable thereafter to return to professional football. Or, imagine that a current NFL player acts upon his preference to practice medicine or enter a religious order.

The collective bargaining agreement between the National Football Management Council and the National Football Players Association (the CBA) permits teams to recover the portion of the $10million signing bonus that was not earned on the playing field, $8million dollars in this case. However, after paying let's say $3million in federal income taxes on the receipt of $10million, our football player turned patriot/doctor/priest does not have $8million to return to his NFL team.

In addition, even if the athlete has other sources of funds and can in fact return the $8million, he will have paid taxes on the receipt of funds he was ultimately not allowed to keep. Technically, he will be allowed a deduction for the $8million he's lost, but as a practical matter a tax deduction has no benefit to a taxpayer who has not sufficient income to absorb the deduction. In the case of our war hero, it is unlikely that he will ever earn enough money during the rest of his life to take advantage of the loss deduction. Moreover, because of the time value of money, the future value of this loss deduction is obviously less than the present value of the taxes paid on that $8million. Even worse, if the taxpayer's tax rate is lower in those later years, which is highly likely in the above scenario, the value of the deduction is even lesser.

This article demonstrates how the foregoing tax hardships can be ameliorated by paying NFL players their signing bonuses in the form of property such that they qualify for tax deferral pursuant to section 83 of the Internal Revenue Code. Section 83, originally designed to address the divestiture of employee stock options, permits deferral of the recognition of income until such time as it cannot be divested from the employee by reason of non-performance. Signing bonuses are earned by the mere signing of a contract and are, according to common law, not contingent upon actual performance on the playing field. However, the CBA permits their forfeiture, and thus places signing bonuses if paid in property within the purview of section 83.

Keywords: tax, jurisprudence, football, sports, bonus, income, deferral

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