Tax Magic: Did Billy Donovan Pull Income Out of a Hat?

Abstract:     
Billy Donovan is the men's head basketball coach at the University of Florida. Donovan agreed to become the new coach of the Orlando Magic, a professional basketball team and he signed a five-year, $27.5 million dollar contract with the Magic.

Almost immediately after signing the contract, Donovan had second thoughts about joining the Magic and leaving the University of Florida. After some negotiation, the two sides reached an agreement that allowed Donovan to walk away from the employment contract with the Magic and remain the head coach at the University of Florida. This article addresses the question of whether Donovan realized income from those transactions.

In examining the question of whether Donovan realized taxable income we will discuss the tax consequences of two possible circumstances. In the first circumstance, we assume that the Magic released Donovan without receiving any compensation from him. The second (and seemingly more accurate circumstance) assumes that the Magic, in exchange for releasing Donovan from the employment agreement, required as compensation his execution of the non-compete contract.

Keywords: Tax, Income, Donovan, Employment Contract, Non Compete

JEL Classifications: H20, H24

Accepted Paper Series