Will the Tax Man Cometh to Coach Rodriguez?
6 Pages Posted: 23 Nov 2009 Last revised: 15 Dec 2009
Date Written: August 4, 2008
When Richard Rodriguez moved from West Virginia University to the University of Michigan. Coach Rodriguez had a contract with his former employer that required him to pay $4 million dollars to West Virginia if he left for another coaching position. After a suit was filed, it was reported that the parties agreed that the $4 million dollars will be paid to West Virginia, of which Rodriguez will pay $1.5 million dollars in installments, and the University of Michigan (his new employer) will pay the remaining $2.5 million. How tax law applies to that buyout and whether Coach Rodriguez will incur federal income tax liability because of Michigan’s payment of $2.5 million are interesting questions. Simply put, will Michigan’s payment of 62.5 percent of the buyout obligation cause the taxman to cometh to Coach Rodriguez?
We conclude that a payment of a buyout fee to terminate an employment contract is a deductible expense, and that the employee does not incur income tax liability when the new employer pays all or part of his buyout obligation.
Keywords: Taxation, Employment, Termination, Buyout, Rodriguez, Coach
JEL Classification: H20, H24, H25
Suggested Citation: Suggested Citation