Tenure Buyouts: Capital Gain Treatment

ATA Journal of Legal Tax Research Vol 3, 2005

16 Pages Posted: 27 Nov 2013 Last revised: 2 Jan 2014

John O. Everett

Virginia Commonwealth University (VCU) - Department of Accounting

William A. Raabe

University of Wisconsin - Whitewater - College of Business and Economics

Julie Gentile

California State University

Date Written: January 1, 2005

Abstract

In the increasingly common case where a faculty member accepts a buyout of tenure rights toward the end of his or her career, an interesting tax question arises. Does the relinquishment of tenure involve a "sale or exchange" of a capital asset, qualifying for long-term capital gains treatment? Or should the transaction be viewed as one generating ordinary income to "replace" normal compensation that would otherwise be received in the future?

Tax Court dicta indicate that the compensation received should be reported as ordinary gross income. But statutory and judicial law effective since the Tax Court decision support an interpretation that some portion of the benefits constitute a payment for a property right, triggering capital gain treatment, a much more taxpayer-friendly result.

An analogy to the capital gain result may be found elsewhere in the Code, suggesting the authors’ position that the tenure buyout represents at least in part the payment for the exchange of an asset.

Keywords: tenure, capital gain, payroll, ordinary income

JEL Classification: E62, H24

Suggested Citation

Everett, John O. and Raabe, William A. and Gentile, Julie, Tenure Buyouts: Capital Gain Treatment (January 1, 2005). ATA Journal of Legal Tax Research Vol 3, 2005. Available at SSRN: https://ssrn.com/abstract=2359559

John O. Everett

Virginia Commonwealth University (VCU) - Department of Accounting ( email )

Richmond, VA 23284
United States

William A. Raabe (Contact Author)

University of Wisconsin - Whitewater - College of Business and Economics ( email )

Whitewater, WI 53190
United States

HOME PAGE: http://billraabetax.com

Julie Gentile

California State University ( email )

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