Abstract
The next few months will be busy ones for moving companies that have NCAA basketball coaches as customers. In the past few months, several men’s college basketball coaches have accepted jobs at different schools. Several of those coaches, who were still under contract at their former institution, had buyout provisions that allowed them to terminate their relationship for a set price. John Beilein is a prominent example of this since his buy out price was so high.
Last season, Beilein was the head basketball coach at West Virginia University where he was under contract with the school until 2012. On April 3 of this year, the University of Michigan hired Beilein to become the head coach of its men’s basketball team. Under his contract with West Virginia University, if Beilein left that position before the contract term expired, he was required to pay a specified amount to the university. Initially, it was reported that the amount to be paid was in the vicinity of $2,000,000 to $2,500,000. Subsequently, it was reported that West Virginia and Beilein agreed that Beilein would pay the university $1,500,000 over a five-year period in full settlement of his obligation.
Prior to Beilein’s hiring, there was speculation in the media that the University of Michigan would pay West Virginia University the amount owed under Beilein’s contract. The question then arose as to the tax consequences to Beilein that such a payment would engender.
The determination of the tax consequences to an employee whose new employer makes the buy out payment owing to the employee’s prior employer raises issues that can arise innumerous circumstances and so warrants consideration. While we focus on Beilein’s facts in this article, that is merely for convenience; and the issue is of much wider significance. The tax treatment of buy out obligations is merely a subset of the broader question of how to tax a new employer’s payments of personal obligations of the new employee that are connected to the commencement of the new employment. For example, a new employer’s payment of the fee owed by the new employee to an employment agency for locating the job raises similar issues.
There were three possible methods for the University of Michigan to address Beilein’s buy out provision: (1) the University of Michigan could pay, or reimburse Beilein for, the required buy out; (2) while the University of Michigan would neither pay the required buy out amount nor specifically reimburse Beilein, the university could pay Beilein a higher salary in order to offset or mitigate his buy out expense and (3) the University of Michigan could neither pay the buy-out nor reimburse Beilein, and no additional compensation would be paid to Beilein to offset his expense. According to reports, the deal between the University of Michigan and Beilein adopts the third option.
This article will examine the possible tax consequences for each of the three options.
Recommended Citation
Douglas A. Kahn and Jeffrey H. Kahn,
Tax Consequences When a New Employer Bears the Cost of the Employee's Terminating a Prior Employment Relationship,
8 Fla. Tax Rev.
(2008).
Available at: https://scholarship.law.ufl.edu/ftr/vol8/iss1/8