Monday, December 15, 2008

NFL Player Agents Warned of 409A Peril

Players Association Sends Urgent Memo

"The NFLPA was clear about the importance of this provision in its memo to all agents: “This memorandum identifies an extremely important tax issue that may affect your player-clients and requires your immediate attention. The NFL has just informed the NFLPA that NFL clubs did not draft or amend many NFL player contracts in order to bring them into compliance with Section 409A of the Internal Revenue Code. As a result, many player contracts that include certain deferred compensation arrangements may not comply with the new tax provisions, thereby resulting in accelerated taxable income and/or an additional 20% tax, imposed on the player-client, unless the contracts are amended on or before December 31, 2008.”"


Anonymous said...

I have an article coming out in Seton Hall S&E Law Journal suggesting that, pursuant to section 83, players receive signing bonuses in the form of property such that their inclusion may be deferred until such time as the CBA prohibits forfeiture of the signing bonus due to non-performance (suspension, etc.).

Might this strategy avoid the 409A trap? Moreover, since signing bonuses carry a substantial risk of forfeiture until 'earned', does 409A apply at all given that 409(a)applies to compensation "to the extent not subject to a substantial risk of forfeiture"?

Andre L. Smith, assistant professor
FIU College of Law
Miami, FL

Lon Sobel said...

Does anyone have a copy of the NFLPA letter -- one that can be posted? (Or is it confidential?)

xtremerisa said...

I agree this is a big problem. In fact, there may be additional nuances that are even more troubling. Here was my take on this, posted on July 31, 2008 under the heading, "Making Sport of 409A":

Well, here's a quickie for you, spanning both entertainment and 409A. Key to any number of re-upping of contracts, trades, etc., in the sports world is the common and critical practice of the "restructuring" of what are extremely large payments and payment streams - "restructuring the contract," if you will. Sometimes, for example, the restructuring is needed to accommodate a team's financial needs generally, to make the contract appealing to another team or to fit within a salary cap. What happens on and after January 1, 2009, after the expiration of transition relief under our ol' friend cap-A? (I still think that maybe the biggest emerging issue under cap-A will prove to be the unchangeability thereunder of any number of compensation arrangements, particularly in the context of a wide range of transactional settings.) For those payments that were deferred comp., and for those payments that are to be newly or additionally deferred, how the heck are these restructuring arrangements going to continue to occur (without acceleration of taxation and an additional 20% tax)? Where they cannot be so restructured, what will be the effect on the sports industry and the teams and athletes involved? There may need to be real attention paid in the industry to ensuring that existing arrangements are "short-term deferrals" so as to permit flexibility, although even that may not be enough to facilitate deals where deferral (if not in compliance with the one-year/five-year requirements), rather than acceleration, is sought. Hmm - will someone ask Congress to get involved? (Don't forget the golfers' exception (couched as a medical/doctors'/hospital exception in the legislative history) under Rostenkowski's 457(e)(12).) Just wondering . . .