Foul on the play! In a brand new case, Hoops, LP, TC Memo 2022-9, 2/23/22, the previous proprietor of knowledgeable basketball staff tried to deduct nonqualified deferred compensation that was owed to 2 of their gamers. However the Tax Court docket decided that taking a present deduction was a violation of the principles.
First, right here’s some background info. A nonqualified deferred compensation plan is an association that’s normally set as much as complement a professional retirement plan like a 401(okay) plan. It’s typically a beautiful recruiting instrument for employers.
For starters, the plan is exempt from most reporting necessities and strict ERISA guidelines, so it will probably discriminate in favor of highly-compensated workers (HCEs). As well as, it’s not topic to the required minimal distribution (RMD) guidelines for certified plans. In consequence, such plans can enchantment to workers at present within the prime of their careers.
Additionally, if the employer is experiencing money circulation issues, funds are postponed till a time when it’s extra possible. And the plan can reward HCEs for assembly particular efficiency requirements—both individually or for the general operation—whereas offering vesting over time or upon the prevalence of sure occasions acknowledged within the settlement.
So long as the plan is unfunded—in different phrases, quantities aren’t put aside and particularly earmarked for this goal—the worker doesn‘t owe tax till a future date—normally at retirement. However this additionally defers the employer’s deduction till the time the worker acknowledges earnings.
Info of the brand new case: In 2000, Hoops Inc., led by Michael Heisley, acquired the Vancouver Grizzlies, an NBA franchise. After the Grizzlies moved to Memphis in 2001, Hoops continued to personal and function the staff till it bought it in 2012.
As a part of the deal, the client agreed to buy considerably the entire belongings and to imagine considerably the entire liabilities and obligations of Hoops. This included binding contracts for 2 gamers, Zach Randolph and Michael Conley. The contracts supplied for nonqualified deferred comp preparations totaling $11 million.
The previous proprietor of the Grizzlies deducted the deferred compensation quantities in 2012, the 12 months of the sale. Nevertheless, the gamers didn’t owe any tax on the earnings but underneath the phrases of their agreements. When the IRS disallowed the deduction, the case proceeded to the Tax Court docket.
Recreation over: The Court docket sided with the IRS. Primarily based on the tax code and relevant laws, it mentioned that the nonqualified deferred comp is deductible solely within the 12 months during which the staff embody these quantities in earnings. This end result applies even when the vendor makes use of the accrual technique of accounting.
Maintain these tax rules in thoughts when working you’re engaged on a sport plan for shoppers.
