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Friday, December 21, 2007

Not So Rich Anymore?

Got an interesting email from MZone reader Ron regarding new coach Rich Rodriquez and the tax consequences of his rumored $4M buyout clause...

I am a CPA and a tax lawyer as well as a football fan. RR has a famous $4,000,000 buy-out in his West by God Virginia contract. It is rumored that UM will directly or indirectly pay this.

This brings up what tax professionals call: "Phantom Income". Money he will have to pay taxes on that he never gets.

If anyone other that RR pays it, RR will owe income taxes on the $4,000,000. In his bracket, that going to hit at 45% to 50% including state and local tax. So that $1,800,000 to $2,000,000 in AFTER TAX cash that he will need to come up with. If UM pays it or it is paid on UM's behalf, he and UM will also have to pay 1.45% Medicare taxes.

Even if WBGV agrees to just drop it, it is "forgiveness of indebtedness" and he will be liable for the taxes on the money.

RR is making money that most people have difficulty imagining and has probably put a nice chunk aside by now (he has had little opportunity to spend much in Morgantown -- how much can a double-wide cost? and Bentley doesn't make a pick-up.) but after paying his taxes in 2008, he will probably have -0- take home pay.

Lots of times, phantom income gets ignored because the IRS doesn't learn of it. But RR's phantom income has got a lot of media attention and there are probably some Mount Near (to use their pronunciation) fans in Compliance and Audit that hold a bit of grudge against Rich.


whetstonebuck said...

And so it begins.

Joe said...

Wouldn't the AEA apply and lower his taxes? I think the AEA is 2 million this year. That means he would have to pay taxes on 2 million and not the whole 4. I think that is correct.

Joe said...

Oops, I was thinking of the AEA for estates (which is the 2 million). Obviously that AEA would not apply here. But, the AEA for gifts is $1,000,000 and the UCr for gifts $345,800. Wonder how those could be used to help lower the taxes (if RR wanted to use the whole UCr). Wonder if the taxes could be structured as to allow payment over time?

srudoff said...

It cracks me up to see Michigan fans making fun of West Virginia, calling them hillybillies, talking about double-wides, etc - your school just hired a born and (in)bred Hillbilly. He's a "Mount Near", his wife is a "Mount Near" - hell she was a "Mount Near" cheerleader! I guess he's acceptable though.

Thunder said...

unfortunately, i think this is the dumbest post i've ever seen on mzone... i mean, sure, it's a well laid out argument by a cpa and tax attorney, but do you really think that lawyers and accountants and officials from both schools haven't thought of these factors? There is zero chance that Rodriguez left an opportunity where he could make millions to go somewhere where he could make less-than-zero.

Lots of other coaches have changed teams to go somewhere more prestigious and didn't have to live on their savings from past employment. (Hey, I could be wrong here, but show me some examples).

As far as RR's phantom income getting more attention than others, how many other buyouts have you heard about this year alone? ARod comes to mind first.. If I had more time tonight, I'd come up with at least a dozen

DaBraylon17 said...

fuck the god damned government. what a fuckin rip off.

here is a question: you win 20,000 dollars on a scratch off lotto ticket, you pay taxes. you win ONE dollar off a scratch off lotto ticket, you DON'T pay taxes on that? WHY NOT?

i understand the need to fund our government, but they tax on too many things.