Are buy-out payments a professional sports team pays a nonresident athlete to terminate his employment contract taxable as New York source income?

Plain-English summary

Petitioner is a professional athlete and foreign domiciliary who played for his home country's national team in three Winter Olympics and for professional teams in his home country before leaving in 1993 to play abroad. In June 2001, he was traded to a New York-based professional sports team and, as a restricted free agent, negotiated a 10-year contract with that team beginning with the 2001-2002 season. His employment with the New York team continued through the 2006-2007 season, during which he missed 24 regular-season games due to injury. Citing that and other performance issues, the New York team exercised a contractual buy-out option in June 2007, terminating his employment under Section 13 of his contract. Under that provision, the team was obligated to pay him, in equal monthly installments over twice the remaining contract years, an amount equal to two-thirds of his total fixed league salary for the unexpired term. Petitioner then returned home and played the 2007-2008 season for a team there instead, spending no more than 158 days in New York State during 2007.

The Department analyzed whether the buy-out payments constituted New York source income under Tax Law § 631(a), which taxes a nonresident's income derived from or connected with New York sources. Because Petitioner was a member of a professional athletic team, the Department applied 20 NYCRR 132.22(b)(4)(i), the regulation defining "total compensation for services rendered as a member of a professional athletic team." That regulation lists what counts as such compensation (salaries, wages, bonuses, and similar amounts for services performed during the season or related activities) but expressly carves out certain items, stating that such compensation "shall not include strike benefits, severance pay, termination pay, contract or option year buy-out payments, expansion or relocation payments, or any other payments not related to services rendered for the team."

Because the payments Petitioner received were made solely on account of the New York team's exercise of its buy-out option - not in exchange for any services he performed - the Department concluded they fell squarely within the regulation's exclusion for termination pay and buy-out payments. The Department therefore held that these payments do not constitute New York source income and are not subject to New York withholding, even though Petitioner had played for the New York team for several seasons.

What this means for you

Professional athletes bought out of a New York team contract

If a professional sports team based in New York terminates your contract under a buy-out or option clause and pays you an amount tied to your remaining contract term rather than to services performed, that payment is not New York source income under 20 NYCRR 132.22(b)(4)(i) - regardless of how many prior seasons you played for the team or how the payments are scheduled to be disbursed.

Teams and payroll administrators

A New York team is not required to withhold New York income tax on buy-out, termination, severance, or similar payments made to a nonresident player whose contract it terminates, because such payments are excluded from the regulatory definition of compensation for services rendered as a team member.

Accountants and tax professionals

When advising a nonresident athlete client, distinguish between compensation for services actually rendered (which remains allocable to New York under the usual "duty days" rules) and termination or buy-out pay, which this opinion confirms is excluded from that source-income calculation entirely - not merely allocated based on days spent in the state.

Common questions

Q: Why aren't buy-out payments treated like the salary the athlete earned while playing for the New York team?
A: 20 NYCRR 132.22(b)(4)(i) specifically distinguishes compensation for services rendered from termination pay and buy-out payments, and expressly excludes the latter from the definition of taxable team-member compensation.

Q: Does it matter that the payments were calculated based on the athlete's remaining contract salary?
A: No. The regulation excludes "contract or option year buy-out payments" from taxable compensation regardless of how the payment amount is calculated, so long as the payment is made on account of termination rather than for services performed.

Q: Does the number of days the athlete spent in New York during the year affect this result?
A: No. Because the buy-out payments are excluded from the definition of compensation for services rendered in the first place, the ordinary day-count allocation rules for nonresident athletes never come into play for these particular payments.

Q: Is the team required to withhold New York tax on these payments?
A: No. Since the payments are not New York source income, the Department concluded they are not subject to New York withholding.

Citations and references

• Tax Law § 631(a) - New York source income of a nonresident individual
• 20 NYCRR 132.22(b)(4)(i) - defines "total compensation for services rendered as a member of a professional athletic team" and excludes strike benefits, severance pay, termination pay, contract or option year buy-out payments, expansion or relocation payments, and other payments not related to services rendered for the team

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_2009.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a09_11i.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Counsel
Advisory Opinion Unit

TSB-A-09(11)I
Income Tax
September 22, 2009

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I090210B

The petition asks whether payments made in respect of termination of name redacted employment
contract with the name redacted constitute New York source income.
We conclude that the payments in respect of the termination of Petitioner’s employment contract
do not constitute New York source income.
Facts
Petitioner is a professional sports player, carries a foreign passport, and is a domiciliary of
X-Country. Petitioner has always maintained a permanent home in X-Country and currently lives in
X-Country. Petitioner has also represented X-Country in the Olympics for each of the 1998, 2002, and
2006 Winter Olympics, and he has also played for X-Country’s professional sports team throughout his
career. Additionally, during the 2004-2005 season, Petitioner returned to X-Country and played for a
professional sports team, the team for which he currently plays.
In 1993, Petitioner left X-Country to play professional sports with a team in another country, by
which he was employed from the 1993-1994 through the 2000-2001 seasons. In June 2001, the
professional sports team traded Petitioner to a team located in New York. Petitioner was a restricted free
agent at this time, which meant that if he were to continue playing professional sports, he could play for
and negotiate a new contract only with the New York team. He negotiated a 10-year contract with the
New York team, which began with the 2001-2002 season.
Petitioner’s employment with the New York professional sports team continued through the
2006-2007 season. In Petitioner’s final season with the New York professional sports team he missed 24
of the regular season games due to injury. As a result of this and other performance issues, at the end of
the 2006-2007 season the New York professional sports team exercised its buy-out option in June 2007.
Petitioner returned home to X-Country in July 2007.
Section 13 of the Employment contract provides the New York professional sports team with an
option to buy out Petitioner’s contract and terminate Petitioner’s employment as follows:
(i) “[t]he [New York professional sports team] . . . at its option . . . may terminate this
Contract . . . after the notice of intention to exercise Buy-Out option is given;”
(ii) “[i]f [New York professional sports team] elects to terminate this Contract pursuant to
Section 13, it shall be obligated to pay [Petitioner], in equal monthly installments, beginning
October 1st next following the date on which the termination is effective . . . to be paid in full
during a period of twice the remaining years of the contract . . . an amount equal to 2/3 of the total
fixed amount of [Petitioner’s] league salary . . . for the unexpired fixed term . . . of this Contract;”
and

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TSB-A-09(11)I
Income Tax
September 22, 2009

(iii) “[u]pon receipt of the notice of termination [Petitioner] shall immediately be a free
agent . . . and shall no longer be obligated to perform under this Contract.”
Pursuant to the Buy-Out Notice, dated June 15 2007, signed by the New York professional sports
team’s General Manager and addressed to Petitioner and others, the New York professional sports team
terminated Petitioner’s employment contract. Pursuant to the agreement, the New York professional
sports team also agreed to pay Petitioner a certain sum in consideration for the termination of the
employment contract. This amount was to be paid over the remaining years of the employment contract.
As a result of the buy-out agreement, Petitioner relinquished his right to employment with the team for
the remaining term of the employment contract. Petitioner did not provide services to the team as a
professional player for the 2007-2008 season, but instead provided full-time services as a professional
player for the 2007-2008 season to a professional sports team in X-Country. Petitioner also states in the
petition that the total number of days he spent in New York State was no more than 158 days during
2007.
Analysis
Tax Law §631(a) defines the New York source income of a nonresident individual as follows:
General. The New York source income of a nonresident individual shall be the sum of
the following: (1) The net amount of items of income, gain, loss and deduction entering into his
federal adjusted gross income, as defined in the laws of the United States for the taxable year,
derived from or connected with New York sources. . .
Petitioner is a professional athlete and the Tax Law Regulations provide specific rules for
determining the New York source income of a nonresident individual who is a member of a professional
athletic team. Tax Law Regulation §132.22(b)(4)(i) defines the term “total compensation for services
rendered as a member of a professional athletic team” as the total compensation received during the
taxable year for services rendered:
(a) from the beginning of the official pre-season training period through the last game in
which the team competes or is scheduled to compete during the taxable year; and
(b) during the taxable year on a date which does not fall within the aforementioned period
(e.g., participation in instructional leagues, the “Pro Bowl” or promotional “caravans”).
Such compensation shall include, but is not limited to, salaries, wages, bonuses as described in
subparagraph (ii) of this paragraph, and any other type of compensation paid during the taxable
year to a member of a professional athletic team for services performed in that year. Such
compensation shall not include strike benefits, severance pay, termination pay, contract or option
year buy-out payments, expansion or relocation payments, or any other payments not related to
services rendered for the team. (Emphasis Added)
Petitioner relinquished his right to employment with the New York professional sports team and,
in accordance with the terms of the buy-out agreement signed by the parties, he was to receive payments
from the team for the remaining term of the employment contract. As Tax Law Regulation
§132.22(b)(4)(i) states that termination pay, or contract or option year buy-out payments, are not
compensation for services rendered as a member of a professional athletic team, the buy-out payments in

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TSB-A-09(11)I
Income Tax
September 22, 2009

respect of termination of Petitioner’s employment contract are not New York source income or subject to
New York withholding.

DATED: September 22, 2009

NOTE:

/S/
Jonathan Pessen
Director of Advisory Opinions
Office of Counsel

An Advisory Opinion is issued at the request of a person or entity. It is limited to
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