Is a nonresident professional athlete's signing bonus allocated to Utah using the same duty-day formula as salary, and will Utah accept an athlete's own duty-day calculation?

Plain-English summary

A tax preparer who handles returns for professional athletes asked the Utah State Tax Commission two questions about how nonresident athletes' signing bonuses get taxed in Utah. Some athletes' teams were reporting the athlete's ENTIRE signing bonus as Utah income (because the team that drafted them happens to be based in Utah) instead of dividing it across all the states where the athlete works, using Utah's normal "duty day" formula for nonresident athletes (Rule 44).

The Commission's answers:

1. Signing bonuses generally ARE allocated by duty days, like salary — unless the bonus meets ALL three of these conditions: it isn't conditioned on the player actually playing games or even making the team, it's paid separately from salary and other pay, and it's nonrefundable. Only a bonus meeting all three escapes the duty-day formula entirely (and so wouldn't be Utah-source income at all under this rule).
2. The Commission will accept an athlete's own duty-day calculation in place of the number reported by the team/employer, when the athlete can show the employer isn't following Rule 44 and the athlete's own numbers are fair and equitable — but that acceptance isn't automatic or risk-free: Processing may still flag a mismatch against the athlete's official W-2 (which reflects what the employer reported), potentially triggering notices, and any calculation (whether the athlete's or the team's) can still be reviewed later by the Auditing Division.

What this means for you

Professional athletes and their tax preparers

If your signing bonus was structured as a true, unconditional, separately-paid, nonrefundable up-front payment (not tied to making the roster or performing), it may not need to be allocated across states by duty days at all. Most signing bonuses that ARE conditioned on making the team, or that are bundled with salary, get taxed like ordinary compensation — split among every state where the athlete had duty days that year, not dumped entirely into the state of the team that happened to sign them.

Team payroll/HR departments

Rule 44 requires teams to withhold and remit tax for nonresident athletes based on the duty-day formula — not based on an "internal agreement" among league teams about how to divide compensation. Reporting an athlete's whole bonus to the state of the signing team (rather than allocating it) creates a real risk of mismatched state filings and disputes the athlete then has to resolve.

Accountants and multistate tax preparers

Because employers' W-2 reporting and an athlete's own duty-day allocation can conflict, expect Utah's Processing Division to still generate notices even on a technically correct return — plan for that and be ready to work with Taxpayer Services. This ruling doesn't establish that Utah always accepts an athlete-prepared calculation; it's fact-specific to a showing that the employer's method isn't fair and equitable.

Common questions

Q: Are all signing bonuses taxed the same as salary in Utah?
A: No. A signing bonus is allocated by duty days like salary UNLESS it meets three conditions together: not conditioned on playing/making the team, paid separately from salary, and nonrefundable. Meeting all three takes it out of the duty-day allocation.

Q: Can an athlete override what their team reported on their W-2?
A: The Commission will accept the athlete's own Rule 44 calculation if the athlete shows the team isn't following Rule 44 and the athlete's numbers are fair and equitable — but this can still trigger a notice because it won't match the team's official reporting, and the calculation can be audited later.

Q: Does this ruling apply to my situation?
A: Not automatically. This is a private letter ruling binding only on the Commission for the taxpayers and facts described; it can't be relied on by anyone else as binding, though it may carry persuasive weight if your facts are similar. Consult a Utah tax professional.

Citations and references

Statutes and rules:

• Utah Code Ann. § 59-10-116 (income tax on nonresident individuals)
• Utah Code Ann. § 59-10-117; § 59-10-118 (Utah source income / taxable income calculation)
• Utah Admin. Code R865-9I-44 ("Rule 44" — duty-day allocation for nonresident professional athletes)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/11-004.pdf

Original ruling text

FINAL PRIVATE LETTER RULING

11-004

                                    MEMORANDUM

To: File

From: Utah State Tax Commission

Date: January 24, 2012

Re: PLR 11-004

    Private Letter Ruling 11-004 addresses the issues and facts provided verbally by

NAME 1with COMPANY 1; this ruling does not directly respond to NAME 1’s written
request letter, which has been included for reference only. After the Utah State Tax
Commission received NAME 1’s written request letter, NAME 1 explained and clarified the
facts and issues for the private letter ruling through subsequent telephone conversations.

     NAME 1 provided the following facts. COMPANY 1 prepares returns for many

professional athletes and currently has questions about the Utah income tax treatment of the
signing bonuses paid to non-Utah resident athletes. Various states treat the bonuses differently.
In the past three years, COMPANY 1 has had many non-Utah resident clients who received
signing bonuses and also income earned from playing in Utah. Additionally, some of the
athletes’ employers are not allocating signing bonuses according to duty days under Utah Admin.
Code R865-9I-44 (“Rule 44”) but are instead allocating the total signing bonuses to Utah when
the teams to which the athletes are first assigned are located in Utah. These employers are
reporting the entire signing bonuses as Utah income on the athletes’ W-2s and also on the reports
to the Utah Department of Workforce Services. These employers, who are not following Rule
44, might be instead following an internal agreement they made with the other teams in the
league. The tax preparers at COMPANY 1 want to know the correct treatment of signing
bonuses under Utah law. These tax preparers intend to allocate future signing bonuses for Utah
returns according to this private letter ruling and also to attach a copy of this ruling and a copy of
their allocation calculations to those returns. COMPANY 1 is not asking how to make specific
calculations under Rule 44; instead, it wants this ruling to focus on the general applicability of
Rule 44 to the situation presented.

     NAME 1 provided the following two issues:

     A.     For Utah, is the signing bonus part of the total compensation that is allocated
            according to duty days under Utah Admin. Code R865-9I-44 (“Rule 44”)?




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   B.      Does the Utah State Tax Commission always accept a duty day calculation that
           follows Rule 44 when that allocation is prepared by a nonresident professional
           athlete, i.e. taxpayer?

   Private Letter Ruling 11-004 addresses the facts and issues as explained above.


                                 REQUEST LETTER
                             (Included for Reference Only)

August 10, 2011

Private Letter Ruling
Audit Department
Utah State Tax Commission
210 N. 1950 W
Salt Lake City, UT 84134

RE: NAME 2
2010 Individual Income Tax
Account ID: ACCOUNT NUMBER

To Whom It May Concern:

The above-referenced individual filed his 2010 Utah State return in April, 2011. We have
received several notices from Utah (Letter IDs: L0888430208 and L1081466496) that unfairly
tax all NAME 2’s wages in Utah when he is a STATE 1 resident and a non-resident professional
athlete (drafted by PROFESSIONAL TEAM 1 in 2010).

We have enclosed additional information that we would like to present in NAME 2’s 2010
situation. Utah Section R865-9I-44 discusses Compensation Received by Nonresident
Professional Athletes and specifically defines “duty days”, “total compensation” and also states
that the “purpose of the rule is to apportion to the state, IN A FAIR AND EQUITABLE
MANNER, a nonresident member of a professional athletic team’s total compensation for
services rendered as a member of a professional athletic team.”

We are therefore submitting an alternative allocation of Utah income for NAME 2’s 2010 season
based upon those rulings (copy attached). I have also submitted a copy of the BASEBALL
LEAGUE 2010 schedule and a revised 2010 Utah Form TC-40 and TC-40B. Finally, a copy of
NAME 2’s W-2 showing TOTAL WAGES allocated to both Utah and STATE 1 and
Addendums A, B and C-1 from NAME 2’s contract are enclosed as proof of his bonus and when
he signed and reported.

As you can see, this revised return results in a refund of NUMBER AMOUNT and is, in our
opinion, a fair and equitable calculation. If Utah does not agree with this submission, then as
stated under R865-9I-44(2), “the commission may require the member of a professional athletic

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team to apportion that compensation under a method the commission prescribes, as long as the
prescribed method results in a fair and equitable apportionment”.

We request a Private Letter Ruling on this matter to accept our revised return based on the
guidelines outlined in R865-9I-44 or provide an alternate method that is fair and equitable.

Sincerely,

NAME 1, EA

Enclosures

                                 RESPONSE LETTER

                                    January 24, 2012

NAME 1, EA
COMPANY 1
ADDRESS 1
CITY, STATE ZIP CODE

RE: Private Letter Ruling Request–Individual Income Tax: Applicability of Utah Admin.
Code R865-9I-44 to a Nonresident Professional Athlete for the Situation Presented

Dear NAME 1:

   Through your letter dated August 10, 2011 and through subsequent telephone

conversations, you have requested a ruling on behalf of the nonresident professional athletes for
whom you prepare income tax returns. Your specific issues for this ruling are:

   A.      For Utah, is the signing bonus part of the total compensation that is allocated
           according to duty days under Utah Admin. Code R865-9I-44 (“Rule 44”)?

   B.      Does the Utah State Tax Commission always accept a duty day calculation that
           follows Rule 44 when that allocation is prepared by a nonresident professional
           athlete, i.e. taxpayer?

    You explained that you prepare returns for many professional athletes and you have

questions about the Utah income tax treatment of the signing bonuses paid to non-Utah resident
athletes. You indicated that various states treat the bonuses differently. You also explained that
in the past three years, you have had many non-Utah resident clients who received signing
bonuses and also income earned from playing in Utah. Additionally, you explained that some of

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the athletes’ employers are not allocating signing bonuses according to duty days under Utah
Admin. Code R865-9I-44 (“Rule 44”) but are instead allocating the total signing bonuses to Utah
when the teams to which the athletes are first assigned are located in Utah. These employers are
reporting the entire signing bonuses as Utah income on the athletes’ W-2s and also on the reports
to the Utah Department of Workforce Services. You explained that these employers who are not
following Rule 44 may be instead following an internal agreement they made with the other
teams in the league. You further indicated that you want to know the correct treatment of
signing bonuses under Utah law, that you intend to allocate future signing bonuses for Utah
returns according to this private letter ruling, and that you plan to attach a copy of this ruling and
a copy of your allocation calculations to those returns. You also said you are not asking how to
make specific calculations under Rule 44; instead, you want this ruling to focus on the general
applicability of Rule 44 to your situation.

I. Applicable Law

   Utah Code § 59-10-116 imposes Utah income tax on nonresident individuals’ Utah state

taxable income. Sections 59-10-117 and 59-10-118 explain the calculation of Utah source
income, which affects the computation of a taxpayer’s Utah state taxable income.

    Utah Administrative Code R865-9I-44 (Rule 44) provides a duty day calculation for Utah

source income earned by nonresident professional athletes, stating in part:

           (1) Definitions.
           (a) "Duty days" means all days during the taxable year from the beginning
   of the professional athletic team's official preseason training period through the
   last game in which the team competes or is scheduled to compete.
            (i) Duty days includes:
           (A) days on which a member of a professional athletic team renders a
   service for a team on a date that does not fall within the period described in
   Subsection (1)(a), for example, participation in instructional leagues, the Pro
   Bowl, or promotional caravans. Rendering a service includes conducting training
   and rehabilitation activities, but only if conducted at the facilities of the team; and
           (B) game days, practice days, days spent at team meetings, promotional
   caravans, and preseason training camps, and days served with the team through all
   postseason games in which the team competes or is scheduled to compete.
           (ii) Duty days for any person who joins a team during the season shall
   begin on the day that person joins the team, and for a person who leaves a team
   shall end on the day that person leaves the team. If a person switches teams during
   a taxable year, a separate duty day calculation shall be made for the period that
   person was with each team.
           (iii) Days for which a member of a professional athletic team is not
   compensated and is not rendering services for the team in any manner, including
   days when the member of a professional athletic team has been suspended without
   pay and prohibited from performing any services for the team, shall not be treated
   as duty days.



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    (iv) Days for which a member of a professional athletic team is on the

disabled list shall be presumed not to be duty days spent in the state. They shall,
however, be included in total duty days spent within and without the state.
(v) Travel days that do not involve either a game, practice, team meeting,
promotional caravan or other similar team event are not considered duty days
spent in the state, but shall be considered duty days spent within and without the
state.
....
(d) "Total compensation" includes salaries, wages, bonuses, 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.
(i) Total compensation does not include strike benefits, severance pay,
termination pay, contract or option-year buyout payments, expansion or relocation
payments, or any other payments not related to services rendered to the team.
(ii) For purposes of this rule, "bonuses" subject to the allocation
procedures described in Subsection (5) are:
(A) bonuses earned as a result of play during the season, including
performance bonuses, bonuses paid for championship, playoff or bowl games
played by a team, or for selection to all-star league or other honorary positions;
and
(B) bonuses paid for signing a contract, unless all of the following
conditions are met:
(I) the payment of the signing bonus is not conditional upon the signee
playing any games for the team, or performing any subsequent services for the
team, or even making the team;
(II) the signing bonus is payable separately from the salary and any other
compensation; and
(III) the signing bonus is nonrefundable.
....
(3) If a nonresident member of a professional athletic team demonstrates
that the method provided under this rule does not fairly and equitably apportion
compensation, that member may submit a proposal for an alternative method to
apportion compensation. If approved, the proposed method must be fully
explained in the nonresident member of a professional athletic team's nonresident
personal income tax return for the state.
....
(5) Nonresident professional athletes shall keep adequate records to
substantiate their determination or to permit a determination by the commission of
the part of their adjusted gross income that was derived from or connected with
sources in this state.
(6) The Utah source income of a nonresident individual who is a member
of a professional athletic team includes that portion of the individual's total
compensation for services rendered as a member of a professional athletic team
during the taxable year which, the number of duty days spent within the state
rendering services for the team in any manner during the taxable year, bears to the

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   total number of duty days spent both within and without the state during the
   taxable year.
           (7)(a) Professional athletic teams shall withhold and remit tax on behalf of
   nonresident professional athletes on a form prescribed by the commission.
           (b) A schedule shall be included with the return, listing all of the following
   information for each nonresident member of a professional athletic team:
           (i) name;
           (ii) address;
           (iii) social security number;
           (iv) income attributable to Utah for the nonresident member of a
   professional athletic team;
           (v) total compensation paid to the nonresident member of a professional
   athletic team by the professional athletic team;
           (vi) the nonresident member of a professional athletic team’s duty days
   both within and without the state;
           (vii) the nonresident member of a professional athletic team’s duty days
   within the state;
           (viii) Utah tax deducted and withheld; and
           (ix) federal income tax deducted and withheld.
           ....

II. Analysis

   Below is a discussion of your two issues:

   A. For Utah, is the signing bonus part of the total compensation that is allocated
      according to duty days under Utah Admin. Code R865-9I-44 (“Rule 44”)?

   A signing bonus is part of a nonresident athlete’s total compensation that is allocated

according to duty days unless that bonus meets the three conditions listed in Rule 44(1)(d)(ii)(B).

    According to Rule 44 subsection (1)(a), duty days are generally defined as “all days

during the taxable year from the beginning of the professional athletic team's official preseason
training period through the last game in which the team competes or is scheduled to compete.”
Subsections (1)(a)(i) through (1)(a)(v) provide further direction on what specifically is or is not a
duty day. For example, under subsection (1)(a)(i)(A) a date that does not fall within the period
described in subsection (1)(a) can still be a duty day if a professional ballplayer renders a service
for a team on that day, such as by participating in a promotional caravan.

   Rule 44(6) provides the duty day calculation, through which a part of an athlete’s total

compensation is Utah source income. Rule 44(1)(d) defines total compensation to include
bonuses. Under Rule 44(1)(d)(ii)(B), bonuses include signing bonuses unless the following three
conditions are met:

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   (I) the payment of the signing bonus is not conditional upon the signee playing
         any games for the team, or performing any subsequent services for the team,
         or even making the team;
   (II) the signing bonus is payable separately from the salary and any other
         compensation; and
   (III) the signing bonus is nonrefundable.

Only when all of the three conditions are met are signing bonuses not part of the total
compensation allocated according to duty days.

   B. Does the Utah State Tax Commission always accept a duty day calculation that
      follows Rule 44 when that allocation is prepared by a nonresident professional
      athlete, i.e. taxpayer?

    Under the circumstances, the Utah State Tax Commission will accept a duty day

calculation that follows Rule 44 when the allocation is prepared by an athlete and reported
according to Rule 44(3) unless that calculation does not fairly and equitably apportion the
athlete’s compensation.

    Rule 44(7) requires professional athletic teams to withhold and remit tax on behalf of

nonresident professional athletes based on duty days. When a professional team fails to follow
Rule 44(7), an athlete may make and submit a duty day calculation that follows Rule 44.
Rule 44(3) allows an athlete to propose an alternative method for apportioning compensation and
instructs how this can be done. Rule 44(3) requires an athlete to demonstrate that the method
provided in Rule 44 does not fairly and equitably apportion the compensation. Your clients
could demonstrate this by showing their employers are not following Rule 44(7). Furthermore,
Rule 44(3) allows a taxpayer to propose an alternative method. Your clients are proposing an
alternative method when they perform the calculations themselves instead of accepting the
employers’ reported information. Lastly, Rule 44(3) requires athletes to include a full
explanation of their proposed method and their calculations. Your plan to attach a copy of this
ruling and a copy of your detailed calculations would help your clients meet this requirement.

     However, even if your clients apportion their compensation according to Rule 44 and also

follow Rule 44(3) providing the required explanations, the Utah State Tax Commission still
cannot guarantee that its Processing Division will initially accept their returns. The information
submitted by your clients will conflict with the information reported by their employers on the
athletes’ W-2s and also to the Utah Department of Workforce Services. Because of this
mismatch, your clients may continue to get notices and may still need to work with the Taxpayer
Services Division to resolve the matters. The only way to prevent the notices is for the
employers to follow Rule 44. Employers must report state income to each state according to that
state’s laws, not just according to any internal agreement among teams within a league.

    Furthermore, in general, acceptance of returns by the Processing Division does not

preclude subsequent reviews by the Auditing Division. Likewise in your situation, a calculation
by either an employer or an employee may still be reviewed by the Auditing Division.

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    Lastly, this ruling does not find that the Utah State Tax Commission always accepts a

duty day calculation prepared by a nonresident professional athlete. While under the facts of this
ruling a duty day calculation prepared by an athlete appears to be appropriate, there potentially
could be other factual situations in which a calculation by an athlete would not be appropriate.
Calculations must always be fair and equitable—even when a professional team makes the
calculations. See Rule 44(2).

III. Conclusion

    This ruling is summarized as follows. First, a signing bonus is part of a nonresident

athlete’s total compensation that is allocated according to duty days unless that bonus meets all
three of the conditions listed in Rule 44(1)(d)(ii)(B). Second, the Utah State Tax Commission
will accept a duty day calculation that follows Rule 44 when that allocation is prepared by an
athlete and reported according to Rule 44(3) unless that calculation does not fairly and equitably
apportion the athlete’s compensation. However, if there is a mismatch in information reported
by the athlete and his or her employer, the athlete may need to work with the Taxpayer Services
Division to resolve the matter. Also, calculations by an athlete or his or her employer may still
be subsequently reviewed by the Auditing Division.

    This ruling is based on current law and could be changed by subsequent legislative action

or judicial interpretation. Also, our conclusions are based on the facts as described. Should the
facts be different, a different conclusion may be warranted. If you feel we have misunderstood
the facts as you have presented them, you have additional facts that may be relevant, or you have
any other questions, you are welcome to contact the Commission.

                                                 For the Commission,



                                                 Marc B. Johnson
                                                 Commissioner

MBJ/aln
11-004

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