Shohei Ohtani to LA Dodgers

[2014olympicgold]

It has been a while since I took undergraduate finance but the obvious answer is that deferring pay costs the player a significant sum in present value.
Using the first present value calculator I could find on the internet, using a safe 6% interest rate throughout (well below a safe S&P500 9%):

The net present value of Ohtani taking $70million per year for 10 years is $546,118,458
The net present value of taking $2million for 10 years than $68 million for 10 years is $311,840,231.32
So, the agreement to defer is costing Ohtani $234,278,227 in value ... Why not just take $450 million/10 years and by done with it

For sake of argument taking $40million for 10 years has a NPV of $312,067,690.98 --> So from an accounting perspective Ohtani is making effectively $40million per season.

I wonder how much he'll save in taxes with this move though. He'd likely not be living in California from years 2033-43 when he's earning the bulk of his deal. (I have never taken a lick of accounting classes, even in highschool)

Just quick math but his current deal when just thinking about taxes:
2024-2033: $2m/yr or $1,000,720 ---- $10,007,200 (In LA)
2034-43: $68m/yr or $40,100,874 ---- $401,008,740 (In Texas)
Total over 20years: $411,015,940

2024-2033: $70m/yr or $33,198,720 --- $331,987,200 (in LA)

So by deferring he earns like $79m more, and that's if he stays in the US, I'm sure the taxes are different in Japan.

So you're saying he's essentially making $40m/yr, I'm thinking he's making (after taxes) $20,550,797 (deferred) or $16,599,360 (not deferred, but over 20yrs still).

I guess the thing is, would you rather your money upfront to invest it, or know you're making enough money off the field to invest properly, and take a ton of money coming in when you retire. I'd personally would be very intrigued at this model if I'm making any money off field.

[2014olympicgold]

Ben Nicholson Smith had this to say about what's rumoured to have happened with Ohtani and the Jays.
https://www.youtube.com/watch?v=QPEC...nel=JaysDigest

"one source said a deal was done with the Blue Jays on Friday but he [BNS] couldn't get corroboration, so he didn't post it".

BNS, Morosi, Rosenthal, and the DodgersNation reporter all figured the Jays signed Toronto, but BNS and Rosenthal were waiting on a 2nd source, where Morosi and DodgersNation didn't. The source could (likely) was Ohtani's camp to use the Jays as leverage for one last attempt at getting the Dodgers to up the offer.

We likely will never know if the Jays had a legit shot and used for leverage, or never had a shot and was only used.

[Axeman33]

Ben Nicholson Smith had this to say about what's rumoured to have happened with Ohtani and the Jays.
https://www.youtube.com/watch?v=QPEC...nel=JaysDigest

"one source said a deal was done with the Blue Jays on Friday but he [BNS] couldn't get corroboration, so he didn't post it".

BNS, Morosi, Rosenthal, and the DodgersNation reporter all figured the Jays signed Toronto, but BNS and Rosenthal were waiting on a 2nd source, where Morosi and DodgersNation didn't. The source could (likely) was Ohtani's camp to use the Jays as leverage for one last attempt at getting the Dodgers to up the offer.

We likely will never know if the Jays had a legit shot and used for leverage, or never had a shot and was only used.

I would say both. I would say they had a legit shot, but I also think Dodgers were given the last right of refusal so if they weren't willing to match the Jays offer, he was going to Toronto. They clearly were willing to match, especially when you consider the layout of the contract and how much is deferred and not costing them for the next 10 years.

[2014olympicgold]

I would say both. I would say they had a legit shot, but I also think Dodgers were given the last right of refusal so if they weren't willing to match the Jays offer, he was going to Toronto. They clearly were willing to match, especially when you consider the layout of the contract and how much is deferred and not costing them for the next 10 years.

Ya that's what I meant on the "legit shot and used for leverage". I'm leaning that way. Ohtani was comfortable with the Jays as his second choice.

[senryu]

I wonder how much he'll save in taxes with this move though. He'd likely not be living in California from years 2033-43 when he's earning the bulk of his deal. (I have never taken a lick of accounting classes, even in highschool)

I believe Ohtani will be taxed based on when the work was performed, when the money was earned through his work, not when the money is actually paid to him. Intentional deferring receipt of salary is not deferring his state tax obligation.

[2014olympicgold]

I believe Ohtani will be taxed based on when the work was performed, when the money was earned through his work, not when the money is actually paid to him. Intentional deferring receipt of salary is not deferring his state tax obligation.

https://turbotax.intuit.com/tax-tips...tion/L83l5ousH

"However, if the employee has elected to take the deferred compensation payments over a period of 10 years or more, the deferred compensation payments are taxed in the state of residence when the payments are made." This can make a big difference if you move to a state that has no state income tax, such as Florida, Washington or Nevada, or at least to one with a lower income tax than where you earned the money.

I dunno if this is accurate, but it sounds like 10years of deferred salary was intentionally used.

[senryu]

https://turbotax.intuit.com/tax-tips...tion/L83l5ousH



I dunno if this is accurate, but it sounds like 10years of deferred salary was intentionally used.

That sourcing seems more accurate than my belief! California is pretty aggressive as to state taxes, so it wouldn't surprise me if they find some way to try to grab some of that deferred money. Someone with tax law knowledge will probably put something out to tell us civilians what the deal is.

[LawMan]

I wonder how much he'll save in taxes with this move though. He'd likely not be living in California from years 2033-43 when he's earning the bulk of his deal. (I have never taken a lick of accounting classes, even in highschool)

Just quick math but his current deal when just thinking about taxes:
2024-2033: $2m/yr or $1,000,720 ---- $10,007,200 (In LA)
2034-43: $68m/yr or $40,100,874 ---- $401,008,740 (In Texas)
Total over 20years: $411,015,940

2024-2033: $70m/yr or $33,198,720 --- $331,987,200 (in LA)

So by deferring he earns like $79m more, and that's if he stays in the US, I'm sure the taxes are different in Japan.

So you're saying he's essentially making $40m/yr, I'm thinking he's making (after taxes) $20,550,797 (deferred) or $16,599,360 (not deferred, but over 20yrs still).

I guess the thing is, would you rather your money upfront to invest it, or know you're making enough money off the field to invest properly, and take a ton of money coming in when you retire. I'd personally would be very intrigued at this model if I'm making any money off field.

Taxes are an interesting angle as well.
If Ohtani retires at the end of the deal (or further defers money until retirement) and immediately moves to a low tax-state (like Texas), or, moves to a tax haven (Monaco, Virgin Islands) he could potentially save A TON of money which could then tip the scales in favor of deferment.

I'm also sure the IRS and California equivalent would have something to say about that. They would want to tax the funds, which were earned in California, as if Ohtani lived in California.
Reading through the accounting subreddit on reddit, the posters are in disagreement on whether Ohtani can avoid California state tax or not (assuming he moves out of California).

You would still need to discount the dollars received (in Texas) in years 11-20 and compare that to higher taxed California dollars in years 1-10 to get an apples to apples comparison. California State tax is up to 13.3%, Texas/Florida is 0% (federal is the same).
From an accounting perspective you would always prefer the money upfront. If you're an Allen Iverson and don't trust yourself to not go broke, then take the money upfront and lock it in a trust away from yourself, but you earn the interest. Ohtani does not need $70million/year + his endorsements, but investing the $70million over years 1-10 vs. not is the whole point of net present value calculations.

Comparing $700mil NOW in California (years 1-10), to $20mil-Cal (1-10), $680m-Texas (11-20) makes the numbers closer
(and ignoring all other state and local taxes for simplicity):

No Deferment
Ohtani makes $70 million x 10 seasons, in California his after-tax pay is $34,858,623 in years 1-10 NPV is $256,362,499

Deferment - Year 11 moves to Texas (0% state tax)
Ohtani makes
Years 1-10 $2million - after all taxes (13.3% California income tax) - $1,062,623 - NPV $7,820,997
Years 11-20 $68million - Texas (0% state income tax) $42,881,837 - NPV - $184,058,236
Total NPV of Contract with Deferments $191,879,233

Ohtani Moves to Virgin Islands - Pays no US Federal Tax
I highly doubt there is any chance this would be successful, but for the sake of argument let's say in Year 11 Ohtani moves to the Virgin Islands, and pays 0% income tax
Years 1-10 $2million - after all taxes (13.3% California income tax) - $1,062,623 - NPV $7,820,997
Years 11-20 $68million - Virgin Islands - $68,000,000 - [B]NPV - $287,688,391.70/B]
Total NPV of moving to Virgin Islands $295,509,388.70

[2014olympicgold]

That sourcing seems more accurate than my belief! California is pretty aggressive as to state taxes, so it wouldn't surprise me if they find some way to try to grab some of that deferred money. Someone with tax law knowledge will probably put something out to tell us civilians what the deal is.

The next thing is we all know people who make millions have access to accountants that know how to hide their salary to a point that do taxes really matter?

Maybe I'm getting to hung up on this too much. It's essentially a $460m 10yr deal with a $240m 'completion bonus' at the end of the deal.

[senryu]

One unique situation here is that, it seems to me, the most likely place for Ohtani to go at the end of the deal is back home to Japan, where presumably his United States tax debt would be unenforceable. The IRS/State of CA would probably try to put liens on real and personal property left behind, but if Ohtani ghosted and owned nothing in the U.S., there wouldn't be any. I wonder if taxation agencies would need to bring some kind of legal action to try to garnish future deferral payments. I wonder if Ohtani would be the kind of person who would leave millions of dollars of unpaid taxes behind and how that would affect his baseball legacy, if at all.

[LawMan]

One unique situation here is that, it seems to me, the most likely place for Ohtani to go at the end of the deal is back home to Japan, where presumably his United States tax debt would be unenforceable. The IRS/State of CA would probably try to put liens on real and personal property left behind, but if Ohtani ghosted and owned nothing in the U.S., there wouldn't be any. I wonder if taxation agencies would need to bring some kind of legal action to try to garnish future deferral payments. I wonder if Ohtani would be the kind of person who would leave millions of dollars of unpaid taxes behind and how that would affect his baseball legacy, if at all.

1. Japanese income tax is as high as US federal tax so there would be no savings here, just paying tax to a different entity.
2. The IRS and CA can deduct income tax at source (take it straight from the Dodgers just like any other employment income, Dodgers would have an obligation to deduct and remit) and withhold until Ohtani files a return to get it back.
3. Japan and the USA have a tax treaty which would govern. Tax treaties (generally) ensure that individuals do not suffer "double taxation" so either Ohtani would pay USA income tax, or Japanese income tax, but not both.

[tweetdrivr]

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[2014olympicgold]

IMG_1302.jpeg

LOL, I also liked the jokes people were making about paying their tickets in a deferred payment program.

[LuigiC173]

a f*ckin Ohtani Dodgers t-shirt is $40 lol.

[stevegamer]

a f*ckin Ohtani Dodgers t-shirt is $40 lol.

That's an example of how they will get the money back - especially at the stadium.

LawMan is pretty much spot on here with the tax angles. I will state the IRS has absolutely zero influence if he moves to another state within the US in retirement, as they are still getting paid their rate. Florida is often mentioned, but Tennessee has a smaller overall tax footprint; it does depend on how things break out for the individual.

https://www.usnews.com/news/best-sta...e-lowest-taxes

Deferring payments is general bad for present value, but agreeing to defer payment nets you a bigger contract, which increases value. An underappreciated reason to defer, especially in the case of lottery winnings, is that most people who get large sums blow through their money, and are left with nothing. This means you have some more certainty down the road, and possibly a better ability to plan. That said, one can take the cash on time, and then buy an annuity to do the same thing.

The Jays were a real contender, honestly, from everything I heard.