There has been much in the news recently about coaches of major college sports teams moving to a new school and incurring an obligation to make payment to their old school under a buyout provision in their contract. The most recent example is the highly publicized move of Richard Rodriguez from West Virginia University to the University of Michigan. Coach Rodriguez had a contract with his former employer that required him to pay $4 million dollars to West Virginia if he left for another coaching position. After a suit was filed, it was reported that the parties agreed that the $4 million dollars will be paid to West Virginia, of which Rodriguez will pay $1.5 million dollars in installments, and the University of Michigan (his new employer) will pay the remaining $2.5 million. How tax law applies to that buyout and whether Coach Rodriguez will incur federal income tax liability because of Michigan’s payment of $2.5 million are interesting questions. Simply put, will Michigan’s payment of 62.5 percent of the buyout obligation cause the taxman to cometh to Coach Rodriguez?
Kahn, Douglas A. "Will the Tax Man Cometh to Coach Rodriguez?" J. H. Kahn, co-author. Tax Notes 120, no. 5 (2008): 474-8.