Around the League Thread | Holiday Season!

[Ernie]

yeah. i understand the specifics of deferral and i'm fine with it if the player feels like it makes sense for them with respect to the tax jurisdiction they are playing in. none of that has anything to do with the league calculating the cap hit in a stupid way for a "hard salary cap".

if i sign three frank vatranos to the same contract, i'm saving 4.29m in aav on my projected cap hit (and i can pretty much sign a fourth frank vatrano). i'm pretty sure that isn't in the spirit of a hard salary cap.

That $6m AAV doesn't really exist though so the cap savings are a fantasy. He really signed for $4.57m per year, and chose to throw a $1.57m of it into a GIC that will double in value over the next 20 years.

 

[krutovsdonut]

i think it's good regarding the tax part, particularly for teams to compete with low tax jurisdiction teams as you've pointed out.

the issue i have is that a team is promising (for example, using puckpedia's interest rate) 100 million dollars to a player, deferring 5 million dollars of that as payment in year 9, and the books will say $12,284,893 AAV instead of $12,500,000. to me, that is insanely stupid for a league with a hard cap.

just to be even more ridiculous, let's say you and the player agree that 1 million/year is enough to live off of. so you defer 92 million dollars to year 9. then the cap hit is $8,542,027 AAV. it's not a hard cap anymore if you keep doing this. and if the league calls it cap circumvention if it's a big amount but not a small amount... that doesn't make any sense to me - a team is gaining a competitive advantage for each year of the contract, whether it's by 100k or 1m.

edit: i missed that vatrano's 3 year 18 million dollar deal with an expected AAV of 6m becomes 4.57m. so any team that gets that contract instantly saves 1.43m in cap hit. that's a ridiculously good advantage. if i offer a player a 1 year deal at 10m dollars, defer 9m to year 2, the cap hit is $9,537,708. it's stupid.

it's more or less exactly what they were trying to do with the luongo deal and the league was furious and they were punished for it.

 

[Ernie]

it's more or less exactly what they were trying to do with the luongo deal and the league was furious and they were punished for it.

Not even remotely the same. I don't know why people keep throwing out these kind of statements without having any sense of the actual financial implications.

 

[Nick Lang]

yeah. i understand the specifics of deferral and i'm fine with it if the player feels like it makes sense for them with respect to the tax jurisdiction they are playing in. none of that has anything to do with the league calculating the cap hit in a stupid way for a "hard salary cap".

if i sign three frank vatranos to the same contract, i'm saving 4.29m in aav on my projected cap hit (and i can pretty much sign a fourth frank vatrano). i'm pretty sure that isn't in the spirit of a hard salary cap.

No shit. With the cap how is it any different from the owner saying I'll give you $4.57 mil now per year and 'll pay you $1.33 per later under the table when no one is looking?

Anaheim are the one's paying him (salary) later from their own account right? That's cap space. It doesn't matter where the Ducks owner gets the money, the bank, investments, business, or GIC's. It's coming out of the owners pockets to the player. It should be counted as used cap space.

 

[Vector]

It's going to be interesting to see what happens when a player with deferred salary gets bought out. Not entirely sure how that would work.

 

[God]

That $6m AAV doesn't really exist though so the cap savings are a fantasy. He really signed for $4.57m per year, and chose to throw a $1.57m of it into a GIC that will double in value over the next 20 years.

How much are the Anaheim Ducks giving Frank Vatrano in total as a result of this contract? 18 million dollars, yes? so the AAV should be 6m. like, why does the AAV all of a sudden get net present value-adjusted for the deferred payment years but not for the ones in the actual contract year that are also going to be subject to interest rates?

Again, if I promise a player 10 million dollars on a one year deal, and defer 9 million to the next year, the cap hit is ~9.5m. that is stupid. it feels like they're incorporating the net present value losses as a result of not getting 9 million in one year, and to me, that does not really matter.

 

[Kryten]

It's going to be interesting to see what happens when a player with deferred salary gets bought out. Not entirely sure how that would work.

Whats the difference between signing a deferred contract and deferring buyout years and length

 

[StreetHawk]

How much are the Anaheim Ducks giving Frank Vatrano in total as a result of this contract? 18 million dollars, yes? so the AAV should be 6m. like, why does the AAV all of a sudden get net present value-adjusted for the deferred payment years but not for the ones in the actual contract year that are also going to be subject to interest rates?

Again, if I promise a player 10 million dollars on a one year deal, and defer 9 million to the next year, the cap hit is ~9.5m. that is stupid. it feels like they're incorporating the net present value losses as a result of not getting 9 million in one year, and to me, that does not really matter.

I would agree. I doubt this deal structure was initiated by Ana. They have the cap room to fit the extra amount.

Maybe I’m old school but I’m taking $18 mill by 2028. Then investing what I keep from that, say $9 mill than trying to save the 13% California state income tax on $9 mill by deferring it between 2035-2044.

 

[krutovsdonut]

Not even remotely the same. I don't know why people keep throwing out these kind of statements without having any sense of the actual financial implications.

you should heed your own advice before posting.

the important financial implication in both instances is that the current cap hit is reduced because you are deferring some of the payments to far in the future.

in luongo'ss case that financial implication was deemed so offensive that the rules were retroactively changed to punish teams that did it.

now it's apparently just fine.

 

[credulous]

the deferred salary stuff is a total distraction and isn't cap circumvention at all. the league has a formula for calculating deferrals that all teams can take advantage of. vatrano isn't making 6m. he's making substantially less than that when you take into account the time adjusted value of money and inflation

the only teams getting an advantage are those in high tax jurisdictions that can now make offers that somewhat compete with offers in tax advantaged jurisdictions. it's exactly the kind of cap advantage fans of teams in canada, new york and california keep screaming for. the only fans that should be complaining about the deferred salary stuff are those in florida, vegas, seattle and dallas

 

[Vector]

Whats the difference between signing a deferred contract and deferring buyout years and length

I'm trying to avoid learning how buyouts actually work so I have absolutely no idea.

 

[Vector]

the deferred salary stuff is a total distraction and isn't cap circumvention at all. the league has a formula for calculating deferrals that all teams can take advantage of. vatrano isn't making 6m. he's making substantially less than that when you take into account the time adjusted value of money and inflation

the only teams getting an advantage are those in high tax jurisdictions that can now make offers that somewhat compete with offers in tax advantaged jurisdictions. it's exactly the kind of cap advantage fans of teams in canada, new york and california keep screaming for. the only fans that should be complaining about the deferred salary stuff are those in florida, vegas, seattle and dallas

Yeah, it's not cap circumvention. I just don't like it because, and this is completely a personal thing for me, I like the simplicity of the NHL's salary cap and this makes the math harder.

 

[krutovsdonut]

The reason the league calculates it as $4.57m is because that's what it's costing the team.

first of all i always thought the canucks got a raw deal on luongo. i have no problem with the idea of deferred income for athletes. it makes a lot of sense, especially for tax planning.

but your distinction is artificial. when the canucks signed luongo in 2009 the $1m payments they committed to make him as much as 12 years later did not have a present day value of $1m. they had a present day value much lower just the same as these deferred payments now.

right?

and in fact every single long term nhl contract costs the team much less in present day value than the face value of the contract. if you applied the present day value notion to cap consistently then year 7 and 8 cap hits in most contracts would be way smaller than they are now.

but the league normally values every nickel paid under a contract at face value for the purposes of cap aav regardless of the fact it is paid years later. that is how the cap works or did work.

and so what is happening now is that these deferred payments are being valued differently for cap purposes than all the other payments made under the same contracts. it's not consistent.

and does anyone doubt that the luongo contract would have been structured exactly this way if this had been permitted at the time?

 

[credulous]

Yeah, it's not cap circumvention. I just don't like it because, and this is completely a personal thing for me, I like the simplicity of the NHL's salary cap and this makes the math harder.

it's fine tho. just pretend it's a 4.571m salary or whatever. that's how puckpedia is showing it. players already aren't making their "cap hits" due to escrow, bonuses and wonky structuring

 

[Vector]

it's fine tho. just pretend it's a 4.571m salary or whatever. that's how puckpedia is showing it. players already aren't making their "cap hits" due to escrow, bonuses and wonky structuring

It’ll take me some time. I like round easy numbers. I’ll probably get over it before the summer hits.

 

[krutovsdonut]

the deferred salary stuff is a total distraction and isn't cap circumvention at all. the league has a formula for calculating deferrals that all teams can take advantage of. vatrano isn't making 6m. he's making substantially less than that when you take into account the time adjusted value of money and inflation

the only teams getting an advantage are those in high tax jurisdictions that can now make offers that somewhat compete with offers in tax advantaged jurisdictions. it's exactly the kind of cap advantage fans of teams in canada, new york and california keep screaming for. the only fans that should be complaining about the deferred salary stuff are those in florida, vegas, seattle and dallas

it's great in theory, just like pension plans. but the future involves risk. just like with pension plans. not sure how manageable that risk will be if this becomes a widespread practice.

 

[credulous]

it's great in theory, just like pension plans. but the future involves risk. just like with pension plans. not sure how manageable that risk will be if this becomes a widespread practice.

i don't know the inner workings of nhl accounting practices but i do have an ultra aggressive tax and contracts lawyer who has structured contracts for me that include deferred money and in all cases the other party to the contract have had to put the assets in question in trust OR purchase insurance that will cover me if they are unable to pay. they don't get to just say 'trust me bro' that they'll pay out their obligations in the future. i don't operate at the same scale as an nhl team or player agent either so i'm pretty sure their contract lawyers are better than mine (or at least bill more associates on their contracts)

for the nhl i wouldn't be surprised if the nhl itself (or an insurer acting on it's behalf) is the guarantor of these contracts

the real risk (and this risk keeps me up some nights) is that tax authorities are starting to turn a skeptical eye to these contracts. california had already introduced the idea of 'california sourced income' to go after income earned in state by those who claim "residency" in nevada and washington and texas for tax purposes and it's reported they are now going after deferred compensation and stock compensation that is used to get around this enforcement

the cra in canada has taken a similar stance. see their action against tavares that was reported on last year

 

[racerjoe]

I would agree. I doubt this deal structure was initiated by Ana. They have the cap room to fit the extra amount.

Maybe I’m old school but I’m taking $18 mill by 2028. Then investing what I keep from that, say $9 mill than trying to save the 13% California state income tax on $9 mill by deferring it between 2035-2044.

Agreed, and what I don’t get is we know all of it would not be taxed in California to begin with, on top of that a good accountant can make a lot of it not count as taxable. Would way rather get my money now and let it grow.

 

[Nick Lang]

the deferred salary stuff is a total distraction and isn't cap circumvention at all. the league has a formula for calculating deferrals that all teams can take advantage of. vatrano isn't making 6m. he's making substantially less than that when you take into account the time adjusted value of money and inflation

the only teams getting an advantage are those in high tax jurisdictions that can now make offers that somewhat compete with offers in tax advantaged jurisdictions. it's exactly the kind of cap advantage fans of teams in canada, new york and california keep screaming for. the only fans that should be complaining about the deferred salary stuff are those in florida, vegas, seattle and dallas

Don't you need all players to accept those deferred payments to make it an equal playing field for tax adjusted value of money and inflation? All of our contracts in Vancouver and high tax franchises should be like that then shouldn't they if the playing field was level shouldn't they, or just random ones here and there are fine?

This way you're just giving a couple more teams a way to pay less money and get less AAV. It's not fair unless everyone is getting the same break.

 

[StreetHawk]

Agreed, and what I don’t get is we know all of it would not be taxed in California to begin with, on top of that a good accountant can make a lot of it not count as taxable. Would way rather get my money now and let it grow.

$9 mill deferred at 13% Cali tax is what like $1.2 mill? Does this also exclude him from the jock tax at other states? So, maybe it's up a little more to $1.4 to $1.5 mill in taxes he saves.

If he pockets the $4.5 mill (50% take home of the $9 mill in deferred), figure he can earn $300K or around 6.67% annually over that time and come out ahead. But, he decided that he wanted to avoid the Cali taxes.

 

[Hodgy]

The reason the league calculates it as $4.57m is because that's what it's costing the team.

Essentially they throw $1.57m for every year of his contract into a savings account which accrues interest.

Then he starts withdrawing from the principal and the accumulated interest in 2035 well after he's retired - basically it's set up as a pension. However, at this point, he's going to be living in a low tax jurisdiction, so will be keeping much more of it than if he was still living in California.

It doesn't cost the league a penny but substantially increases the amount of money a player receives after taxes and levels the playing field (a bit) between franchises in high tax and low tax jurisdictions.

Close - there can’t be interest earned on the deferred salary. If there is, then I think it’s the full cap hit not present value but I’d have to double check.

Don't you need all players to accept those deferred payments to make it an equal playing field for tax adjusted value of money and inflation? All of our contracts in Vancouver and high tax franchises should be like that then shouldn't they if the playing field was level shouldn't they, or just random ones here and there are fine?

This way you're just giving a couple more teams a way to pay less money and get less AAV. It's not fair unless everyone is getting the same break.

Players don’t want to do it because they want their money right away. The benefit of tax savings vs. Inflation and lack of use of the money right of way makes it something players don’t like. But yes, the Canucks would do this with every player if they could.

 

[StreetHawk]

Players don’t want to do it because they want their money right away. The benefit of tax savings vs. Inflation and lack of use of the money right of way makes it something players don’t like. But yes, the Canucks would do this with every player if they could.

Player would still need to pay Federal income Tax. Savings would be on the state income tax and possibly the Entertainment tax from other states. Is that tax savings down the line worth the time value of money (plus inflation)?

 

[Hodgy]

Player would still need to pay Federal income Tax. Savings would be on the state income tax and possibly the Entertainment tax from other states. Is that tax savings down the line worth the time value of money (plus inflation)?

Ya, although keep in mind the player could move from the US entirely.

 

[krutovsdonut]

i don't know the inner workings of nhl accounting practices but i do have an ultra aggressive tax and contracts lawyer who has structured contracts for me that include deferred money and in all cases the other party to the contract have had to put the assets in question in trust OR purchase insurance that will cover me if they are unable to pay. they don't get to just say 'trust me bro' that they'll pay out their obligations in the future. i don't operate at the same scale as an nhl team or player agent either so i'm pretty sure their contract lawyers are better than mine (or at least bill more associates on their contracts)

for the nhl i wouldn't be surprised if the nhl itself (or an insurer acting on it's behalf) is the guarantor of these contracts

the real risk (and this risk keeps me up some nights) is that tax authorities are starting to turn a skeptical eye to these contracts. california had already introduced the idea of 'california sourced income' to go after income earned in state by those who claim "residency" in nevada and washington and texas for tax purposes and it's reported they are now going after deferred compensation and stock compensation that is used to get around this enforcement

the cra in canada has taken a similar stance. see their action against tavares that was reported on last year

i agree with you that there are significant risks involved in any tax planning that doesn't crystalize for a decade. more so than ever with high income individuals in the us and even more so with foreigners earning in the us. we can expect us taxes to focus unduly on extracting wealth from retirees and foreigners for the foreseeable future.

and if the teams are just buying deferred annuities that far out and counting the cost of same in their cap i don't see how they are getting the cap savings they are. deferred annuities are a racket for insurance companies and last time i checked the only rational reason to buy them is to defer taxation, not for the investment value. the cost of a deferred annuity is much more than a true pdv, by definition.

my guess is they are buying or pledging something significantly less certain than that and even deferred annuities are not risk free. that's why we have credit ratings for the issuers. ask aig bondholders.

 

[credulous]

i agree with you that there are significant risks involved in any tax planning that doesn't crystalize for a decade. more so than ever with high income individuals in the us and even more so with foreigners earning in the us. we can expect us taxes to focus unduly on extracting wealth from retirees and foreigners for the foreseeable future.

and if the teams are just buying deferred annuities that far out and counting the cost of same in their cap i don't see how they are getting the cap savings they are. deferred annuities are a racket for insurance companies and last time i checked the only rational reason to buy them is to defer taxation, not for the investment value. the cost of a deferred annuity is much more than a true pdv, by definition.

my guess is they are buying or pledging something significantly less certain than that and even deferred annuities are not risk free. that's why we have credit ratings for the issuers. ask aig bondholders.

i agree there's risk but it's not 'what if the team is sold and the new owner doesn't honor the old contracts?' or 'what if the team folds?' level risk. it's more like 'what if the 2008/09 financial crisis but worse'