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Correction to This Article
The Cash Flow column in the Nov. 28 Business section said incorrectly that a lawsuit by Curt Flood overturned rules that bound professional baseball players to the club with which they originally signed. While Flood's case is widely credited with ultimately leading to the end of those rules, his antitrust suit was rejected by the Supreme Court.
Cash Flow

Tax-Free Bonuses Tagged Out

By Albert B. Crenshaw
Sunday, November 28, 2004; Page F01

Where there's a will there's a way, the old saying goes, but when it comes to ducking taxes it's more like, where there's a way someone will.

Thus it is that the Treasury Department discovered not long ago that some taxpayers have been dusting off an old Internal Revenue Service ruling about signing bonuses in baseball contracts and using it to justify skipping payroll taxes and income-tax withholding on signing bonuses generally.

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Similarly, some unions and employers have been using that and other old IRS rulings to avoid payroll and withholding on ratification bonuses that sometimes are offered as inducements to union members to approve a new contract.

In both cases, recipients are liable for income taxes when they eventually file their returns, but they and their employers can escape Social Security, Medicare and other such payroll taxes entirely.

"It's a nice way to save some change," a Treasury official said.

So last week, Treasury and the IRS slammed that particular door shut.

In a new revenue ruling, the IRS says that signing and ratification bonuses are "compensation" to workers who receive them and thus subject to payroll taxes and to income tax withholding.

Signing bonuses and the like are sufficiently common today that most employers and employees view them as simply part of the first year's pay, and routinely withhold income and payroll taxes. But Treasury and the IRS found it difficult to enforce that consensus against taxpayers who did not withhold and instead pointed to the old baseball ruling -- which dates from 1958 -- and some subsequent rulings.

Back in 1958, signing bonuses were much rarer, and in baseball signing a contract typically meant a long-term commitment. Until a suit brought by Curt Flood overturned them, the rules of professional baseball were such that the club all but owned the player after he signed his first contract.

So when the IRS was asked how to treat signing bonuses, the agency held that "a bonus paid by a baseball club to an individual solely for signing the individual's first contract and not in any way contingent on the performance of subsequent services is not remuneration for services and, therefore, is not wages" upon which withholding is required, though the ruling did say that a bonus "that is contingent upon the performance of subsequent services" constitutes wages subject to withholding.

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