Tax Type
Individual Income Tax
Description
Individual income tax treatment of a signing bonus received by a professional athlete.
Topic
Payment and Refund
Persons Subject to Tax
Taxability of Persons and Transactions
Date Issued
05-10-2007
May 10, 2007
Re: Request for Ruling: Individual Income Tax
Dear *****:
This is in reply to your letter in which you request a ruling regarding the individual income tax treatment of a signing bonus received by a professional athlete.
FACTS
According to the request, two athletes (Taxpayer 1 and Taxpayer 2) signed contracts in 2006 to perform for a professional sports team located outside Virginia. Both athletes were initially trained at facilities located outside Virginia and then were assigned to a minor league team located in Virginia for the 2006 season. Taxpayer 1 spent approximately two weeks with the Virginia minor league team and then was transferred to another team outside Virginia. Taxpayer 2 spent the entire 2006 season with the Virginia team. It has not yet been determined where Taxpayer 1 and Taxpayer 2 will play for the 2007 season.
The contract includes wages and a signing bonus that is to be paid in two installments - one in 2006 and one in 2007. You request a ruling concerning Virginia's income tax treatment of the signing bonus.
RULING
The Department has previously addressed this issue in Public Document (P.D.) 88-302 (10/31/88). Individuals who are neither domiciliary nor actual residents of Virginia and have income from Virginia sources are taxed as nonresidents. The Virginia taxable income of a nonresident is defined under Va. Code § 58.1-325 as:
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- an amount bearing the same proportion to his Virginia taxable income, computed as though he were a resident, as the net amount of his income, gain, loss and deductions from Virginia sources bears to the net amount of his income, gain, loss and deductions from all sources.
"Income and deductions from Virginia sources" is defined under Va. Code § 58.1-302 to include income from "[a] business, trade, profession or occupation carried on in Virginia." [Emphasis added.] Under the above definition, the income earned by an athlete, attributable to the amount of time that he is working in Virginia (whether or not such services include actual "playing time") in Virginia, is considered income from Virginia sources.
In P.D. 88-302, the Department concluded that a signing bonus received by a professional athlete would be taxed in the same manner as a bonus received by any other individual taxpayer. If the athlete were a resident of Virginia (either a domiciliary resident or an actual resident) it would be includable in Virginia taxable income regardless of the source of the income to the extent the bonus is included in federal adjusted gross income.
If the athlete were a Virginia nonresident, a signing bonus would also be included in federal adjusted gross income and in Virginia taxable income computed as if a resident. In the computation of the nonresident apportionment ratio (the ratio of his net amount of income, gain, loss and deductions from Virginia sources to the net amount of income, gain, loss and deductions from all sources), a signing bonus would not generally be considered to be income from Virginia sources. For example, if a player were paid a signing bonus that is paid to a nonresident athlete without regard to the performance of any services on behalf of the team, it would not be deemed to be Virginia source income in the nonresident apportionment ratio.
If, however, the signing bonus were predicated upon the performance of actual services in Virginia the bonus would be deemed to be Virginia source income. As such, unless the signing bonus were in some way predicated upon an athlete's performance of services in Virginia, neither the 2006 nor the 2007 installments of the signing bonus would be subject to Virginia income tax in either of your scenarios.
In the cases of Taxpayer 1 and Taxpayer 2, a determination would have to be made as to whether each taxpayer acquired a Virginia domicile in 2006 while a member of the Virginia team. If a Virginia domicile was not established, each taxpayer would have to determine the number of days spent in Virginia during 2006 and 2007. P.D. 98-183 (10/30/1998) sets forth the Department's standard for determining days spent in Virginia.
If neither Taxpayer 1 nor Taxpayer 2 is a domiciliary or actual resident of Virginia for 2006 or 2007, they would file Virginia income tax returns as nonresidents. If this is the case, the professional sports team would not be required to withhold Virginia income tax from the signing bonus payments. Any overpayment of income tax resulting from Virginia employer withholding on the signing bonus payment would be refunded when a Virginia income tax return is filed.
The Code of Virginia sections and public documents cited, along with other reference documents, are available online at www.tax.virginia.gov in the Tax Policy Library section of the Department's website. If you have any questions regarding this response, please contact ***** in the Department's Office of Policy and Administration, Appeals and Rulings, at *****.
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- Sincerely,
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Janie E. Bowen
Tax Commissioner
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AR/1-1048886293B
Rulings of the Tax Commissioner