Davis Signs With Baltimore (7/$161M, incl $42M deferred)

[weams]

I've posted the applicable language from the current CBA below.

As I read it, for purposes of determining the Average Annual Value (AAV), MLB does not deduct any salary deferrals.

Here is the language from:

ARTICLE XXIII?Competitive Balance Tax

E. Determination of Salary

(2) Average Annual Value of Guaranteed Multi-Year Contracts

A Uniform Player?s Contract with a term of more than one (1)

championship season (?Multi-Year Contract?) shall be deemed to have a Salary in each Guaranteed Year equal to the ?Average Annual Value? of the Contract (plus any bonuses subsequently included by operation of Section E(4) below). ?Average Annual Value? shall be calculated as follows: the sum of (a) the Base Salary in each Guaranteed Year plus (b) any portion of a Signing Bonus (or any other payment that this Article deems to be a Signing Bonus) attributed to

a Guaranteed Year in accordance with Section E(3) below plus © any deferred compensation or annuity compensation costs attributed to a Guaranteed Year in accordance with Section E(6) below shall be divided by the number of Guaranteed Years.

Also,

(6) Deferred Compensation

(a) Definition ?Deferred Compensation? shall mean any Salary payable to a Player pursuant to a Uniform Player?s Contract in a Contract Year after the last championship season for which the Contract requires services as a baseball player to be rendered.

(b) Attribution

(i) Deferred Compensation shall be included in a Player?s

Salary as if paid in the championship season to which it is attributed under a Uniform Player?s Contract. If a Contract does not attribute Deferred Compensation, the Contract shall be treated as if the Deferred Compensation was attributed equally to each of the Guaranteed Years in the Contract.

(ii) If the Deferred Compensation is to be paid with interest at an effective rate that is within one and one-half percentage points of the Imputed Loan Interest Rate for the first Contract Year covered by the Contract, then the Deferred Compensation shall be included at its stated value. Otherwise, the Deferred Compensation shall be included at its present value in the season to which it is attributed, said present value to be calculated by increasing any such payments by the Contract?s stated interest rate, if any, and then reducing such payments back to their present value by applying as a discount rate the Imputed Loan Interest Rate for the first Contract Year covered by the Contract. If the terms of a Contract are confirmed by the Association and the Office of the Commissioner before the Imputed Loan Interest Rate for the first Contract Year covered by the contract is available, the Imputed Loan Interest Rate shall be the annual ?Federal mid-term rate? as defined in section 1274(d) of the Internal Revenue Code for the month preceding the month in which terms are confirmed. If a Uniform Player?s Contract uses the date or year in which a Player retires as a triggering event for the commencement of payment of the Deferred Compensation, it will be assumed for purposes of calculating Salary under this Article only that the Player retires on the day that he reaches age 40 or at the end of the Contract, whichever is later. © An ?Annuity Compensation Arrangement? is an agreement in a Uniform Player?s Contract whereby the Club promises to purchase an annuity to pay the Player after he is no longer required to render services as a baseball player under such Uniform Player?s Contract.

(i) The portion of the cost of the annuity to be paid by the

Club while the Player is required to render services as a baseball player under the Contract shall be included as Salary for the Contract Year in which such cost is to be paid.

(ii) The portion of the cost of the annuity instrument to be

paid by the Club after the Player is no longer required to render services as a baseball player under such Contract, if any, shall be treated as Deferred Compensation attributable pro rata over the Guaranteed Years of the Contract at its present value as calculated pursuant to paragraph (6)(b) above. Any compensation that the Player is scheduled to receive pursuant to such Annuity Compensation Arrangement shall not be considered Salary or Deferred Compensation.

Well, that makes great sense. Thank you for looking it up. I was obviously confussed by the discount that is thrown out there on compensation deals as to value and not about luxury tax impact.

[backwardsk]

The two starters from last year's rotation who are no longer here made 49 starts combined. The Orioles went a combined 23-26 in those starts.

I agree that the SP situation is not as dire as portrayed. That said, I'd love to pick up Latos.

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So I stated this yesterday and I think weems repeated it. I was wrong. I counted all of Norris' Orioles appearances, not just his starts. Norris and Chen combined for 42 starts. The Orioles went 23-19 in those starts. My bad.

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[24fps]

It's not just inflation. The Orioles could park the cash they intend to pay in the future (rather than today) in a U.S. Treasury and earn interest. Pretty much no matter what a dollar today is better than a dollar tomorrow. In the financial world, this nears a universal truth.

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A more straitforward and responsible approach would simply be to negotiate an annuity for the deferred amount to be paid in a stipulated fashion, write a check for an amount much smaller than $42 million and shift any future monetary risk to the insurance company. This would have the added benefit of removing any future obligation for the Orioles to pay for non-contributing players. Annuities have tax benefits for the annuitant as well that could perhaps be amplified by living is a state with no income tax, but this would be a question for an accountant or tax attorney.

Would the Orioles fund an annuity to cover CD's deferred cost? I don't know, but I would be impressed if they did and my reservations about this wacky deal would be considerably lessened.

AzRon posted a long section from the CBA in reference to a question about how AAV is computed for luxury tax purposes. Within that section is also language about "Annuity Compensation arrangements". This indicates to me that this is not a new idea, but it's unclear whether or not it's optional.

[Tony-OH]

Seven years is still about two to three season too long for this deal, but now that we know he's basically making $17 million a season thanks to the deferred money, it makes this deal a little more palatable.

[Babypowder]

Right. Like someone else mentioned, he could be like Jim Thome who OPSed .922 at age 35+, mostly in the AL as a DH, compared to .970 through age 34. Or he could be like Ryan Howard. We'll have to cross the bridge when we get there.

Jim Thome is also likely a Hall of Famer and was worth over 30 wins by age 30 to Davis' 14.5. He was starting from a much higher level of performance. I looked through all the extreme TTO players I could find over the last two decades and found only Jim Thome and Jose Bautista who were effective into their mid 30s. Most of them were pretty much finished by 33. Thome also wasn't really a TTO guy until later in his career when his contact skills eroded a bit, so it's not as if he is great evidence that Davis could age well either. Davis has very little wiggle room between effective and toast with his profile.

[Bahama O's Fan]

I wonder if they added that extra money for him to agree to play RF?

[schittenden]

No. Personal employee income taxes are based on the cash.

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Who says? Certainly not New York. Or Maryland.

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[weams]

Jim Thome is also likely a Hall of Famer and was worth over 30 wins by age 30 to Davis' 14.5. He was starting from a much higher level of performance. I looked through all the extreme TTO players I could find over the last two decades and found only Jim Thome and Jose Bautista who were effective into their mid 30s. Most of them were pretty much finished by 33. Thome also wasn't really a TTO guy until later in his career when his contact skills eroded a bit, so it's not as if he is great evidence that Davis could age well either. Davis has very little wiggle room between effective and toast with his profile.

So, somewhere in between maybe.

[weams]

Seven years is still about two to three season too long for this deal, but now that we know he's basically making $17 million a season thanks to the deferred money, it makes this deal a little more palatable.

I figure the last two years will be painful. If he stays healthy through the first five.

[Bahama O's Fan]

If he is suspended, does he lose his salary? Or is that still fully guaranteed?

[24fps]

I figure the last two years will be painful. If he stays healthy through the first five.

Duquette and Showalter are only contracted to be here during the presumed glory years. There is that to consider.

[Babypowder]

So, somewhere in between maybe.

Optimistically, yes. I hope he is an exception and not the rule but I fully expect him to provide little to no value the last 3-4 years of the deal. I also can't really be confident about the first few either, since he has only been worth the 17 million he will be paid twice in his career, and that was in his prime. Davis is really risky, if you ask me.

[Hallas]

$42M deferred at no interest. Does everyone feel better at $17M/year? By comparison, Jones is getting $50M the next 3 years, Davis $51M.

it's not 17 million a year. it's 17 million a year + deferred money. The net present value of the deferred money is somewhere in the range of 24 million (depending on how generous your annuity calculator is.)

So it's really 7/141-ish.

[NATTYBO's]

I figure the last two years will be painful. If he stays healthy through the first five.

I think we all just need to be happy that the team made significant free agent signings. I am not privy to the negotiations so I have no idea if the overpaid or not. I am happy that they are spending money....its DD job to determine what's best for the team. I preferred Upton to everyone but I'm not a professional talent evaluator.

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[BohKnowsBmore]

Who says? Certainly not New York. Or Maryland.

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Could you please elaborate your position? Perhaps we are speaking at cross-purposes. Or I am missing something special about baseball player taxes. It is my understanding that for the player, the income taxes will be paid once the cash is received by the player, even if it is "for" several years earlier. For example, let's say Davis has a one-year deal for $20M, with $15M to be paid in 2016 and $5M deferred into 2017. In this scenario, $15M would be 2016 income and $5M would be 2017 income.

From the IRS:

https://www.irs.gov/publications/p538/ar02.html

Cash Method

Most individuals and many small businesses use the cash method of accounting. Generally, if you produce, purchase, or sell merchandise, you must keep an inventory and use an accrual method for sales and purchases of merchandise. See Inventories, later, for exceptions to this rule.

Income

Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. If you receive property and services, you must include their fair market value (FMV) in income.

Constructive receipt. Income is constructively received when an amount is credited to your account or made available to you without restriction. You need not have possession of it. If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations.

Example.

You are a calendar year taxpayer. Your bank credited, and made available, interest to your bank account in December 2012. You did not withdraw it or enter it into your books until 2013. You must include the amount in gross income for 2012, the year you constructively received it.

An article from the LA Times form a few years ago hits on the concept of deferrals:

http://www.latimes.com/sports/la-sp-worst-sports-contracts-20131117-story.html

Deferring salaries also delays payments to agents and tax collectors. States such as California collect taxes from athletes based on the number of days they spend working in the state, including as members of visiting teams. Players who deferred a significant portion of their salary a few years ago to this year must now swallow California?s higher rates for high-income earners.

I know there is some additional complexity to athlete income taxes, so I would be very interested to hear your position in a little more detail with respect to the taxation of deferred comp.

Also, just for fun, Andrew McCutchen's pay stub from a while back that went up online:

All of those tax jurisdictions