Rev. Rul. 58-145

An inquiry has been received relative to the Collection of Income Tax at Sources on Wages (chapter 24, subtitle C, Internal Revenue Code of 1954) on bonuses paid by a baseball club to professional baseball players.

A baseball club pays two types of bonuses to baseball players. One type of bonus is paid to a new player solely for signing his first contract, without any requirement of subsequent service. This type of bonus is not contingent upon whether the player is retained by the club after a specified time. The second type of bonus is awarded as a consideration for the new player's signing his first contract, but the payment of a portion of such bonus is dependent upon subsequent service by the player or upon his being retained by the club after a specified date.

The questions presented relative to the treatment of the two types of bonuses for income tax withholding purposes and the answers thereto are set forth below, as follows:

Question 1 . Is the first type of bonus, that is, the bonus paid to a new baseball player solely for signing his first contract, subject to the withholding of income tax?

Answer . Bonuses which are not predicated on continuing employment, made to new baseball players solely for signing their first contracts, do not represent remuneration for services performed and, accordingly, do not constitute wages subject to the withholding of income tax under section 3402 of the Internal Revenue Code.

Question 2 . Does the above rule in answer to question 1 apply even in instances where it is provided that such bonus shall be paid in installments over a period of years, which means that some installments of the bonus may be paid at a time when the player has the status of an employee of the club?

Answer . The fact that a bonus is paid in installments over a period of years does not, in itself, establish such bonus as wages subject to the withholding of income tax.

Question 3 . If the answer to question 2 is that the rule still applies where the bonus is paid in installments, does that rule continue to apply where there is a military service clause which provides for postponement of payment without introducing any contingency as to continued employment except for a requirement that the player `reports back in condition to play?'

Answer . If the military service clause contained in the bonus contract does not introduce any requirement as to continued employment, the presence of the clause in such contract does not alter the conclusion reached in answer to question 2 above.

Question 4 . Can the rule stated with respect to a bonus payable solely upon signing a contract apply even where the contract provides also for an additional bonus contingent upon subsequent service and retention of the player beyond a specified date?

Answer . That portion of the bonus which is not predicated on continuing employment would not constitute taxable wages subject to the withholding of income tax. However, payments of wages and other payments, including bonuses, subsequently made under such contracts and predicated on continued employment are subject to the withholding of income tax under section 3402 of the Internal Revenue Code.

The bonus payments received by ballplayers under any of the circumstances set forth above are taxable to such individuals as ordinary income in the taxable year in which received. See Rev. Rul. 55-727, C.B. 1955-2, 25.