Shohei Ohtani copycats might start popping up soon — and not only in baseball, where young players might try to pursue lucrative careers as both a hitter and a pitcher. Instead, his deal is resonating in Silicon Valley, where the unique structure of Ohtani’s heavily deferred $700 million contract with the Los Angeles Dodgers has opened the eyes of other high earners.
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Pinnacle Peak Advisors, a tax advisory firm catering to the wealthy in San Jose, Calif., keeps fielding questions from parties outside the sports world curious about the workings of Ohtani’s deal.
“What this may lead to is the increased frequency of these types of deals,” said Garrett Perez, an accountant and partner at Pinnacle. “It’s so publicized now. The numbers are so big. … Clients, other investment people, just want to know.”
Ohtani this month agreed to play for the Dodgers for a decade at $70 million per season, but from 2024-33, he’ll draw just $2 million per season. Ohtani is deferring $680 million — more than 97 percent of his earnings — until after his 10-year deal with the Dodgers expires, when that money comes back to him in equal annual payments from 2034-43.
When Ohtani receives the bulk of the money, he’ll no longer be under contract with the Dodgers; experts say that the structure of the contract appears likely to save Ohtani between $90 and $100 million in state taxes, so long as he lives outside of California when the deferred money is paid out.
Another key component in potential tax savings is how he has timed the deferral payments, spanning a decade. A 1996 federal law forbids states from taxing retirement income on out-of-state residents when payments are made in “substantially equal periodic” amounts over at least 10 years.
“If you meet a certain criteria, which I believe his contract will meet, then those $68 million annualized payments that occur after the first 10 years … they kind of fall into this quirky little exception, where if he’s not residing in California, at the time, they wouldn’t be subject to a California tax,” said Jeff Daly, a Los Angeles-based accountant and a managing director at Goldman Sachs’ family office. “And the California tax today is north of 13 percent, heading to be north of 14 percent on Jan. 1. So if you do 14 percent on $680 million, you can kind of see that it’s a pretty interesting structure.”
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California’s highest marginal income tax rate will be 14.4 percent next year for those earning more than $1 million.
Perez agreed with Daly that Ohtani’s deferrals appear protected from the state income tax.
“It’s a pretty straightforward statute,” Perez said. “He’s got a pretty good argument here that this will work.”
California also has a law that mirrors the federal one, said Andrew Leahey, a tax and technology attorney who writes columns for Bloomberg.
Perez said he has seen similar types of deals before in the tech industry, but could not recall one that drew so much attention. Massive deferrals are generally uncommon, he added, because most people don’t want to wait to receive their money.
Ohtani has pegged his motivation for the deferral structure to winning. Via his translator, Ohtani said at his introductory press conference in Los Angeles that he was aware salary deferrals had been agreed to previously in the sport, and that he wanted to help the Dodgers add players around him. The deferrals help the Dodgers both in cash flow and in their luxury-tax figure.
“I was looking into it and doing some calculations,” Ohtani said. “I figured, I mean, if I can defer as much money as I can … that’s going to help the Dodgers be able to sign better players and make a better team, I felt like that was worth it.”
Ohtani and his team proposed the deferrals to the Dodgers, rather than the other way around, Dodgers president of baseball operations Andrew Friedman said.
“I wouldn’t have had the guts to propose it,” Friedman said.
Ohtani’s agency, CAA, declined comment.
A person briefed on Ohtani’s contracts who was not authorized to speak publicly said that Ohtani was aware of potential tax savings with the structure, and that he earns an estimated $50 million annually from various sponsorships, which makes it easier for him to draw just $2 million in salary from the Dodgers.
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“He has the luxury that not many people have,” Daly said. “He can probably live a great life.”
It’s not a certainty that Ohtani sees the full savings the 1996 law appears to offer him. California legislators have made efforts to introduce higher taxes on the wealthy, including those who leave the state.
Theoretically, even if the laws remain as they are, the California Franchise Tax Board could also attempt to argue Ohtani doesn’t qualify.
“California is very aggressive,” Perez said. “They’re gonna want to look at the language of the contract.”
Franchise Tax Board spokesperson Daniel Tahara said that the FTB cannot comment on specific taxpayers and that deferred compensation matters are handled case by case.
“The timing of the payments and timing of generating taxable California source income is a fact-specific finding that would depend upon the unique facts and circumstances of a taxpayer as well as the terms of any compensation agreement,” Tahara said. “If the deferred compensation fits the definition of retirement income under federal law after the employee left the state, it would not be taxable by California. However, because these are fact-specific cases that require examination of the terms of compensation, it is impossible to answer this question definitively.”
The deferrals come with some opportunity cost to Ohtani. For one, he’s taking them without charging the Dodgers any interest, which brings the present value of the $700 million deal down to a considerably lower figure: $460 million by one estimate calculated using a method prescribed by baseball’s collective bargaining agreement, $438 million by another.
Tax rates at the federal level might also continue to rise from here, Leahey and Perez noted.
And what if Ohtani had taken the money up front and invested it — would that outweigh the potential tax savings?
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“Taking a deferred payment with no interest on the base amount means he is leaving on the table all the interest he could receive if the money was in his hands and invested. Conservative investments … regularly return 10 percent per year,” Leahey said. “On those kinds of figures, that’s a huge chunk of change.”
No team, including the Dodgers, offered Ohtani $70 million per year without deferrals. It seems a reasonable assumption, though, that had Ohtani wanted to, he could have found a team willing to pay him something around the net present value of his Dodgers deal — somewhere in the mid-40s annually — without deferrals.
“We got clients that every year they make 20 angel investments, with the hope that one of them hits, and more often than not one or two of them do over a 10-year span. It’s kind of remarkable,” Perez said. “That’s no guarantee, and 14.4 is a big rate to hurdle, even in a good year, if you have just a normal S&P portfolio.”
Even though Ohtani and the Dodgers have framed the deferrals around winning first and foremost, a potential tax savings of close to nine figures seems likely to have carried significant appeal, too.
“I don’t think it was accidental that his structured payment period for the $68 million is a 10-year period,” Daly said, “because that precisely lines up with the law.”
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(Top photo: Meg Oliphant / Getty Images)
