Shohei Ohtani has officially caught tax regulator attention multiple times this year

Shohei Ohtani might be dealing with regulators for the forseeable future.

San Francisco Giants v Los Angeles Dodgers / Christian Petersen/GettyImages

 

The beloved Internal Revenue Service has been knocking at Los Angeles Dodgers superstar Shohei Ohtani’s proverbial door a few times this year. There’s a saying: “More money, more problems.” These are those problems.

Ohtani, especially after signing a $700 million contract with the Dodgers this offseason, is extremely wealthy. But the unique structure of his contract — which will pay him over the course of nearly two decades, long after he actually serves his active playing time related to the contract — pays him in deferred installments rather than right now. It brings the true value of the contract down, allows the Dodgers to keep more funds to build around him now, and possibly gets him tax relief.

In January, there were questions posed about the tax implications of his unique contract. The California State Controller released a statement on the contract acknowledging that he could, “potentially return to Japan and escape payment of California state income taxes on the deferred amount.” The Controller used Ohtani’s very public contract as an example, saying it exposed an imbalance in the tax law around the unlimited income deferral for wealthy taxpayers.

Amid a gambling scandal — more on it here — regulators are asking questions relating to Ohtani once more.

Shohei Ohtani’s former interpreter being investigated by IRS

According to The Athletic (subscription required) and other reports, Ippei Mizuhara, Shohei Ohtani’s now former interpreter, is being investigated by the IRS.

Ohtani’s accounts are reported to have wired $4.5 million to pay off a gambling debt with an illegal bookie. The original story was Ohtani did this out of the kindness of his heart. Later, it was reported that Mizuhara stole the money unknowingly from Ohtani. Unproven theories have emerged about the possibility of Mizuhara placing bets on Ohtani’s behalf. There are too many unanswered questions at this point to give a clear answer on what, exactly, happened, and MLB has opened an official investigation in an effort to uncover the truth.

Regardless of how Mizuhara acquired the $4.5 million, the revenue service will have questions about it and the tax implications. Depending on the facts and circumstances of the transaction(s), it could trigger a gift tax for Ohtani. It could also be considered gross income for Mizuhara. Even if it is true that Mizuhara stole the funds, it may be considered gross income. The federal tax law stipulates that, “all income from whatever source derived,” is considered gross income unless excluded by law.

Yes, the IRS even requires criminals to report money that they made from criminal activities on their tax return. And now that this story has gone public, it may expect to see it on Mizuhara’s.

A gift, interestingly enough, may not trigger a tax for Mizuhara in accordance to U.S. Code 2503. Usually the donor is responsible for gift tax, according to Publication 559.

Flip side, if it is a theft, there may be an opportunity for Ohtani to look into a theft loss, which is covered in the tax code in topic 515. According to the IRS, “The taking must be illegal under the law of the state where it occurred and must have been done with criminal intent.”

It doesn’t matter how, exactly, Ohtani and Mizuhara define the exchange (whether they call it a theft or gift), the IRS will be interested to know the specific facts and circumstances of the funds exchanged in order to decide how it should be treated for tax purposes. Likely, that’s exactly why they’ve opened an investigation.

It’s impossible to say exactly how the situation will be viewed by the IRS without knowing all the facts and circumstances. But it will be compelling to see if the MLB relies at all on the IRS findings, and how the federal government interprets the form of the exchange of money.