No luxury tax implications of timing of extension for David Ortiz or Jon Lester
|03.21.14 at 8:11 pm ET|
There was a time when the Red Sox were very careful to announce extensions after Opening Day. Players who hammered out the parameters of long-term deals in spring training but waited until after the first day of the season to announce them included David Ortiz, Coco Crisp, Josh Beckett, Clay Buchholz and Adrian Gonzalez.
The reasoning was sensible enough. If the extensions had become official prior to the start of the season, then the players’ salaries for the season for which they were under contract would be recalculated for luxury tax purposes. So, for instance, in 2011, Adrian Gonzalez made $6.3 million. Had his seven-year, $154 million extension become official when the Sox traded for him from the Padres or during spring training, his deal would have been treated as an eight-year, $160.3 million pact — meaning a luxury tax figure of just over the average annual value of $20 million a year. By waiting until mid-April to announce the deal, Gonzalez counted for just $6.3 million in 2011 — thus saving the Sox millions in luxury tax penalties that year.
That history created an expectation that, if the Sox reach agreements with David Ortiz (who is making $15 million in 2014 but who counts for $17 million against the luxury tax) and Jon Lester (who is making $13 million in 2014 on a team option, but whose luxury tax figure is approximately $9.37 million), they wouldn’t be announced until after the start of the regular season to avoid a potential luxury tax hit.
The new Collective Bargaining Agreement, which took effect starting in the 2012 season, eliminated the recalculation of a contract’s AAV as a result of an extension. So long as the second deal does nothing to alter the terms of the first, the two contracts are treated as separate.
So, if the Sox reach agreement with either player on an extension starts in 2015 and doesn’t alter what they’re owed for the coming season, then those new deals won’t alter the player’s salary as calculated for luxury tax purposes. If Ortiz agrees to a one-year extension, regardless of whether it’s for $15 million or $1 billion, his 2014 AAV would remain $17 million for the purposes of calculating the Sox’ luxury tax this year. Similarly, as long as a deal with Lester wouldn’t take effect until 2015, then the team could announce it tomorrow or in June with no difference in its implications for the 2014 payroll — the left-hander will count for $9.37 regardless of the timing of the announcement.
Even with that alteration, and despite the fact that a resolution of extension talks is expected before the end of spring training, that doesn’t necessarily mean that an announcement will happen in Fort Myers. The Sox may well decide that, if they reach agreement with either player, they’d prefer to save the announcement for the start of the regular season, most likely in Boston. Or perhaps it won’t be until the start of the regular season that the two sides will be able to finalize the details of an extension — if one is coming at all.
But regardless, the timing of any announcement won’t be driven by luxury tax implications. That aspect, at least, of extension strategy is now a thing of the past.
* – (WEEI.com was guilty of propagating the misunderstanding that an extension could alter a luxury tax hit for a season if announced prior to Opening Day. We regret the error.)
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