Capital Gains – Your team’s task at hand…..
Assignment
As a team consider your options for advice to your client and prepare a tax opinion that sets forth your recommendations on the tax ramifications of each of the transactions outlined. If there are differing opinions, factor this into your reply to your client by explaining the risks that you see. Often this is referred to as the hazards of litigation.
If something is not clear and you make assumptions, please include your assumptions in your opinion.
Facts
Jack X an accomplished professional football player, would like your advice with respect to what amounts, if any, received under his contract with Pro Sports Apparel (PSA), are taxable as ordinary income from personal services, royalties or capital gains. He would also like to know the tax implications since his earnings put him in the highest tax bracket.
One year and one month after the signing the contract with PSA he entered into a separate agreement with PSA whereby it satisfied its obligation under paragraph 1 to pay him $12,500,000 on July 8, year 3 by payment of $11,000,000 within 30 days.
Also, at the time of signing the contract PSA common stock was trading on the NYSE at $2.35 per share. Jack has retained all of the shares which are currently trading at $3.95 per share. He is considering selling 20% of his holdings this year.
ENDORSEMENT CONTRACT
AGREEMENT, made and entered into as of July 8, Year 1, by and between Jack X and Pro Sports Apparel (PSA), 123 Main Street, Weston, IN xxxxx.
WHEREAS Jack X is a professional football player of great expertise and accomplishment, so that his name has great promotional value when applied as a trademark to football merchandise and various other leisure products and activities, and Jack is the holder of all rights to the Jack X Exercise Fitness Trainer, an unpatented device developed and marketed for Jack X; and
WHEREAS PSA is engaged in the manufacture and promotion of football and other sports merchandise and leisure products and activities and desires to obtain the services and endorsement of Jack and to acquire all rights to the Jack X Fitness Trainer;
NOW, THEREFORE, for and in consideration of the mutual covenant and agreements hereinafter set forth, the parties agree as follows:
Sportswear Commercials
1. In exchange for the promise of PSA to pay Jack $12,500,000 3 years from the date of this agreement, Jack agrees to serve within 90 days from the date of this agreement as an actor on and off camera in and in connection with three television commercials advertising PSA. Jack shall perform such services on days designated by PSA and convenient to Jack., but in no event shall his total hours under this clause exceed 30 hours or shall he be required to perform such services on more than four separate days.
2. PSA agrees that all such commercials shall be in good taste, and that Jack shall not be required to do or say anything which would be demeaning or detract from his personal reputation or his image as an athlete. Jack agrees to perform such commercials to the best of his ability in a competent and artistic manner according to the direction of PSA or its agents.
3. All such commercials belong exclusively to PSA, which may use them or any part of them as it sees fit for a period of three years from the date hereof on any television station throughout the world in accordance with the rules and regulations of the Screen Actors guild commercial Contract.
Endorsement of Football Apparel
4. In exchange for 500,000 shares of common stock of PSA, traded on the NYSE Jack hereby grants to PSA, for a period of three years from the date of this agreement, the exclusive right to use, in a manner determined by PSA in its sole discretion, his name, facsimile, signature or nickname on any athletic equipment or apparel. During such period, Jack shall permit PSA to use his photograph in connection with the advertising and promotion of athletic apparel and equipment whether or not bearing his name, facsimile, signature or nickname.
Exercise Fitness Trainer
5. In exchange for $3,500,000, jack hereby grants to PSA all rights to the Exercise Fitness Trainer, including but not limited to, the exclusive right to use, manufacture and sell the Exercise Fitness Trainer and to use the trade name “Jack X Ultimate Fitness Trainer”. Jack also grants to PSA in perpetuity the right to use his name, facsimile, signature, nickname or photograph in connection with the promotion of the exercise fitness trainer. Jack also agrees that he will not assist in the development or promotion of any exercise device which may compete with the “Jack X Ultimate Fitness Trainer”.

General Terms

6. Jack agrees that he shall not perform in commercials, promote or endorse, or allow his name, facsimile, signature, or nickname to be used in the promotion of or endorsement of any sportswear or exercise equipment for the of 3 years with respect to the athletic apparel and 10 years for exercise equipment.
7. This Agreement shall in no way be construed as creating an employer-employee relationship between PSA and Jack, the parties intend that Jack shall not be an employee of PSA.
8. This Agreement supersedes all other contracts outstanding between the parties, and such contracts and any obligations yet to be performed thereunder are herby terminated.
9. This Agreement embodies the entire understanding between the parties and shall e construed and governed by the laws of the State of Indiana.
10. Any controversy arising hereunder shall be settled by arbitration in accordance with the rules, then obtaining, of the American Arbitration Association, and judgment upon award rendered may be entered in any court having jurisdiction hereof.
11. This Agreement shall be binding on and inure to the benefit of the successors and assigns of PSA, and the personal representatives, heirs, legatees and assigns of Jack.
IN WITNESS WHEREOF, the parties have executed this agreement in duplicate on the 14th day of July, Yr 1.

/s/ JJ Smith
Pro Sports Apparel (PSA)

/s/ Jack X
By Jack X