Why Is Scott Frost Suing the University of Nebraska Over “Phantom Income” and a $5 Million Buyout?

Scott Frost’s lawsuit against the University of Nebraska Board of Regents is more than a dispute between a former head football coach and his alma mater. It is a real-world example of how employment contracts, buyout provisions, and tax reporting decisions can collide in ways that create massive financial exposure.

Frost alleges that after he was fired without cause, Nebraska mishandled both the timing and reporting of his buyout payments. According to the lawsuit, that alleged misstep left him with millions of dollars in unpaid compensation and roughly $1.7 million in federal tax liability on income he says he never actually received. That type of scenario is often referred to as “phantom income,” where taxes are assessed on money that has not yet been paid.

At its core, the case asks questions that matter far beyond college athletics. When are severance or buyout payments legally “earned”? How long do offset clauses last when a terminated employee takes a new job? And can an employer report the present value of future payments as current wages before the money is actually paid?

These issues are not limited to high-profile coaches. Physicians, executives, administrators, and business owners across Nebraska regularly rely on negotiated employment contracts to protect them if a relationship ends. Frost’s lawsuit shows how unclear contract language or aggressive payroll reporting can quickly spiral into IRS audits, penalties, and years of litigation.

Key Takeaways

• Scott Frost claims Nebraska still owes him at least $5 million in buyout payments for the 2025 and 2026 contract years.

• He alleges the university reported future buyout payments on his 2022 W-2, creating approximately $1.7 million in tax liability on income he had not received.

• The case highlights why offset clauses, liquidated damages provisions, and tax reporting language matter for anyone with a high-dollar employment contract.

What Is Scott Frost Alleging in the Lawsuit?

Frost’s complaint, filed in Lancaster County District Court, alleges that the University of Nebraska breached his employment contract and mishandled payroll and tax reporting after his termination.

Frost was fired without cause on September 11, 2022. Under the terms of his coaching contract, Nebraska agreed to pay liquidated damages through December 31, 2026. While he received payments for earlier years, Frost claims that at least $5 million remains unpaid for the final two years of the agreement.

The most significant allegation involves his 2022 Form W-2. According to the complaint and public reporting, Nebraska issued Frost a W-2 reflecting approximately $9.5 million in taxable income for that year. Frost contends that figure included not only his actual 2022 salary, but also the present value of buyout payments scheduled for 2025 and 2026. Those future payments, he argues, had not been made and were contingent on later events.

How a W-2 Can Create “Phantom Income”

The heart of Frost’s tax claim is the concept of phantom income. This occurs when a taxpayer is assessed income tax on value they have not actually received in cash.

Under federal tax law, severance and similar employment-related payments are generally taxed in the year they are actually paid, not merely promised. They are typically reported on Form W-2 and subject to income and employment taxes at that time. Frost alleges that Nebraska violated this basic timing principle by reporting future buyout payments as current wages.

The lawsuit claims that this reporting decision resulted in approximately $1.7 million in additional federal income tax liability, late-filing penalties, and substantial professional fees. Frost also alleges that the delayed issuance of the W-2 made timely tax filing impossible and triggered further complications. According to media summaries of the complaint, an IRS audit later agreed that the accelerated reporting and employment-tax treatment were improper.

The Contract Dispute: Liquidated Damages and Offset Clauses

Beyond the tax issues, the lawsuit centers on a contract interpretation dispute worth millions of dollars.

Liquidated damages clauses are designed to set a predetermined amount an employer must pay if it terminates a contract early without cause. Under Nebraska law, these provisions are generally enforceable when they represent a reasonable estimate of anticipated damages rather than a penalty.

Offset clauses, by contrast, allow an employer to reduce what it owes if the terminated employee earns income from a new job during a specified period.

Frost argues that Nebraska’s right to offset his buyout payments expired on December 31, 2024. He claims his contract imposed no ongoing duty to mitigate damages after that date. As a result, he contends that income from later coaching positions, including work with the Los Angeles Rams and UCF, should not reduce what Nebraska owes him for 2025 and 2026.

Nebraska is expected to argue that its offset rights extended through the end of the buyout period. How the court interprets that language will likely determine whether Frost recovers the remaining $5 million or whether the university’s reductions stand.

Why This Case Matters Beyond College Football

You do not need to be a high-profile coach to see yourself in this dispute. Similar compensation structures appear in executive, medical, and administrative contracts throughout Nebraska.

The Frost lawsuit highlights several practical lessons. Employment contracts should clearly define when severance or buyout payments are earned and payable. Offset clauses should include unmistakable start and end dates, particularly where contracts have been amended over time. Payroll reporting should track actual payments, not projections or present values, to avoid creating phantom income and unnecessary IRS scrutiny.

How a Nebraska Attorney Can Help With Buyouts and Severance Issues

A Nebraska attorney can help review, negotiate, and enforce employment contracts involving severance or liquidated damages. Early legal review can identify risky offset language, vague tax provisions, or reporting assumptions that may not hold up if a dispute arises. When problems do occur, coordinated legal and tax guidance can help pursue corrected reporting, reduce penalties, and resolve disputes before they escalate into litigation.

FAQ: Scott Frost Lawsuit and Nebraska Buyout Law

Is Scott Frost really suing for $5 million?

Yes. The lawsuit seeks at least $5 million in unpaid liquidated-damages payments for the 2025 and 2026 contract years, along with damages tied to tax consequences and professional fees.

What is the $1.7 million tax issue about?

Frost alleges Nebraska reported future buyout payments on his 2022 W-2, creating tax liability on income he had not received. He claims an IRS audit later agreed that the reporting was improper.

Is Nebraska an at-will employment state?

Yes. Nebraska generally follows the at-will employment doctrine unless there is a contract for a definite term. High-level coaching and executive agreements are a notable exception.

Are severance and buyout payments taxable?

In most cases, yes. They are typically treated as taxable wages when paid. The dispute in this case centers on timing and reporting, not whether the income is taxable at all.

What should I do if my employer issued an incorrect W-2?

If a W-2 or 1099 appears incorrect, especially after a severance or settlement, act quickly. Request a corrected form, consult a tax professional, and speak with a Nebraska attorney to reduce penalties and audit risk.