SCOTUS Reports

Tag: Professional Athlete

  • Leavell v. Commissioner, 104 T.C. 140 (1995): When Personal Service Corporations Fail to Control Employee’s Income

    Leavell v. Commissioner, 104 T. C. 140 (1995)

    Income from personal services must be taxed to the individual who performs the services, even if a personal service corporation (PSC) is used, if the service recipient has the right to control the manner and means of the services.

    Summary

    Allen Leavell, a professional basketball player, formed a personal service corporation (PSC) to manage his basketball and endorsement services. Despite an agreement between Leavell and his PSC, and a contract between the PSC and the Houston Rockets, the Tax Court ruled that Leavell was an employee of the Rockets. The court focused on the Rockets’ control over Leavell’s services, evidenced by the personal guarantee Leavell provided and the detailed control stipulated in the NBA contract. This case highlights the importance of genuine control by a PSC over an individual’s services to avoid income reallocation to the individual under the assignment of income doctrine.

    Facts

    Allen Leavell, a professional basketball player, formed a personal service corporation (Allen Leavell, Inc. ) in 1980 to manage his basketball and endorsement services. Leavell agreed to provide his services exclusively to the corporation, which then contracted with the Houston Rockets using an NBA Uniform Player Contract. However, the Rockets required Leavell to personally guarantee his services, indicating their direct control over him. The contract detailed extensive control over Leavell’s basketball activities and personal conduct. The Rockets paid the corporation, which then paid Leavell a salary, but the IRS sought to include these payments in Leavell’s personal income.

    Procedural History

    Leavell filed a petition with the U. S. Tax Court challenging the IRS’s determination of a deficiency in his 1985 federal income tax. The Tax Court, after reviewing the case, ruled in favor of the IRS, determining that the payments made by the Rockets to Leavell’s corporation were taxable to Leavell personally. The court’s decision was influenced by the reversal of a similar case, Sargent v. Commissioner, by the Eighth Circuit Court of Appeals.

    Issue(s)

    1. Whether the income paid by the Houston Rockets to Allen Leavell’s personal service corporation for his basketball services should be included in Leavell’s gross income?

    Holding

    1. Yes, because the Rockets had the right to control the manner and means by which Leavell’s basketball services were performed, making him their employee, not his corporation’s.

    Court’s Reasoning

    The Tax Court applied the assignment of income doctrine, focusing on the control over Leavell’s services. The court determined that the Rockets, not the PSC, controlled Leavell’s basketball activities, as evidenced by the NBA contract’s detailed requirements and Leavell’s personal guarantee. The court rejected the PSC’s control based on the lack of meaningful control over Leavell’s services, aligning with the Eighth Circuit’s reversal of Sargent. The court emphasized that the PSC’s control was illusory given the Rockets’ direct control over Leavell’s performance. The court also considered policy implications, noting that allowing PSCs to control services without genuine authority could undermine tax principles.

    Practical Implications

    This decision reinforces that for a PSC to be recognized as the recipient of income from personal services, it must genuinely control the manner and means of those services. It impacts how athletes and other professionals structure their service arrangements through corporations, requiring careful consideration of control elements in contracts. The ruling may deter the use of PSCs for tax deferral if genuine control cannot be established. Subsequent cases, such as those involving other professional athletes, have cited Leavell to assess the legitimacy of PSCs. The decision also underscores the importance of contractual terms that reflect actual control dynamics, influencing how legal practitioners draft and negotiate such agreements.

  • Horton v. Commissioner, 85 T.C. 52 (1985): Determining Tax Home for Temporary Employment

    Horton v. Commissioner, 85 T. C. 52 (1985)

    A taxpayer’s tax home remains at their permanent residence if employment away from home is temporary.

    Summary

    In Horton v. Commissioner, the Tax Court ruled on the tax home of a professional hockey player, William Horton, who played for minor league teams in California during the 1978 tax year. The court determined that Horton’s employment in California was temporary, thus his tax home remained in Flint, Michigan, where he and his wife maintained a permanent residence. This allowed Horton to deduct travel and living expenses incurred while playing hockey away from his tax home. The court’s rationale hinged on the temporary nature of Horton’s employment contracts and the fact that his wife’s permanent job was in Michigan, supporting the conclusion that their tax home did not shift to California.

    Facts

    William Horton, a professional hockey player, played for minor league teams in California during the 1978 tax year. His employment contracts were limited to six months, covering the hockey season. Horton maintained a residence in Flint, Michigan, where his wife, Sharon, worked full-time at a telephone company, earning more than half of the family’s income. Horton returned to Michigan between seasons and worked as a real estate agent during the off-season. The IRS challenged Horton’s deductions for travel and living expenses, arguing his tax home was in California.

    Procedural History

    Horton filed a petition with the Tax Court challenging the IRS’s determination of a tax deficiency and additions to tax for the 1978 tax year. The court dismissed the case against Sharon Horton due to her death and focused on the tax home issue regarding William Horton.

    Issue(s)

    1. Whether Horton’s employment in California during 1978 was temporary or indefinite, affecting the location of his tax home.
    2. Whether Horton was entitled to deductions for travel and living expenses incurred while playing hockey in California.

    Holding

    1. Yes, because Horton’s employment contracts were limited to six months and his actions demonstrated a treatment of the employment as temporary, his tax home remained in Flint, Michigan.
    2. Yes, because Horton’s employment was temporary, he was entitled to deduct travel and living expenses while away from his tax home in Michigan.

    Court’s Reasoning

    The court applied the rule that a taxpayer’s tax home is generally the vicinity of their principal place of business unless their employment away from home is temporary. The court determined that Horton’s employment in California was temporary, as his contracts were for six months, and he returned to Michigan between seasons. The court emphasized that Horton’s wife’s permanent job in Michigan, where she earned the majority of the family’s income, further supported the conclusion that their tax home remained in Michigan. The court cited cases like Groover v. Commissioner to support its application of the temporary employment exception to the tax home rule. The court also noted Horton’s consistent treatment of his California employment as temporary, as evidenced by his return to Michigan and engagement in real estate work during the off-season.

    Practical Implications

    This decision clarifies that a taxpayer’s tax home remains at their permanent residence if their employment away from home is temporary. For attorneys and tax professionals, this case provides guidance on how to assess a client’s tax home, particularly for individuals with temporary employment in different locations. It highlights the importance of considering the taxpayer’s family situation, such as a spouse’s employment, when determining the tax home. The ruling also has implications for professional athletes and others with seasonal or temporary work, allowing them to deduct travel and living expenses incurred away from their permanent residence. Subsequent cases have followed this precedent when addressing similar tax home issues, reinforcing its significance in tax law practice.

  • Frost v. Commissioner, 61 T.C. 488 (1974): When College Training Does Not Qualify as ‘Work’ for Income Averaging

    Frost v. Commissioner, 61 T. C. 488 (1974)

    College training and activities do not constitute ‘work’ under the income averaging provisions of the Internal Revenue Code.

    Summary

    William Frost, a professional baseball player, sought to use income averaging for a $15,000 signing bonus received from the San Francisco Giants in 1966. The Tax Court ruled that Frost could not utilize income averaging because his college baseball activities did not qualify as ‘work’ under Section 1303(c)(2)(B) of the Internal Revenue Code. The court determined that ‘work’ must involve gainful employment, and Frost’s college training, despite being crucial to his development as a professional athlete, did not meet this criterion since it was not compensated as employment.

    Facts

    William Frost was a professional baseball player who received a $15,000 signing bonus from the San Francisco Giants in 1966. Frost had played baseball at the University of California on a scholarship from 1963 to 1966. He was drafted by the Giants in 1966 and signed a contract that included the bonus payment. Frost attempted to use the income averaging provisions of the Internal Revenue Code to spread the tax liability of the bonus over several years, arguing that the bonus was attributable to his college baseball performance during the base period years of 1962-1965.

    Procedural History

    Frost filed an amended tax return in 1969 claiming a refund based on income averaging. The IRS issued a statutory notice of deficiency in 1970, asserting that Frost was not eligible for income averaging. Frost petitioned the U. S. Tax Court for a redetermination of the deficiency.

    Issue(s)

    1. Whether Frost’s activities playing college baseball constitute ‘work’ within the meaning of Section 1303(c)(2)(B) of the Internal Revenue Code.

    2. If so, whether the $15,000 signing bonus was attributable to such ‘work’ performed during the base period years.

    Holding

    1. No, because Frost’s college baseball activities did not constitute ‘work’ as they were not gainful employment but rather training to become a professional athlete.

    2. Since Frost’s college activities did not qualify as ‘work,’ the court did not need to address whether the bonus was attributable to those activities.

    Court’s Reasoning

    The court analyzed the statutory language and legislative history of Section 1303(c)(2)(B), which allows income averaging if more than half of a taxpayer’s income in the computation year is attributable to ‘work’ performed in two or more of the base period years. The court defined ‘work’ as gainful employment that generates income, either from an employer or self-employment. It rejected Frost’s argument that his college baseball training constituted ‘work,’ stating that such training was not compensated as employment but was aimed at developing skills to eventually obtain a professional contract. The court cited previous cases like Heidel and Wilson, which involved similar issues with college athletes and beauty pageant winners, respectively, to support its conclusion. The court emphasized that while Frost’s training was essential to his professional career, it did not meet the statutory definition of ‘work’ under the income averaging provisions.

    Practical Implications

    This decision clarifies that college training and activities, even if essential to developing professional skills, do not qualify as ‘work’ for the purposes of income averaging under Section 1303(c)(2)(B). Attorneys and tax professionals should advise clients that income received as a signing bonus or similar payment for future services cannot be averaged based on prior unpaid training or college activities. This ruling impacts professional athletes, artists, and others who receive lump-sum payments after periods of unpaid training or education. It also underscores the importance of careful tax planning for individuals expecting large income fluctuations, as they may not be able to utilize income averaging provisions based on pre-professional training.

  • Heidel v. Commissioner, 56 T.C. 95 (1971): When Athletic Scholarships and Signing Bonuses Affect Income Averaging Eligibility

    Heidel v. Commissioner, 56 T. C. 95 (1971)

    The value of an athletic scholarship does not count as support furnished by the recipient for income averaging purposes, and a signing bonus received by a professional athlete is not attributable to work performed during college years.

    Summary

    James Heidel, a former college football player at the University of Mississippi, sought to use income averaging for his 1965 tax year after receiving a $50,000 signing bonus from the St. Louis Football Cardinals. The court ruled that Heidel was not eligible for income averaging because the value of his athletic scholarship could not be considered support furnished by him, and the bonus was not attributable to work performed during his college years. The decision hinged on interpretations of Internal Revenue Code sections related to scholarships and the nature of the bonus payment, emphasizing the narrow eligibility criteria for income averaging.

    Facts

    James Heidel received an athletic scholarship from the University of Mississippi for the 1961-1965 academic years. In 1965, after playing college football, Heidel signed a professional contract with the St. Louis Football Cardinals and received a $50,000 signing bonus. Heidel and his wife filed a joint tax return for 1965, electing to use income averaging. The Commissioner of Internal Revenue disallowed the election, leading to a deficiency determination. Heidel’s parents claimed him as a dependent in 1961, and he relied on the scholarship value to meet the support test for income averaging eligibility.

    Procedural History

    The Commissioner of Internal Revenue determined a tax deficiency for Heidel’s 1965 income due to the disallowance of income averaging. Heidel and his wife petitioned the U. S. Tax Court, which heard the case and issued its decision on April 20, 1971, ruling in favor of the Commissioner.

    Issue(s)

    1. Whether the value of a Southeastern Conference grant-in-aid athletic scholarship received by Heidel constitutes support furnished by him for himself in 1961 within the meaning of section 1303(c)(1), I. R. C. 1954?
    2. Whether the $50,000 bonus Heidel received from the St. Louis Football Cardinals in 1965 was income attributable to work performed by him in substantial part during two or more of the base period years 1961 through 1964 within the purview of section 1303(c)(2)(B), I. R. C. 1954?
    3. Whether Heidel was an “eligible individual” in 1965 within the meaning of section 1303, I. R. C. 1954, and thus entitled to the benefits of income averaging under sections 1301 through 1305, I. R. C. 1954?

    Holding

    1. No, because the scholarship was considered a “no-strings educational grant” and not support furnished by Heidel himself.
    2. No, because the bonus was not attributable to work performed during the base period years but was either an inducement to sign or an advance payment for future services.
    3. No, because Heidel failed to meet the eligibility requirements under section 1303(c) due to the reasons stated above.

    Court’s Reasoning

    The court applied the rules under section 152 and the regulations thereunder to determine support for income averaging eligibility. It concluded that the scholarship could not be considered support furnished by Heidel himself because it was a “no-strings educational grant” and not taxable income. The court also found that the signing bonus was not attributable to work performed during the base period years, as it was either an inducement to sign or an advance payment for future professional services. The court emphasized the narrow scope of the income averaging provisions and the intent of Congress to grant relief only to those who work on a specific project for several years and receive payment in the final year. The court cited Bingler v. Johnson to distinguish between scholarships and compensation for services, and noted the lack of evidence that the bonus was related to Heidel’s college performance.

    Practical Implications

    This decision clarifies that athletic scholarships do not count as support furnished by the recipient for income averaging purposes, which could affect how student-athletes plan their financial strategies. It also establishes that signing bonuses in professional sports are not considered attributable to work performed during college, impacting how such income is treated for tax purposes. This ruling may influence how tax professionals advise clients in similar situations and how athletes structure their contracts and bonuses. Subsequent cases involving income averaging and the treatment of scholarships and bonuses may reference this case to distinguish between types of income and support. The decision underscores the importance of understanding the specific eligibility criteria for income averaging and the narrow interpretation of these provisions by the courts.