SCOTUS Reports

Tag: Professional Athletes

  • Sargent v. Commissioner, 93 T.C. 572 (1989): Determining Employee Status in Personal Service Corporations

    Sargent v. Commissioner, 93 T. C. 572 (1989)

    In tax law, professional athletes are considered employees of the sports team, not their personal service corporations, when the team exercises significant control over their services.

    Summary

    In Sargent v. Commissioner, professional hockey players formed personal service corporations to contract their services to the Minnesota North Stars. The court held that the players were employees of the team, not their corporations, due to the team’s extensive control over the players’ activities. This control included determining game schedules, player participation, and strategy. Consequently, income received by the corporations from the team was taxable to the players under the assignment of income doctrine or section 482 of the Internal Revenue Code. The decision underscores the importance of control in determining employer-employee relationships for tax purposes.

    Facts

    Gary Sargent and Steven Christoff, professional hockey players, established personal service corporations (Chiefy-Cat and RIF Enterprises) to contract their services to the Northstar Hockey Partnership, owners of the Minnesota North Stars. Sargent and Christoff entered into employment agreements with their respective corporations, which then contracted with the team. The team controlled game schedules, player participation, and strategy, while the players were subject to fines for non-attendance at mandatory training camps. The team provided uniforms and equipment, and the players were not considered employees for the NHL Players’ Pension Plan purposes.

    Procedural History

    The Commissioner of Internal Revenue determined deficiencies in the players’ federal income taxes, asserting that income paid to their corporations should be taxable to them. The case was heard by the United States Tax Court, which consolidated related cases and issued a decision that the players were employees of the team, not their corporations.

    Issue(s)

    1. Whether Sargent and Christoff were employees of the Northstar Hockey Partnership or their personal service corporations.
    2. Whether the amounts received by the personal service corporations for the players’ services were taxable to the players under section 61 or section 482 of the Internal Revenue Code.

    Holding

    1. No, because the Northstar Hockey Partnership exercised significant control over the players’ services, making them employees of the team.
    2. Yes, because under the assignment of income doctrine or section 482, the income received by the corporations was allocable to the players as they were the true earners of the income.

    Court’s Reasoning

    The court applied common law principles to determine that the team, not the personal service corporations, was the employer due to its control over the players’ activities. The court highlighted the team’s authority over game schedules, player participation, and strategy, which negated any meaningful control by the corporations. The decision was grounded in the assignment of income doctrine from Lucas v. Earl and section 482, which allow the reallocation of income to the true earner. The court rejected the players’ argument that their individual talents constituted control, emphasizing the team nature of hockey. A dissenting opinion argued that the majority disregarded the corporations’ separate existence without a finding of sham, contrary to precedent.

    Practical Implications

    This decision impacts how professional athletes and other service providers structure their income through personal service corporations. It reinforces that the entity exercising control over the service is likely the employer for tax purposes, potentially limiting tax planning strategies involving such corporations. The ruling may influence future cases involving the taxation of income earned through corporate intermediaries in service industries. It also led to legislative changes with the enactment of section 269A, aimed at addressing similar tax avoidance schemes. Subsequent cases have considered this ruling when determining employer-employee relationships in the context of personal service corporations.

  • Stemkowski v. Commissioner, 76 T.C. 252 (1981), aff’d in part, rev’d in part 690 F.2d 40 (2d Cir. 1982): Substantiation Required for Deducting Off-Season Conditioning Expenses

    Stemkowski v. Commissioner, 76 T. C. 252 (1981), aff’d in part, rev’d in part 690 F. 2d 40 (2d Cir. 1982)

    Taxpayers must substantiate off-season conditioning expenses to claim them as deductions under section 162 of the Internal Revenue Code.

    Summary

    Peter Stemkowski, a professional hockey player, sought to deduct off-season conditioning expenses incurred in Canada. The U. S. Tax Court initially disallowed these deductions due to lack of substantiation. The Second Circuit Court of Appeals reversed and remanded the case, directing the Tax Court to consider whether these expenses were deductible under section 162. Upon remand, the Tax Court found that Stemkowski failed to adequately substantiate his off-season conditioning expenses, leading to their disallowance. However, the court allowed deductions for expenses related to answering fan mail and subscribing to Hockey News, finding these to be ordinary and necessary business expenses.

    Facts

    Peter Stemkowski, a professional hockey player, claimed deductions for off-season conditioning expenses incurred in Canada on his 1971 tax return. The IRS disallowed these deductions, leading to a tax deficiency notice. Stemkowski appealed to the U. S. Tax Court, which initially held that the expenses were allocable to Canadian income and not deductible under section 862(b). The Second Circuit Court of Appeals reversed the Tax Court’s decision on the allocation of income but remanded the case for further consideration of whether the off-season conditioning expenses were deductible under section 162.

    Procedural History

    Stemkowski’s case was initially heard by the U. S. Tax Court, which disallowed his off-season conditioning expense deductions in 1981. He appealed to the U. S. Court of Appeals for the Second Circuit, which in 1982 affirmed the Tax Court’s decision in part, reversed it in part regarding the allocation of income, and remanded the case for further consideration of the deductibility of the expenses under section 162. Upon remand, the Tax Court again reviewed the case and disallowed the deductions due to lack of substantiation.

    Issue(s)

    1. Whether Stemkowski adequately substantiated his off-season conditioning expenses to claim them as deductions under section 162 of the Internal Revenue Code?
    2. Whether expenses incurred by Stemkowski in answering fan mail are deductible as ordinary and necessary business expenses under section 162?
    3. Whether the cost of subscribing to Hockey News is deductible as an ordinary and necessary business expense under section 162?

    Holding

    1. No, because Stemkowski failed to provide sufficient evidence to substantiate his off-season conditioning expenses.
    2. Yes, because the expenses for answering fan mail were found to be ordinary and necessary business expenses under section 162.
    3. Yes, because the cost of subscribing to Hockey News was deemed an ordinary and necessary business expense under section 162.

    Court’s Reasoning

    The Tax Court emphasized the importance of substantiation for claiming deductions under section 162. Stemkowski’s failure to provide documentary evidence or specific testimony about his off-season conditioning expenses led to their disallowance. The court cited Welch v. Helvering and Rule 142(a) of the Tax Court Rules of Practice and Procedure, which place the burden of proof on the taxpayer. The court also referenced the Cohan rule but declined to apply it due to the lack of any evidence that the expenses were incurred. In contrast, the court allowed deductions for fan mail expenses and Hockey News subscription costs, finding these to be directly related to Stemkowski’s profession and adequately substantiated. The court noted that section 274(d) did not require substantiation for fan mail expenses, and section 1. 162-6 of the Income Tax Regulations supported the deduction of professional journal subscriptions.

    Practical Implications

    This case underscores the necessity for taxpayers, especially professionals, to meticulously document and substantiate expenses claimed as deductions. For athletes and other professionals, off-season conditioning expenses must be clearly linked to their professional activities and supported by evidence to be deductible. The ruling also clarifies that certain expenses, such as those for fan mail and professional journals, are more readily deductible if they are directly related to the taxpayer’s profession. Legal practitioners should advise clients on the importance of record-keeping and the specific requirements for substantiation under sections 162 and 274 of the Internal Revenue Code. Subsequent cases involving similar issues have reinforced the need for substantiation, with courts consistently requiring clear evidence of expenses before allowing deductions.

  • Stemkowski v. Commissioner, 76 T.C. 252 (1981): Allocation of Income for Nonresident Alien Athletes

    Stemkowski v. Commissioner, 76 T. C. 252 (1981)

    The salaries of nonresident alien professional athletes are allocable only to the regular season of play, not to off-season, training camp, or playoff activities.

    Summary

    Stemkowski and Hanna, nonresident alien professional hockey players, contested the allocation of their U. S. income and claimed deductions for off-season conditioning, away-from-home expenses, and other miscellaneous costs. The Tax Court ruled that their salaries were allocable only to the regular season, not to training camp, playoffs, or off-season activities. The court also denied deductions for conditioning expenses, as they were related to income earned in Canada, and disallowed other expenses due to lack of substantiation or connection to U. S. income.

    Facts

    Stemkowski and Hanna, Canadian citizens, played professional hockey for U. S. teams in 1971. Their contracts specified a 12-month term, but the salary was for services during the regular season only. Stemkowski played for the New York Rangers, with some games in Canada, while Hanna played for the Seattle Totems, all games in the U. S. Both players engaged in off-season conditioning in Canada to meet contractual fitness requirements.

    Procedural History

    The Commissioner determined deficiencies in the players’ U. S. income taxes and denied their claimed deductions. The players petitioned the U. S. Tax Court, which consolidated their cases and heard them as a test case for other similar disputes. The court’s decision addressed the allocation of income and the deductibility of various expenses.

    Issue(s)

    1. Whether the stated salaries in the employment contracts covered services beyond the regular season, such as off-season, training camp, and playoffs, allowing allocation to non-U. S. sources?
    2. Whether off-season physical conditioning expenses were deductible as ordinary and necessary business expenses under section 162?
    3. Whether various expenses incurred in 1971 were deductible as “away-from-home” traveling expenses under sections 62 and 162?
    4. Whether miscellaneous expenses claimed for 1971 were deductible, and if so, were they adequately substantiated?

    Holding

    1. No, because the salaries were paid only for the regular season of play, and thus only days spent in Canada during the regular season were excludable from U. S. income.
    2. No, because the off-season conditioning expenses were allocable to income earned at training camps in Canada, which was not subject to U. S. tax.
    3. No, because the players’ tax homes were the cities where their teams were located, and they failed to substantiate their expenses.
    4. No, because the miscellaneous expenses were either not ordinary and necessary or not adequately substantiated.

    Court’s Reasoning

    The court analyzed the employment contracts and found that the salaries were intended to cover only the regular season, based on the contract language and testimony from hockey league officials. The off-season conditioning requirement was viewed as a condition of employment, not a service for which the salary was paid. The court applied Treasury Regulation section 1. 861-4(b) to allocate income based on time spent performing services in the U. S. during the regular season. The players’ failure to substantiate expenses under section 274(d) precluded deductions for away-from-home and miscellaneous expenses. The court also found that the players’ tax homes were their team cities, not their Canadian residences, following the principle from Commissioner v. Flowers.

    Practical Implications

    This decision clarifies that nonresident alien athletes’ salaries are taxable in the U. S. based on the time spent playing in the U. S. during the regular season. It establishes that off-season conditioning is not a deductible business expense for U. S. tax purposes if related to income earned outside the U. S. Practitioners should advise clients to carefully document and substantiate all claimed deductions, as the court strictly enforced the substantiation requirements of section 274. The ruling also reinforces the principle that an athlete’s tax home is typically the location of their team, affecting the deductibility of living expenses. Subsequent cases have followed this precedent in determining the allocation of income and deductibility of expenses for nonresident alien athletes.

  • Gardin v. Commissioner, 64 T.C. 1079 (1975): Determining ‘Home’ for Tax Purposes in Professional Sports

    Gardin v. Commissioner, 64 T. C. 1079 (1975)

    A professional athlete’s ‘home’ for tax purposes under section 162(a)(2) is at the franchise location where they are employed, not their personal residence.

    Summary

    Ronald L. Gardin, a professional football player, sought to deduct living expenses incurred at the franchise locations of the Baltimore Colts and New England Patriots as ‘away from home’ expenses. The Tax Court held that Gardin’s ‘home’ for tax purposes was the franchise location of his employment, not his personal residence in Tucson, Arizona. The court found that Gardin’s employment with the teams was sufficiently permanent to establish the franchise locations as his tax home, disallowing the deductions. This ruling clarified that professional athletes must establish their ‘home’ at their employment location for tax deduction purposes.

    Facts

    Ronald L. Gardin was a professional football player who signed contracts with the Baltimore Colts for the 1970, 1971, and 1972 seasons. He resided in Tucson, Arizona, where he had purchased a home. Gardin played for the Colts in 1970 and part of 1971 before being traded to the New England Patriots in September 1971. He incurred living expenses at the franchise locations of both teams, which he attempted to deduct as ‘away from home’ expenses under section 162(a)(2) of the Internal Revenue Code.

    Procedural History

    The Commissioner of Internal Revenue determined a deficiency in Gardin’s 1971 federal income taxes and disallowed the claimed deductions. Gardin petitioned the United States Tax Court for a redetermination of the deficiency. The court, in a decision by Judge Tannenwald, upheld the Commissioner’s disallowance of the deductions.

    Issue(s)

    1. Whether Gardin’s living expenses at the franchise locations of the Baltimore Colts and New England Patriots were deductible under section 162(a)(2) as expenses incurred ‘away from home’?

    Holding

    1. No, because Gardin’s ‘home’ for tax purposes was at the franchise location of his employment, not his personal residence in Tucson.

    Court’s Reasoning

    The court reasoned that Gardin’s employment with the Colts and Patriots was sufficiently permanent to establish the franchise locations as his tax home. The court emphasized that Gardin had multi-year contracts with the teams and that his employment did not have the ‘quality of impermanence’ necessary to classify it as temporary. The court cited previous cases, such as Wills v. Commissioner, to support its conclusion that a professional athlete’s tax home is typically at the franchise location. The court also noted that allowing deductions for living expenses at franchise locations would lead to an unintended result of most professional athletes being able to deduct such expenses.

    Practical Implications

    This decision established that professional athletes must treat their franchise location as their ‘home’ for tax purposes when seeking to deduct travel expenses under section 162(a)(2). Attorneys representing professional athletes should advise clients to establish their primary residence at the franchise location to maximize potential deductions. The ruling also impacts how similar cases involving other professional sports should be analyzed, focusing on the permanence of employment at the franchise location. Subsequent cases have applied this principle, reinforcing the notion that a professional athlete’s tax home is typically where their team is based.