SCOTUS Reports

Tag: Stemkowski v. Commissioner

  • 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.