Sargent v. C.I.R.

• Decision Date: 02 April 1991
• Docket Number: No. 90-1782,90-1782
• Citation: 929 F.2d 1252
• Parties: -718, 59 USLW 2631, 91-1 USTC P 50,168, 13 Employee Benefits Ca 2058 Gary A. SARGENT and Janice B. Sargent, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. Steven M. CHRISTOFF and Tami Jo Christoff, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. Steven M. CHRISTOFF, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1252

929 F.2d 1252

67 A.F.T.R.2d 91-718, 59 USLW 2631, 91-1

USTC P 50,168,

13 Employee Benefits Ca 2058

Gary A. SARGENT and Janice B. Sargent, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

Steven M. CHRISTOFF and Tami Jo Christoff, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

Steven M. CHRISTOFF, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.

No. 90-1782.

United States Court of Appeals Eighth Circuit.

Submitted Dec. 13, 1990.

Decided April 2, 1991.

John W. Hughes, New York City, for appellants.

Bruce R. Ellisen, Washington, D.C., for appellee.

Before ARNOLD and BEAM, Circuit Judges, and BOGUE, ^* Senior District Judge.

BOGUE, Senior District Judge.

This case, on appeal from the United States Tax Court, is one of first impression for this Court. Initially, the Commissioner of Internal Revenue issued Notices of Deficiency with respect to the federal income Sargent and Christoff (hereinafter "Appellants") were hockey players with the Minnesota North Stars Hockey Club (hereinafter the "Club"). Appellants' personal service corporations (PSC), created to represent the business associations of each Appellant, contracted with the Club to provide each Appellant's services to the Club as a hockey player and, in the case of Sargent, also as a consultant. The North Stars paid each PSC for the use of each Appellant's services; each PSC, in turn, paid each Appellant a salary and contributed the remainder to each PSC's qualified pension plan. The Commissioner proposed to disallow these pension deductions and elected to tax Appellants on the entire amount paid by the Club to the PSC.

taxes of Gary A. Sargent ¹ for the years 1978 through 1981; and for Steven M. Christoff ² for the years 1980 through 1982.

Appellant Sargent filed a Petition with the Tax Court on March 11, 1986, contesting the deficiencies. Appellant Christoff did likewise on May 17, 1988, and May 18, 1988. ³ The case was tried in the United States Tax Court, New York, New York, on November 16, 1988; and on November 13, 1988, Judge Tannenwald, Jr., writing for the majority, ⁴ issued an opinion upholding the deficiencies proposed by the Commissioner. We reverse the decision of the Tax Court and hold that Appellants were employees of their respective personal service corporations; and, therefore, Appellants should not be taxed on the pension deductions of their PSCs.

STANDARD OF REVIEW

We review decisions of the United States Tax Court on the same basis as decisions in civil bench trials in United States District Courts. Commissioner v. Duberstein, 363 U.S. 278, 290-91, 80 S.Ct. 1190, 1199, 4 L.Ed.2d 1218 (1960). The trial judge's findings of fact will not be set aside unless clearly erroneous. Id.; Fed.R.Civ.P. 52(a). Mixed questions of law and fact that require the consideration of legal concepts and involve the exercise of judgment about the values underlying legal principles are reviewable de novo. United States v. McConney, 728 F.2d 1195, 1199-1204 (9th Cir.1984) (en banc), cert. denied, 469 U.S. 824, 105 S.Ct. 101, 83 L.Ed.2d 46 (1984).

The determination of an employer-employee relationship involves a mixed question of law and fact. Because, however, the decision is predominantly one of determining whether the established facts ⁵ fall within the relevant legal definition, and does not involve constitutional issues, we apply a clearly erroneous standard of review. Id. at 1202-03. The Tenth Circuit has similarly concluded that the determination of an employer-employee relationship is a question of fact. Marvel v. United States, 719 F.2d 1507, 1515 (10th Cir.1983).

BACKGROUND

The facts are set forth in detail in the Tax Court's opinion, and we shall state only the essentials: Appellants were both professional hockey players with the Minnesota North Stars Hockey Club. Prior to signing with the North Stars, Appellant Sargent sought out the assistance of Attorney Arthur Kaminsky concerning the benefits of incorporation. Kaminsky advised Sargent that incorporation provided two primary benefits: increased bargaining power and the possibility of placing money into a pension plan.

Based upon his consultations with Kaminsky, Sargent incorporated Chiefy-Cat, Inc. (Chiefy-Cat) on July 20, 1978. Sargent was the sole shareholder, president, and sole director of this personal service corporation. On July 20, 1978, Sargent entered into an Employment Contract with Chiefy-Cat wherein he agreed to provide his services as a professional hockey player and consultant exclusively for Chiefy-Cat for the period July 1, 1978, to June 30, 1984. At the same time, Chiefy-Cat agreed to furnish the services of Sargent as both a hockey player and consultant to the Club. In exchange, the Club agreed to pay Chiefy-Cat a set salary during each respective playing season. ⁶ Further, Sargent's employment agreement with Chiefy-Cat provided that Chiefy-Cat agreed to pay Sargent a set salary during each respective season. ⁷

Chiefy-Cat withheld and paid the applicable federal and state income taxes and timely filed Employers Quarterly Federal Tax Returns and Forms W-2 and W-3. On March 5, 1980, the Commissioner of the Internal Revenue Service issued a letter whereby the pension plan established by Chiefy-Cat and covering Sargent was determined to be a qualified pension plan. ⁸ That favorable determination is still in effect and is not an issue before this Court.

Christoff followed substantially the same route toward incorporation. He employed the services of Attorney Kaminsky, and sought the same benefits as those sought by Sargent. Thus, on August 11, 1980, Christoff incorporated RIF Enterprises, Inc. (RIF), and entered into an employment agreement with RIF identical--for the most part--to that between Sargent and Chiefy-Cat. Likewise, RIF contracted with the North Stars and agreed to provide Christoff's services as a hockey player to the Club. In exchange, the Club agreed to pay RIF a salary during each respective hockey season. ⁹ From this salary, RIF directed contributions to the PSC's qualified pension plan. ¹⁰

During the years at issue, neither Sargent nor Christoff were considered employees of the Club for purposes of the National Hockey League Players' Pension Plan. In each case, the Club paid Chiefy-Cat and RIF, respectively, the amounts that it would otherwise have contributed to the Players' Pension Plan on their behalf. The sole issue before this Court is whether Sargent and Christoff should be taxed now on those amounts contributed by their respective PSC's to each PSC's qualified pension plan. ¹¹

I.

The Tax Court takes the position that because Sargent and Christoff were members of a hockey "team," the requisite control over them--for purposes of taxation--was lodged in the hockey Club, and not in their respective PSCs, with which they had a contractual employment relationship. We reject this contention.

With respect to the "control" factor, which is heavily relied upon by the Tax Court, the Regulations state:

In this connection, it is not necessary that the employer actually direct or control the manner in which the services are performed; it is sufficient if he has the right to do so.

Treasury Regulation Sec. 31.3121(d)-1(c)(2) (1980).

It seems to this Court that legal analysis is forgotten if we simply measure the control element of an employment relationship by whether the employee is or is not a member of a superficially defined "team." Eventually, the issue becomes mired in a game of definitions: If the organizational structure is itself mislabeled a "team," a personal service corporation, as a matter of law, is a forbidden tax deferment tool for each and every person providing his or her services to that organization. On the other hand, if the organization to which the services are provided is not defined as a "team," then those same service-providers are free to create a PSC and subject that PSC's legitimacy to traditional common law and tax code analysis, regardless of the level of control exerted over those persons by the organization. Such an arbitrary approach is specious at best.

Accordingly, within Regulation Sec. 31.3121(d)-(1)(c)(2), two necessary elements must be met before the corporation, rather than the service-recipient, in this case the North Stars Hockey Club, may be considered the true controller of the service-provider. First, the service-provider must be just that--an employee of the corporation whom the corporation has the right to direct or control in some meaningful sense. See Vnuk v. Commissioner, 621 F.2d 1318, 1320-21 (8th Cir.1980); Johnson v. Commissioner, 78 T.C. 882 (1982). Second, there must exist between the corporation and the person or entity (Club) using the services a contract or similar indicium recognizing the corporation's controlling position. See Pacella v. Commissioner, 78 T.C. 604 (1982); Keller v. Commissioner, 77 T.C. 1014 (1981), aff'd 723 F.2d 58 (10th Cir.1983); Johnson, supra.

These two elements were applied in a case strikingly similar to the one before us. In Johnson, supra, Charles Johnson, a professional basketball player with the San Francisco Warriors, created a PSC and the IRS sought to tax Johnson for the entire amount paid to his PSC by the Warriors. Without ever addressing whether Johnson was or was not a member of a "team," the Tax Court ultimately held the contracts to be dispositive of the issue of control:

In the case before us, we accept arguendo that the [PSC-Johnson] agreement was a valid contract which required the payments with respect to [Johnson's] performance as a basketball player ultimately to be made to the [PSC]. We also accept arguendo that the [PSC-Johnson] agreement gave [the PSC] a right of control over [Johnson's] services, ... Thus, the first element [of control] is satisfied. [emphasis added]

Johnson, 78 T.C. at 883.

Ultimately, Johnson was required to pay individual income tax on the entire amount paid to his PSC, but only...