Sargent v. Comm'r of Internal Revenue
| Citation | 93 T.C. No. 48,93 T.C. 572 |
| Decision Date | 13 November 1989 |
| Docket Number | 11170-88,Docket Nos. 7386-86,11290-88. |
| Parties | GARY A. SARGENT and JANICE B. SARGENT, ET AL.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Petitioners, professional hockey players, formed personal service corporations. They had contracts to furnish their services to those corporations; the corporations in turn contracted with the Northstar Hockey Partnership, the owner of the Minnesota North Stars hockey team, to furnish the services of petitioners. HELD, the control of the partnership over the services performed by petitioners was sufficiently extensive to constitute petitioners employees of the partnership and not of their respective personal service corporations. HELD FURTHER, amounts received by the personal service corporations for petitioners' services constitute income allocable to petitioners under secs. 61 or 482, I.R.C. John W. Hughes, for the petitioners.
Sharon Katz-Pearlman and William R. Davis, Jr., for the respondent.
This is the lead case in the Minnesota North Stars Litigation Project. 2 Respondent determined the following deficiencies in petitioners' Federal income taxes:
After concessions, the sole issue for decision is whether petitioners are subject to tax on amounts paid to their wholly owned personal service corporations on account of services rendered by them to the Minnesota North Stars hockey team.
Some of the facts have been stipulated and are so found.
Petitioners Gary and Janice Sargent maintained their legal residence in Burnsville, Minnesota, at the time of the filing of their petition herein. They filed joint Federal income tax returns for the years in issue with the Internal Revenue Service Center, Holtsville, New York.
Petitioners Steven M. and Tami Jo Christoff maintained their legal residence in Bloomington, Minnesota, at the time of the filing of their petitions herein. Steven Christoff filed his individual Federal income tax return for 1980 with the Internal Revenue Service Center, Ogden, Utah, and the Christoffs filed a joint return for 1981 and 1982 with the same service center.
All further references to petitioner Sargent are to Gary A. Sargent, and all further references to petitioner Christoff are to Steven M. Christoff. All further references to petitioners are to Gary A. Sargent and Steven M. Christoff.
During the years in issue, Sargent and Christoff were professional hockey players. After graduation from college in 1976, Sargent was drafted by the Los Angeles Kings (Kings). After playing for the Kings, Sargent sought the assistance of Arthur Kaminsky, an attorney, concerning the benefits of incorporation. Mr. Kaminsky advised Sargent that the benefits of incorporation included increased bargaining power and the possibility of placing money into a pension plan. Based upon his consultations with Mr. Kaminsky, Sargent incorporated Chiefy-Cat, Inc. (Chiefy-Cat) on July 20, 1978. Sargent was the sole shareholder, president, and sole director of Chiefy-Cat. On July 1, 1978, Sargent entered into an Employment Contract (employment contract) with Chiefy-Cat wherein he agreed to perform services as a professional hockey player and consultant exclusively for Chiefy-Cat for the period July 1, 1978, to June 30, 1984. On July 1, 1978, Chiefy-Cat entered into a Memorandum of Agreement (memorandum of agreement) with the Northstar Hockey Partnership (Club) wherein Chiefy-Cat agreed, among other things, to furnish the services of Sargent as a hockey player and consultant to the Club and, in exchange, the Club agreed to pay and paid to Chiefy-Cat $85,000 during the 1978 playing season (July 1978 - June 1979), $115,000 during the 1979 season (July 1979 - June 1980), $120,000 during the 1980 season (July 1980 - June 1981), and $130,000 during the 1981 season (July 1981 - June 1982). Also on July 1, 1978, the Club, Chiefy-Cat, and Sargent entered into an agreement (guarantee) whereby Chiefy-Cat represented to the Club that, by virtue of its contractual agreement with Sargent, it had the right to cause Sargent to perform services on its behalf and that it would cause Sargent to perform his services in order to enable it to fulfill its contractual obligation to the Club. Sargent guaranteed to the Club the performance of all obligations of Chiefy-Cat to the Club.
The employment contract provided that Chiefy-Cat agreed to pay Sargent $60,000 during the first year and $95,000 for each succeeding year. Chiefy-Cat withheld and paid the applicable Federal and state income taxes and employment and unemployment taxes and timely filed Employers Quarterly Federal Tax Returns and Forms W-2 and W-3.
On March 5, 1980, respondent issued a letter whereby a pension plan established by Chiefy-Cat and covering Sargent was determined to be a qualified pension plan. Such favorable determination is still in effect. Chiefy-Cat made the following contributions to the plan:
+--------------------------------+
¦Year ¦Contribution ¦
+-----------------+--------------¦
¦07/78—05/31/79 ¦$20,893 ¦
+-----------------+--------------¦
¦06/01/79—05/31/80¦24,675 ¦
+-----------------+--------------¦
¦06/01/80—05/31/81¦27,099 ¦
+-----------------+--------------¦
¦06/01/81—05/31/82¦27,749 ¦
+--------------------------------+
In 1983, Sargent executed, in his individual capacity, the necessary forms to be placed on the Voluntarily Retired List of the Club.
On February 27, 1980, Christoff individually entered into a contract to play hockey for the Club during the 1979-1980 through the 1982-1983 seasons. That contract provided for a signing bonus of $35,000, payable $27,500 upon signing and $7,500 on October 15, 1980.
On August 11, 1980, based upon consultation with Mr. Kaminsky, Christoff incorporated RIF Enterprises, Inc. (RIF). Christoff was the sole shareholder, president, and sole director of RIF. The primary purposes of incorporation were the same as those which motivated Sargent (see page 3, supra). On August 11, 1980, Christoff also entered into an Employment Agreement (employment agreement) with RIF wherein he agreed to render services exclusively to RIF as a hockey player and consultant during the period August 11, 1980, to September 30, 1985. A similar agreement was executed on October 15, 1980, in which RIF agreed to pay Christoff $45,000 for the first year and $50,000 for the second year of the agreement.3 On October 15, 1980, the Club and RIF entered into a Memorandum of Agreement (memorandum of agreement) wherein, among other things, the Club engaged RIF to provide the services of Christoff as a hockey player, and RIF agreed, among other things, to provide the services of Christoff to the Club. In exchange, the Club agreed to pay RIF $63,500 during the 1980 season (July 1980 - June 1981) and $71,500 during the 1981 season (July 1981 - June 1982). Also on October 15, 1980, the Club, RIF, and Christoff entered into an agreement (guarantee) whereby RIF represented to the Club that, by virtue of its contractual agreement with its employee, Christoff, it had the right to cause Christoff to perform services on behalf of RIF and that it would cause Christoff to perform his services in order to fulfill its contractual obligation to the Club, and Christoff guaranteed to the Club the due performance of all obligations of RIF to the Club. On December 2, 1980, the Club, RIF, and Christoff entered into a further agreement containing additional provisions indemnifying the Club against any income, withholding or other taxes relating to payments by the Club to RIF pursuant to the memorandum of agreement, which taxes RIF agreed to pay.
On September 1, 1981, respondent issued a letter whereby a pension plan established by RIF and covering Christoff was determined to be a qualified pension plan. Such favorable determination is still in effect. RIF made the following contributions to the plan:
+--------------------------------+
¦Year ¦Contribution ¦
+-----------------+--------------¦
¦08/11/80—05/31/81¦$7,200 ¦ ¦
+-----------------+---------+----¦
¦06/01/81—05/31/82¦17,750 ¦4 ¦
+-----------------+---------+----¦
¦06/01/82—05/31/83¦1,625 ¦ ¦
+--------------------------------+
In 1982, Christoff was traded by the Club to the Calgary Flames Hockey Club (the Flames). Christoff played for the Flames as an individual and not on behalf of any corporation. The Flames would not recognize RIF as an entity. In the summer of 1983, Christoff was released from the Flames, briefly returned to the North Stars, and was subsequently traded to the Los Angeles Kings where he played again as an individual.
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, but the Club paid Chiefy-Cat and RIF respectively the amounts that it would otherwise have contributed to the plan on their behalf. There was no requirement that either Chiefy-Cat or RIF pay over these amounts to its pension plan.5
Each memorandum of agreement gave the Club the right to sell, transfer or assign, or loan out the services of Sargent and Christoff, respectively.
Each memorandum of agreement provided that Sargent and Christoff, respectively, would not, without the Club's consent, engage in any other athletic sport nor make any public appearances, sponsorships, etc., relating to the services performed for the Club.
The Club provided Sargent and Christoff with uniforms and hockey equipment during the years in issue.
As between the Club and petitioners, the Club controlled the scheduling of the games in which the Minnesota North Stars team would play. During a game, the coach of the Club had the responsibility of deciding which players would play and for how long and the strategy of play. The coach was also responsible for conducting the practices which the players were...
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