Stemkowski v. C. I. R.
| Citation | 690 F.2d 40 |
| Decision Date | 17 September 1982 |
| Docket Number | No. 1206,D,1206 |
| Parties | 82-2 USTC P 9589 Peter STEMKOWSKI, Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Appellee. ocket 81-4194. |
| Court | U.S. Court of Appeals — Second Circuit |
Charles L. Abrahams, La Mesa, Cal., for appellant.
David E. Carmack, Washington, D.C. (Glenn L. Archer, Jr., Asst. Atty. Gen., Michael L. Paup, Joanathan S. Cohen, Tax Div., Dept. of Justice, Washington, D.C., of counsel), for appellee.
Before LUMBARD, OAKES and PIERCE, Circuit Judges.
This supposed test case 1 involves the taxability of a Canadian citizen who formerly played professional hockey for the New York Rangers of the National Hockey League (NHL). As a nonresident alien, Stemkowski was subject to United States tax on that portion of his income connected with his performance of services in this country, and entitled to deduct expenditures relating to such United States income. The taxable year involved is 1971. After a trial in 1977, the Tax Court, William A. Goffe, Judge, filed an opinion in February 1981, 76 T.C. 252, upholding the Commissioner on all major issues. In July 1981, Judge Goffe entered a judgment of deficiency against Stemkowski (taxpayer) for $3,927. We affirm in part, and reverse and remand in part.
The five major issues on appeal are:
1. Whether the Tax Court correctly held that the stated salary in the NHL Standard Player's Contract covered only the services of taxpayer during the regular hockey season and not during the off-season, training camp, or the play-offs, so that only the time a player spent in Canada during the regular season could be used to calculate the portion of his salary excludable from his United States income.
2. Whether the Tax Court correctly held that taxpayer was not entitled to deduct certain off-season physical conditioning expenses claimed as ordinary and necessary business expenses.
3. Whether the Tax Court correctly held that taxpayer was not entitled to various other deductions for what he claimed were ordinary and necessary business expenses, including those for newspapers, magazines, telephone, television, "promotional" activities, and gifts to trainers.
4. Whether the Tax Court correctly held that taxpayer was not entitled to deduct sales taxes because they were not connected with the conduct of his trade or business within the United States, or to deduct amounts withheld from his salary to pay premiums on disability insurance.
5. Whether the Tax Court correctly held that taxpayer was not entitled to deduct living costs incurred in and around New York, the home city of his hockey team.
Taxpayer was traded prior to the beginning of taxable year 1971 to the New York Rangers, who play their home games at Madison Square Garden in New York City. He had previously signed a two-year NHL Standard Player's Contract with the Detroit Red Wings, and this contract was assigned to and assumed by the Rangers. The contract provided for compensation of $31,500 in the 1970-71 season and $35,000 in the 1971-72 season plus various NHL bonuses, including a $1500 bonus for each round won in the play-offs. The player agreed to give his services in all "league championship" (i.e., regular season), exhibition, and play-off games, to report in good physical condition to the club training camp at the time In addition to their rights under this contract, NHL players in 1971 were entitled under the NHL's Owner-Player Council Minutes and Agreements to receive $25 per exhibition game plus $25 per week of training camp unless they had played fifty or more games in the previous season, in which case they received $600 in lieu of payments for exhibition games and training camp allowances other than transportation, food, and lodging. The players were also provided with medical and disability coverage, per diem expenses while traveling during the regular season, and various other benefits.
and place fixed by the club, to keep himself in good physical condition at all times during the season, and to participate in any and all promotional activities of the club and the league that in the opinion of the club promoted the welfare of the club or professional hockey.
An NHL player's year is divided into four periods: (1) training camp, including exhibition games, beginning in September and lasting approximately thirty days; (2) the "league championship" or regular season of games beginning in October and lasting until April of the following year; (3) the play-off competition, which ends in May; and (4) the off-season, which runs from the end of the regular season for clubs that do not make the play-offs, or from a club's last play-off game, to the first day of training camp. Stemkowski lived in Canada during all of the off-season and most of the training camp period and played in Canada fifteen days out of 179 during the regular season and five out of twenty-eight days during the play-offs. When he was not living in Canada or travelling to games elsewhere, he lived in Long Beach, New York, near New York City, where he shared a rented house with other professional hockey players.
On his tax return, Stemkowski reported $44,271 in income, of which he initially excluded $10,625 as earned in Canada, and claimed approximately $3,000 in miscellaneous deductions. 2 The Commissioner issued Stemkowski a notice of deficiency in February 1975, determining that Stemkowski had underestimated the proportion of his income derived from services in the United States, and that he had not established that the deductions he claimed were for ordinary and necessary business expenses connected with his United States income. In the petition from this determination of deficiency that he filed with the Tax Court, Stemkowski increased his claimed exclusion for income earned in Canada to $22,439, and claimed additional and increased deductions, which, after several amendments to his petition, totalled approximately $17,000. 3
The less time Stemkowski was in the United States during the period covered by his contract, the less United States tax he owes. Thus, Stemkowski could reduce his tax liability either by showing that he was in Canada for a longer period during the time covered by the contract or, as is at issue here, that the contract covered a time during which he was in Canada. The Tax Court held that the total number of days for which Stemkowski was compensated under his contract was not 234 (all but the off-season) as he had claimed on his tax return, or 365 as he had claimed before the Tax Court, but only 179, the number of days in the regular season. The Tax Court held that Stemkowski could not use days spent in Canada during training camp, the play-offs, or the off-season in calculating his foreign-source exclusion from income. The Tax Court further found that Stemkowski's off-season physical conditioning expenses, because incurred solely in connection with his contractual obligation to show up in good condition at training camp in Canada, were not connected to income from the conduct of a trade or business within the United States and thus were not deductible. Expenses incurred in New York, the home city of the Rangers, were held not to have been incurred while away from home and in the pursuit of business. The Tax Court also denied Stemkowski's claimed expenses for magazines, newspapers, promotions, telephone, television and trainers' gifts as not incurred for his trade or business because these were not required by his contract. The Tax Court denied Stemkowski's claimed deduction for disability insurance for lack of evidence that these payments were deductible; the claimed deduction for sales tax was denied because it was not connected with income from the conduct of a trade or business in the United States. Stemkowski's claimed expenses above those reimbursed by his employer while travelling to and from opponents' cities during the regular season and play-offs were denied by the Tax Court for lack of substantiation. Taxpayer has duly appealed under section 7482 of the Internal Revenue Code of 1954 (I.R.C.).
The first issue is the Tax Court's determination of the portion of Stemkowski's compensation under the NHL Standard Player's Contract that was drawn from United States sources. As a nonresident alien, Stemkowski was taxable on income connected with the conduct of a trade or business, including the performance of personal services, within the United States. I.R.C. §§ 871(b), 864(b). Where services are performed partly within and partly outside the United States, but compensation is not separately allocated, Treas. Reg. § 1.861-4(b) (1975) allocates income to United States sources on a "time basis":
(T)he amount to be included in gross income will be that amount which bears the same relation to the total compensation as the number of days of performance of the labor or services within the United States bears to the total number of days of performance of labor or services for which the payment is made.
This regulation applies to Stemkowski because the NHL Standard Player's Contract does not distinguish between payments for services performed within and outside the United States.
The parties disagree on what components of a hockey player's year are covered by the basic compensation in the NHL Standard Player's Contract, and therefore on how to compute the time-basis ratio. The taxpayer contends here as he did before the Tax Court that the contract salary compensates him for training camp, play-off, and even off-season services. The Commissioner argues and the Tax Court held that the contract salary covers only the regular season, and therefore that contract salary should be allocated to United States income in the same proportion that the number of days played in the United States during the regular season (164) bears to the total number of days in the regular season (179). 4 We agree...
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