Sargent v. Commissioner
93 T.C. 572; 1989 U.S. Tax Ct. LEXIS 144; 93 T.C. No. 48 (1989)
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Rule of Law:
The assignment of income doctrine requires income to be taxed to the person who earns it, and an athlete in a team sport is considered an employee of the team, not their personal service corporation, when the team exercises a high degree of control over the athlete's activities.
Facts:
- Gary Sargent and Steven Christoff were professional hockey players for the Minnesota North Stars hockey team (the Club).
- Sargent formed a wholly-owned corporation, Chiefy-Cat, Inc., and signed an exclusive employment contract with it to perform services as a professional hockey player.
- Chiefy-Cat then entered into a contract with the Club to provide Sargent's services, and the Club paid Chiefy-Cat directly.
- Christoff engaged in a nearly identical arrangement, forming a corporation named RIF Enterprises, Inc., which contracted with the Club for his services.
- The Club's coach had the responsibility for deciding which players would play, for how long, game strategy, and conducting mandatory practices.
- The Club provided the players with uniforms and equipment and had the right to trade the players to other teams.
- The players' corporations paid them a salary and made contributions to qualified pension plans on their behalf.
Procedural Posture:
- The Commissioner of Internal Revenue (Respondent) determined deficiencies in the Federal income taxes of Gary Sargent and Steven Christoff (Petitioners) for the tax years 1978-1982.
- The Petitioners filed petitions in the United States Tax Court challenging the Commissioner's determinations.
- The cases were consolidated for trial, briefing, and opinion as the lead case in the Minnesota North Stars Litigation Project.
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Issue:
Does the assignment of income doctrine require professional hockey players to be taxed on income paid to their wholly-owned personal service corporations when the hockey team exercises significant control over the players' services?
Opinions:
Majority - Judge Tannenwald
Yes. The assignment of income doctrine requires the income to be taxed to the players because they were employees of the Club, not their personal service corporations. The determination of an employer-employee relationship rests on who has the right to control the individual's work. In team sports like hockey, the club and its coaches exercise a high level of control over player activities, including game tactics, playing time, and practice schedules. This level of control is so pervasive that it establishes a common-law employment relationship directly between the player and the club, overriding the contractual arrangements with the personal service corporation. Therefore, the income was earned by the players in their capacity as employees of the Club and cannot be legally assigned to their corporations.
Dissenting - Judge Wells
No. The majority wrongly brushes aside established precedent and creates a new test that effectively nullifies the use of personal service corporations for team sport athletes. The proper analysis should follow the two-part test from Johnson v. Commissioner, which recognizes the validity of a PSC arrangement if (1) the individual is an employee of the corporation which has a right to control them, and (2) a contract exists between the PSC and the third party. The majority's focus on the team's on-field control renders the first prong impossible for any team athlete to meet, ignoring the legal validity of the employment contracts between the players and their corporations. This decision disregards the separate legal existence of corporations established in Moline Properties and inappropriately creates a new judicial rule where Congress has already acted by enacting section 269A.
Analysis:
This decision establishes a critical distinction between athletes in team sports and other professionals who use personal service corporations (PSCs) for tax planning. By focusing on the high degree of control inherent in team sports, the court limited the ability of team athletes to assign their income to PSCs, thereby reducing the tax benefits available from corporate pension plans. The ruling signifies that courts will scrutinize the substance of an employment relationship, particularly the element of control, over the form of contractual arrangements. It effectively creates a 'team sports exception' to the general acceptance of PSCs, making it significantly harder for these athletes to utilize such structures compared to professionals in individual sports or other fields.
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