Court Opinion

ID: 4472413
Source: CourtListenerOpinion
Date Created: 2020-01-13 23:25:03.982296+00
Date Added: 2024-06-11T14:50:20.320319
License: Public Domain

SWIFT, J., concurring in the result only: Upon further consideration and with the benefit of the opinion of the U.S. Court of Appeals for the Eighth Circuit in Sargent v. Commissioner, 929 F.2d 1252 (8th Cir. 1991), revg. 93 T.C. 572 (1989), I believe the majority opinion incorrectly relies too heavily on employee-independent contractor principles in analyzing the relationships of petitioner and his personal service corporation (psc) with the Rockets. I would decide the issue before us on the basis of the two-pronged control or contractual analysis of Johnson v. Commissioner, 78 T.C. 882 (1982), affd. without published opinion 734 F.2d 20 (9th Cir. 1984), that traditionally has been used in analyzing the issue of the assignment of income as between a PSC and its individual owners. Under that analysis and based on certain undisputed and particularly pertinent facts in this case, I believe that a conclusion would be required herein that petitioner individually, and not petitioner’s PSC, is to be charged with the income relating to petitioner’s services as a basketball player for the Houston Rockets. Employee-Independent Contractor Analysis After expressly finding that petitioner entered into an exclusive employment contract with his PSC for his basketball services (see majority op. p. 142) and that petitioner’s PSC entered into a contract to provide basketball services to the Rockets (majority op. p. 142), the majority’s analysis focuses on the “control” that is exercised by the Rockets and by the Rockets’ coach over petitioner as a basketball player, and the majority concludes that petitioner was an “employee” of the Rockets with regard to such services and therefore that the income received from the Rockets should be charged or assigned to petitioner individually, not to petitioner’s PSC. This analysis is directly contrary to and inconsistent with the majority’s findings that petitioner had an employment contract with his PSC for his basketball services and that petitioner’s PSC contracted to provide basketball services to the Rockets. Moreover, the majority opinion overlooks the fact that the team or coach’s control that is exercised over players on competitive sports teams is inherent in team sports. Such control has little, if anything, to do with whether the player is an employee of, or an independent contractor with, the team. Such control simply reflects the way team sports are played. Whether one considers a Little League baseball team, a high school basketball or wrestling team, a college football team, or a professional basketball, baseball, football, hockey, or soccer team, one must acknowledge that with each team sport, with each team, with each coach, and with each player, in order for the team to win and to be competitive, the team and the coach control many aspects of the game and of the individual player’s participation in each game and on the team. Such control, in the context of competitive team sports, is simply the way the game is played by everyone— male and female, volunteer and professional, independent contractor and employee. The team simply plays better when the players are coached, when the players play as a team, and when the coach has control over most aspects of the game and of the individual player’s participation on the team. Upon further consideration of participation in team sports in the above light, it is evident that the control that is exercised by teams and by coaches over individual players on the teams has little to do with whether a particular individual player is an employee or an independent contractor of the team (and it certainly tells us little to nothing about whether the player is an employee of a psc). In each situation, the game is played essentially the same. The coach’s control is essentially the same. The nature of and degree of control that the team and coach exercise are not affected by whether the player treats himself or herself as a direct employee of the team or as an employee of his or her PSC to which the employee is attempting to attribute the income received from the team. It should be noted that the parties herein, with regard to petitioner’s relationship with the Rockets, do not make an employee-independent contractor argument or analysis in their briefs, and they do not here ask us to determine whether petitioner was an employee or independent contractor of the Rockets. We are asked here simply to apply traditional assignment-of-income principles to the facts before us, to evaluate the bona fide nature of petitioner’s alleged contract with his PSC (not just the existence of some amorphous oral contract with no terms), and to evaluate whether the written contract with the Rockets for petitioner’s basketball services was, in substance and reality, a contract with petitioner, not with petitioner’s PSC. Assignment of Income Ever since the Court of Appeals for the Tenth Circuit’s decision in United States v. Empey, 406 F.2d 157 (10th Cir. 1969), it has been clear that even though PSC’s may be generally recognized as viable corporations for Federal income tax purposes under Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943), Federal income tax adjustments may still be appropriate with regard to particular income received for particular services of the individual owners of the PSC’s. See, e.g., Keller v. Commissioner, 77 T.C. 1014 (1981), affd. 723 F.2d 58 (10th Cir. 1983), in which the taxpayer’s PSC was recognized as a legitimate corporation and some income received by the PSC was taxed to the PSC, but certain other income received by the PSC was taxed to the individual owner of the PSC. Under the case authority, the fact that a PSC is a viable corporation and has a legitimate business purpose will not preclude the application of the assignment of income doctrine or adjustments under section 482 with respect to particular income received by the PSC where the contractual rights of the PSC vis-a-vis the service recipient with regard to the particular income in question are not established by valid contracts — first, between the service provider and the PSC; and second, between the PSC and the service recipient. See Johnson v. Commissioner, 78 T.C. at 890. As we explained in Johnson v. Commissioner, supra at 891, a case involving facts similar to the facts of this case: Given the inherent impossibility of logical application of a per se actual earner test, a more refined inquiry has arisen in the form of who controls the earning of the income. An examination of the case law from Lucas v. Earl hence reveals two necessary elements before the * * * [PSC], rather than its * * * [service provider], may be considered the controller of the income. First, the * * * [service provider] must be * * * an employee of, the * * * [PSC] whom the * * * [PSC] has the right to direct or control in some meaningful sense. Second, there must exist between the * * * [PSC] and the * * * [service recipient] a contract or similar indicium recognizing the * * * [PSC’s] controlling position. [Citations and fn. refs, omitted.] In Sargent v. Commissioner, 929 F.2d at 1256-1257, the above statement of this traditional test was approved and quoted verbatim by the Court of Appeals for the Eighth Circuit, and the Court of Appeals explained further— the Tax Court * * * [in Johnson] ultimately held the contracts to be dis-positive of the issue of control: Ultimately, * * * [the taxpayer] was required to pay individual income tax on the entire amount paid to his PSC, but only because his PSC had no contractual arrangement with the * * * [service recipient]. Said the Tax Court regarding the second prong of the “control” test: “[c]rucial is the fact that there was no contract or agreement between the * * * [service recipient] and [the PSC].” We are not faced with such a dilemma in this case. Not only did * * * [the service provider] have a contractual arrangement with their respective PSC’s, thereby passing the first prong of the analysis, each PSC also had a contractual relationship with the * * * [service recipient]. Consistent with its analysis in the past, the Tax Court in Johnson concluded that the existence of bona fide contracts between the parties satisfied the requisite elements of control. * * * [Citation omitted; emphasis added.] In Sargent v. Commissioner, supra, our opinion at 93 T.C. 572 (1989) was reversed by the Court of Appeals for the Eighth Circuit, but mainly because the Eighth Circuit rejected the team control test that we had enunciated in our opinion. Because the Eighth Circuit concluded that the facts of Sargent established the existence of the necessary bona fide contracts between the service providers and the PSC’s and between the PSC’s and the service recipients, the income was treated by the Eighth Circuit as earned by the PSC’s. The facts of this case are more similar to the facts of Johnson v. Commissioner, supra, and, in my opinion, this case should be controlled by the two-pronged control or bona fide contract test set forth in Johnson v. Commissioner, supra. In this case, petitioner did not have a written contract with his PSC, and petitioner has not established any of the specific terms and conditions of a bona fide oral contract between petitioner and his PSC. A written contract did exist with the Rockets, but in that written contract certain corporate formalities were not adhered to and significant irregularities appear in that petitioner, not his PSC, signed the contract as the player and contracting party. On the first page of the 1984 Uniform Player Contract with the Rockets (1984 Contract), petitioner’s individual given first name, his given middle name, and his last name (namely, “Allen Frazier Leavell”) are typed in as the “Player” and as a party to the contract. The word “Inc.” is handwritten next to petitioner’s full given name without any initials or date indicating when the word “Inc.” was added to the document. Also, when the word “Inc.” was added in handwriting, petitioner’s given middle name was not deleted from the contract. On the signature line on the last page of the 1984 Contract with the Rockets, only petitioner’s individual name appears as the “Player” and as a party to the contract. There is no indication on the signature line that petitioner was signing the 1984 Contract as an officer or representative of his PSC. Nowhere in the 1984 Contract does the correct name of petitioner’s PSC (namely, Allen Leavell, Inc.) appear. In connection with the 1984 Contract, the Rockets required that petitioner individually execute a personal guarantee in which petitioner personally and individually agreed to play professional basketball for the Rockets. Under the terms of the personal guarantee, petitioner agreed to be personally bound by all of the terms and conditions set forth in the 1984 Contract, and petitioner agreed to perform the professional basketball services described in the 1984 Contract. Earlier, in 1983, with respect to petitioner’s professional basketball services for the Rockets during the 1983-84 basketball season, a written contract (1983 Contract) with the Rockets was entered into reflecting terms similar to the terms of the 1984 Contract. On the first page of the 1983 Contract, petitioner’s PSC is named as the “Player” and as a party to the contract. On the signature line of the 1983 Contract, however, only petitioner’s individual name appears as the “Player” and as a party to the contract. There is no indication on the signature line that petitioner was signing the 1983 Contract as an officer or representative of his PSC. Most, if not all, of the specific terms and the specific language of the 1984 Contract with the Rockets implicitly speak in terms of petitioner individually as the “Player” governed by the contract. For example, only petitioner, individually, not his PSC, could possibly play “10 minutes per game” or be “one of the top three players in assists or steals”. Additionally, the Rockets did not rely on the contract with petitioner’s PSC but required petitioner to sign a personal guarantee, thereby indicating the Rocket’s reliance not on the 1984 Contract, but rather reliance on the personal guarantee and on petitioner individually for performance under the contract. The majority opinion defers to the trial judge’s finding that an oral contract existed between petitioner and his PSC. The mere existence of a contract, however, is in my opinion insufficient in and of itself to establish the bona fide nature of the contract. Petitioner must prove that the contract contained essential terms that establish the bona fide nature of the contract. Those terms, if they existed, are missing from the record in this case. In summary, my suggested analysis in this case in favor of respondent is consistent with the decided cases in this area, and it is based on the cumulative effect of the following three points: (1) The record is inadequate to determine the substance and terms of any bona fide oral contract between petitioner and petitioner’s PSC; (2) the 1984 Contract with the Rockets contained irregularities inconsistent with petitioner’s position in this case that he had a bona fide contract with his PSC that controlled the performance of his basketball services for the Rockets; and (3) the Rockets required petitioner individually to provide a personal guarantee. I emphasize that the contractual irregularities and deficiencies discussed and highlighted in this side opinion are not disputed. They are acknowledged in the majority opinion, and they should, in my opinion, control the outcome of this case. They lead to the conclusion that petitioner, not his PSC, is to be charged with the income received from the Rockets. Section 269A In 1982, Congress enacted section 269A, applicable to years beginning after December 31, 1982, in response to court decisions involving the relationship between the assignment of income doctrine and the use of closely held PSC’s. Congress intended that section 269A overturn the decisions reached in cases like Keller v. Commissioner, 77 T.C. 1014 (1981), affd. 723 F.2d 58 (10th Cir. 1983), where an individual service provider owner of a PSC attempts to attribute income to the PSC that was in substance earned by the individual service provider. H. Conf. Rept. 97-760, at 633-634 (1982), 1982-2 C.B. 600, 679-680. Generally, section 269A allows respondent to reallocate income from a PSC to a service-provider owner if substantially all of the services are performed for one other entity, and if the principal purpose for forming the PSC or the principal use of the PSC is to avoid or evade Federal income tax. It is significant that in enacting section 269A Congress did not inject into that remedial statute the employee-independent contractor analysis and factors that the majority utilizes in its analysis (i.e., the employee-versus-independent-contractor status of the individual service provider to the service recipient is simply not a factor). The applicability and scope of section 269A has not yet been addressed in any published opinion. In this case, respondent, without adequate explanation, has conceded that the facts before us are not within the scope of section 269A. I suggest that in future similar situations respondent not shy away from utilizing the statutory provisions Congress has provided to address adjustments involving the assignment of income between PSC’s and individual owners of the PSC’s.