Stemkowski v. Commissioner - 690 F.2d 40 (2d Cir. 1982)

Rule:

A nonresident alien is taxed on income connected with the conduct of a trade or business, including the performance of personal services, within the United States. 26 U.S.C.S. §§ 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." The 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.

Facts:

Appellant Stemkowski was a Canadian citizen who formerly played professional hockey for the New York Rangers of the National Hockey League (NHL). Appellant’s contract with the NHL 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. On his tax return, appellant reported $44,271 in income, of which he initially excluded $10,625 as earned in Canada, and claimed approximately $3,000 in miscellaneous deductions. The appellee Commissioner of Internal Revenue issued appellant a notice of deficiency in February 1975, determining that appellant 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. Appellant sought review and the tax court affirmed. Appellant sought further review of the judgment.

Issue:

1. Did the Tax Court err in holding that the stated salary in the NHL Contract covers only the services of the taxpayer during the regular hockey season?
2. Did the Tax Court err in holding that the taxpayer was not entitled to deduct certain off-season physical conditioning expenses claimed as ordinary and necessary business expenses?

Answer:

1) No. 2) Yes.

Conclusion:

The Court held that the appellant's basic contract salary covered both play-off and training camp services, as well as the regular season, so that only off-season was not included in the time basis ratio. The Court noted that during the off-season, the contract imposed no specific obligations on a player. There was no evidence that appellant was required to follow any mandatory conditioning program or was under any club supervision during the off-season. He was required to observe, if anything, only general obligations, applicable as well throughout the year, to conduct himself with loyalty to the club and the league and to participate only in approved promotional activities. Anent the second issue, the Court held that appellant's off-season conditioning, hockey publications, and fan mail expenses might have been deductible, as ordinary and necessary business expenses. According to the Court, while a requirement by an employer that an employee make an expenditure may be one factor weighing in favor of the employee's right to a deduction, it was not a prerequisite for the deduction. 26 U.S.C.S. § 162(a) required only that the expense be a necessary and ordinary expense paid or incurred during the taxable year in carrying on a trade or business.