Petition for Writ of Certiorari — Johnson v. Commissioner

84-159 [| Fites”

JUL 30 1984

No. ALEXANDER L. STEVAS.

CLERK

In the Supreme Court

OF THE

United States

OctoBEer TERM, 1983

CHARLES JOHNSON,

Petitioner,

VS.

CoMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO

UNITED STATES COURT OF APPEALS,

NINTH CIRCUIT

Rosert L. Dunnett

Duwnett, Bays & O’ ConnELL

50 University Ave.

Los Gatos, CA 95031

(408) 354-3520

Attorney for Petitioner

=

BOWNE OF SAN FRANCISCO, INC. © 190 NINTH ST. *S.F., CA 94103 © (415) 664-2300

QUESTIONS PRESENTED FOR REVIEW

Whether in a federal income tax assessment by the

Internal Revenue Service (IRS) based upon an alleged

anticipatory assignment of income where an individual

taxpayer entered into a contract with a bona-fide, arm’s

length, unrelated corporation exchanging his exclusive

personal services as a professional basketball player for a

guaranteed, long-term compensation to bepaid monthly

by the corporation and thereafter the corporation licensed

his services to National Basketball Association (NBA)

teams, and the corporation received compensation for the

player’s services from the NBA teams,

(1) the taxpayer must have a vested, unrestricted

claim to future income at the time he enters into the

exclusive personal services contract with the licensing

corporation in order for the individual taxpayer to be

liable for federal income taxes on the compensation

paid by the NBA teams to the licensing corporation;

(2) the individual taxpayer, subsequent to his entering

into the contract with the licensing corporation, can

execute a contract with the N®8A teams without

becoming liable for federal income taxes on the pay-

ments thereafter made by the NBA teams to the

licensing corporation for the individual taxpayer’s

services.

il

TABLE OF CONTENTS

Page

Questions Presented for Review ...........-.---------------1-----0--- i

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Opinions Below ................-.------:-:sceceeceseeeseeecseseceetecesnensnnseneee 1

Statement of Grounds on Which Jurisdiction of this

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Reasons for Allowance of the Writ ..............-.-------------------- 5

IE acc necro 14

Appendix A. .....W..-...22----0+n-ccccesneatecenresnsnenseensnsosusnnncnesanenesren A- 1

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TABLE OF AUTHORITIES

Cases

Page

Cold Metal Process Co. v. Commissioner, 247 F.2d 864

SE aS RRR renee ee Se ae 6, 11

Commissioner v. Oates, 207 F.2d 711 (7th Cir. 1953) ... 6

Cotlow v. Commissioner, 228 F.Rptr.2d 186 (2nd Cir.

I a nce ac ellis aecencesighentnomianioas 10

Estate of Cole v. Commissioner, 32 TCM 1973-74, Dee.

i A ERASE NCEE MON ea IO ee eR SO 7

Foglesong v. Commissioner, 35 TCM 1976-294, Dec.

aaa sete easlasenchaiedibieknatasoeconcalanactn 7

Foglesong v. Commissioner, 621 F.2d 865 (7th Cir.

a ec ii cella calidbaneesilieltipsiichssrenbetiownion 11, 12

Fox v. Commissioner, 37 B.T.A. 271 (1938) .......00.... 7

Gann v. Commissioner, 31 T.C. 211 (1958) -.....0000 0... 8

Gettler v. Commissioner, 34 TCM (1975-87, Dec.

I ek ile eecsiclc cn dapabtacaaencaunanerramnadlikdnatnnne 7

Harrison v. Schaffner, 312 U.S. 579 (1941) —0000 ww... 6,11

Johnson v. United States, 698 F.2d 372 (9th Cir. 1982) 2

Laughton v. Commissioner, 40 B.T.A. 101 (1939) ........ 7

Lucas v. Earl, 281 U.S. 111 (1930) ......00.. 5, 7,9, 10, 11

Moline Properties v. Commissioner, 319 U.S. 436

os lPdlte SOR RE rn ee 7

R. & L., Ine. v. Commissioner, 84 F.2d 7/21 (Sth Cir.

an ital clccaiats siasanensiceasoninbiessronaiinkcaeisinmiageids 12, 13

Rubin v. Commissioner, 460 F.2d 1216 (2nd Cir. 1972) 7

Shellabarger v. Commissioner, 38 F.2d 566 (7th Cor.

EGER NY 13

Teschner v. Commissioner, 38 T.C. 1003 (1962) __......... 10, 11

Wood Harmon Corporation v. United States, 311 F.2d

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Statutes

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Int. Rev. Code of 1954, § 61(a) .....ccccccccccsccssssssessessseseeee 2,7, 8

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No.

In the Supreme Court

OF THE

United States

OcrosBeErR TERM, 1983

CHARLES JOHNSON,

Petitioner,

VS.

CoMMISSIONER OF INTERNAL REVENUE,

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO

UNITED STATES COURT OF APPEALS,

NINTH CIRCUIT

To The Honorable Chief Justice of the United States, and

to The Associate Justices of the United States Supreme

Court:

Petitioner Charles Johnson files this Petition for Writ

of Certiorari to review the judgment of the United States

Court of Appeals for the Ninth Circuit which affirmed the

judgment of the Trial Court in assessing federal income

tax liabilities against Petitioner.

In support of the Petition, it is respectfully shown as

follows:

OPINIONS BELOW

The opinion of the Court of Appeals has not been officially

reported. A copy of that opinion is attached as Appendix A.

2

A copy of the Opinion and Findings of Fact and Conclu-

sions of Law of the trial court is attached as Appendix B.*

STATEMENT OF GROUNDS ON WHICH

JURISDICTION OF THIS COURT IS INVOKED

The Memorandum Opinion and order of the Court of

Appeals is dated and was filed and entered on April 16,

1984. Petitioner filed a Petition for Rehearing and Sugges-

tion for Rehearing en Banc on April 27, 1984. On May 29,

1984, the Petition for Rehearing was denied and the Sug-

gestion for Rehearing en Banc was rejected. On June 9,

1984, the judgment and order of the Court of Appeals was

filed.

Jurisdiction to review the judgment of the Court of

Appeals by writ of certiorari is conferred by 28 U.S.C.

§ 1254(1).

STATUTES INVOLVED

Int. Rev. Code of 1954, § 61(a):

“'_. Except as otherwise provided in this subtitle, gross

income means all income from whatever source derived,

including (but not limited to) the following 1 -ms:

(1) Compensation for services, including fees, com-

missions, and similar items; .. .”

STATEMENT OF THE CASE

This action was filed and tried in the Tax Court of the

United States to determine the correctness of certain fed-

eral income tax deficiencies assessed against Petitioner by

the IRS for the years 1975, 1976, and 1977. Jurisdiction is

1The Opinion of the Court of Appeals stated in part, “This case

is essentially similar to a previous case decided by this Court in-

volving the same appellant, Johnson v. United States, 698 F.2d 372

(9th Cir. 1982), reh. and reh. en banc denied (1983)... . and the

outcome must be the same.” Under these circumstances, Petitioner

has attached the 1982 Johnson case as Appendix C.

acca iaaai

3

conferred upon that Court by 26 U.S.C. ¢ 7442 and 26 U.S.C.

§ 6215(a). This is a petition for determination of the cor-

rectness of the IRS’s assessment.

Petitioner is a professional basketball player. He played

seven seasons in the NBA, five and one-half seasons with

the Golden State Warriors (Warriors), 1972-1977, and

one and one-half seasons with the Washington Bullets

(Bullets), 1978-1979.

During his first two NBA seasons (1972-73, 1973-74),

Petitioner recognized the financiai and economic uncer-

tainty which accompanied a career in the NBA. Under the

standard NBA player's contract, he was required to “make”

the team each September and continue to be on the team

for a prescribed period of time (usually through a date in

December) in order to be guaranteed payments for the

remainder of the season. Payments on these standard con-

tracts typically ran from October through September. If a

player was “waived” before playing for the prescribed

time, payment for his services ceased.”

After examining different ways of obtaining more finan-

cial certainty and stability, Potitioner entered into a long-

term contract with Presentaciones Musicales, S.A. (PMSA)

on or about August 16, 1974. PMSA guaranteed monthly

payments to Petitioner for several years in exchange for

the exclusive right to license Petitioner’s services to pro-

fessional athletic teams and receive payment for those

services from the teams.

From and after August 16, 1974, Petitioner received no

payments from the Warriors, the Bullets or any other team

*Any player performing under a standard NBA contract can be

dismissed from the team at any time. The term used by the league

is “waiving” a player. After he is placed on waivers, other teams

have 48 business hours to accept the player and the contract under

which he is performing. If no team accepts the player in 48 hours,

he has “cleared waiver” and becomes a free agent.

+

in the NBA. Petitioner did receive compensation payments

under his August 16, 1974 contract with PMSA.

On August 20, 1974, PMSA assigned the contract to

Interlit, B.V.I.° (Interlit). Thereafter, on August 27, 1974,

Petitioner signed a two-year contract with the Warriors.

Petitioner later signed an additional Warriors cortract and

subsequent contracts with the Bullets. The Warriors and

the Bullets paid Interlit (PMSA’s assignee) for Petition-

er’s services. Both teams deducted withholding taxes from

the payments to Interlit. Said withholding taxes were paid

to the IRS and relevant state taxing authorities. Each year

a Form W-2 was issued to Petitioner showing the amount

withheld for both federal and state income tax purposes.

Petitioner paid annual estimated tax payments to the IRS.

Commencing in 1975, and each year thereafter, Petition-

er timely filed his federal and state income tax returns and

reported the compensation paid to him under the PMSA

contract. Each year Petitioner claimed as a refund the

withholding tax payments made by the Warriors and Bul-

lets to the IRS as well as the excess of estimated tax pay-

ments. Each vear these previously-paid taxes would be

refunded to Petitioner by federal and state authorities.

Under his long-term PMSA contract, all payments for

Petitioner’s services were the property of PMSA or its

assignee, Interlit. This included the amounts refunded to

Petitioner by the IRS and state taxing authorities. Thus,

when refunds were received by Petitioner, they were en-

dorsed in each instance to Interlit and paid to Interlit.

The IRS assessed additional income tax liabilities against

Petitioner for the years 1975, 1976 and 1977, asserting that

he should be taxed on ie payments made by the teams

*At the time of PMSA’s assignment, Interlit was known as EST,

International. The name of the corporation was changed in 1976.

This petition shall use the name Interlit.

9)

acquiring his services to PMSA or its assignee, Interlit.

In July, 1979 and July, 1980, Petitioner timely filed peti-

tions with the Tax Court challenging the correctness of the

IRS assessments.

The petitions were consolidated and a trial of the matter

was held in August, 1981. The Tax Court held that Peti-

tioner should be taxed on the payments made by the NBA

teams to the corporation solely because the Court found

there was no contract, written, oral or implied, between

the NBA teams and PMSA. The Tax Court recognized

and accepted Petitioner’s prior long-term contract with

PMSA and its assignment to Interlit. The Court further

acknowledged that when Petitioner entered into the long-

term contract on August 16, 1974, he had no vested right

to receive any future compensation from the Warriors

until he made the team and remained on the team until

December 2 each year of any season. Each year of his

career in the NBA, Petitioner had to “make” the team in

order for PMSA or Interlit to be entitled to any payments

for his services. The Tax Court assumed for purposes of

its decision that PMSA and Interlit were bona-fide, unre-

lated corporations.

REASONS FOR ALLOWANCE OF THE WRIT

The statement of Questions Presented for Review, ante,

sets forth important questions regarding the interpretation

and application of federal income tax law under the antici-

patory assignment of income doctrine first declared in

Lucas v. Earl, 281 U.S. 111 (1930), and continually defined

and refined to adjust the application of the doctrine to the

reality of our nation’s commercial activity.

These questions deal with the circumstances under which

an individual taxpayer situated as described above may be

subjected to federal income tax liability on income never

received by the taxpayer and received instead by a bona-

6

fide, arm’s length, unrelated third party. Arguments sup-

porting the importance of these questions and the need for

their determination by this Court follows separately after

each question.

Question 1. Whether, in the cireumstances described

above, the taxpayer must have a vested, unrestricted claim

to future income at the time he enters into the exclusive

personal services contract with the licensing corporation

in order for the individual taxpayer to be liable for federal

income taxes on the compensation paid by the NBA teams

to the corporation.

On this issue, Petitioner’s position is positive because

on its face and as a matter of law a taxpayer cannot be

liable for federal income taxes based upon possible income

the taxpayer might or might not receive and to which he

has neither a vested right nor an unrestricted claim.

On this issue the Ninth Circuit is apparently divided

from the other Circuits. The Ninth Circuit, in this case,

while accepting the trial court’s recognition and acknowl-

edgment that the Petitioner had no vested, unrestricted

right to any NBA income when he entered into the exclu-

sive personal services contract with PMSA on August

16, 1974, has held Petitioner liable for federal income taxes

on amounts subsequently paid by the NBA teams to

PMSA’s assignee, Interlit. Other Circuits have held, citing

this Court’s decision in Harrison v. Schaffner, 312 US.

579 (1941), that the rule applicable to anticipatory assign-

ment of income applies when the assignor (Petitioner

herein) is entitled at the time of the assignment (August

16, 1974 herein) to receive the income at a future date and

is vested with an unrestricted claim to the income. Wood

Harmon Corporation v. United States, 311 F.2d 918 (2nd

Cir. 1963); Cold Metal Process Co. v. Commissioner, 247

F.2d 864 (6th Cir. 1957); Commissioner v. Oates, 207 F.2d

711 (7th Cir. 1953).

7

The Court below apparently deviated from this approach

and divided itself from the other Circuits.

There are numerous cases which address the proper tax

treatment for individuals operating under a personal ser-

vices contract with a corporation. In some of these cases

the personal services contracts were recognized for income

tax purposes,‘ and in others the individual’s tax liability

was modified because an assignment of vested, guaranteed

income was found.*

The licensing corporation involved herein, PMSA, has

on other occasions entered into personal services contracts

with individuals. One of these contracts was examined in

Estate of Cole v. Commissioner, 32 TCM 1973-74, Dec.

31,909(M). The taxpayer in Cole was Nat “King” Cole, an

internationally known entertainer. Cole is particularly rel-

evant to this case because the same corporation, PMSA, is

involved, and the issue decided included assessments by the

IRS based on the theory that Cole had assigned income

taxable to him under LR.C. § 61. The Court, on page 314

of its opinion, stated the anticipatory assignment of in.

come issue as follows:

Whether amounts paid by Capitol Records, Inc., to

Associated Arts, N.V. (AA), a Netherlands Antilles

Corporation in excess of the amounts paid by AA to

Nathaniel Cole (Cole) in the years 1961 through 1964,

‘Fox v. Commissioner, 37 B.T.A. 271 (1938); Laughton v. Com-

missioner, 40 B.T.A. 101 (1939); Gettler v. Commissioner, 34 TCM

1975-87, Dec. 33,124(M); Estate of Cole v. Commissioner, 32 TCM

1973-74, Dec. 31,909 (M).

*Lucas v. Earl, 281 U.S. 111 (1930); Moline Properties v. Com-

missioner, 319 U.S. 436 (1943); Foglesong v. Commissioner, 35

TCM 1976-294, Dec. 34,024(M); Rubin v. Commissioner, 460 F.2d

1216 (1972).

8

constitute income of Cole which he attempted to assign

te AA...”

The Court held that there was no assignment of income

taxable to petitioner under LR.C. § 61.

The Cole Court addressed the assignment of income

issue and, on page 322, quoting from Wood Harmon Corp.

v. United States, supra, stated:

The philosophy underlying these cases is that the tax-

payer has performed services or has a vested interest

in property which gives him an unrestricted claim to

compensation or income therefrom; the exercise of the

unfettered power to dispose of that iacome is deemed

analogous to its enjoyment or realization, resulting

in a tax upon the assignor rather than upon the as-

signee who receives the income in fact.’

‘It has been stated that the “rule” applicable to an an-

ticipatory assignment of income applies when the as-

signor is entitled at the time of the assignment to re-

ceive the income at a future date and is vested with

such a right.” Cold Metal Process Co. v. Commis-

sioner, 247 F.2d 864, 873 (6th Cir. 1957). (emphasis

in original)

As the Court in Wood Harmon Corp., supra, so clearly

pointed out in its footnote to the statement we quoted,

the rule applicable to an assignment of income applies

when the assignor is entitled at the time of assignment

to the income at a future date and is vested with such

a right. In clear distinction to this type of case are

those cases such as James F. Oates, 18 T.C. 570

(1952), aff'd, 207 F.2d 711 (C.A. 7, 1953), and Ernest

K. Gann, 31 T.C. 211 (1958), where the income which

°Stated in terms of this case, the issue would read: “Whether

amounts paid by the Warriors (or Bullets) to Interlit, in excess of

the amounts paid by Interlit to Petitioner Johnson in the years

1975 through 1977, constitute income of Johnson which he at-

tempted to assign to Interlit .. .”

9

respondent was contending had been assigned were

amounts which would become due only upon the hap-

pening of future events and the taxpayer had assigned

his contractual right to such payments if and when

they became due under the contract in return for some

immediate or deferred payment. As we pointed out in

Ernest K. Gann, supra, in order for a taxpayer to have

constructively received income, such income must be

actually available to him and he merely refuses to

accept it himself, or if the case involves assignment,

assigns the right to receive it to another. Where, as in

the instant case, the amount is not due or subject to

the taxpayer’s demand but will only arise upon the

occurrence of a future event, the income is not con-

structively received by a taxpayer and an assignment

of the contractual rights is not an assignment of in-

come but of a contractual right.

Cole recognized the doctrine of anticipatory assignment

of income as it has developed since Lucas v. Earl, supra.

On August 16, 1974, Petitioner entered into a personal

services contract with PMSA. On August 16, 1974, Peti-

tioner did not have a contract to play for the Warriors

(or anyone else) for the 1974-75 NBA season (or any other

season). Petitioner had performed no services, possessed

no right to receive income, and had no interest in any con-

tract with the Warriors that gave him an unrestricted

claim to compensation or income from the Warriors. Peti-

tioner had nothing to assign. Petitioner did have a guaran-

teed income from PMSA. The guaranteed payments were

made pursuant to that contract on a monthly basis.

Petitioner received and reported as his income the pay-

ments from PMSA.’ These payments were consistently

™Where there is an arm’s length assignment of income rights for

a valuable consideration received, it is clear that the assignor re-

alizes only the amount of the consideration received, Rhodes vy.

10

made each month whether or not the Warriors or the

Bullets paid Interlift.

Petitioner was placed on waivers in January, 1978, and

received no compensation from the Warriors. PMSA still

paid the monthly amounts. Petitioner was placed on waiv-

ers by the Bullets in September, 1979. He did not obtain

employment as a professional basketball player for an-

other 16 months. PMSA, or its successor in interest, con-

tinued its monthly payments to Petitioner during that

time.

In Teschner v. Commissioner, 38 T.C. 1003 (1962), the

Court recognized the fallacy of an over-simplistic appli-

cation of the rule in Lucas v. Earl, supra.

In his ruling, the respondent declared, “The basic rule

in determining to whom an item of income is taxable

is that income is taxable to the one who earns it.” If

by this statement the respondent means that income

is in all events ineludible in the gross income of whom-

soever generates or creates the income by virtue of

his own effort, the respondent is wrong. If this were

the law, agents, conduits, fiduciaries, and others in a

similar capacity would be personally taxable on the

proceeds of their efforts. . . . The employee would be

taxable on income generated for his employer by his

efforts. Such results, completely at variance with

every accepted concept of Federal income taxation,

demonstrate the fallacy of the premise.

Teschner v. Commissioner, supra, at 1007.

In a concurring opinion, Judge Dawson stated:

Harrison v. Shaffner, 312 U.S. 579 (1941), settled the

proposition that there can be no anticipatory assign-

Commissioner, 1941, 43 B.T.A. 780, affirmed 6 Cir. 1942, 131 F.2d

50, and the assignee is taxable for receipts in excess of this amount.

See Blair v. Commissioner, 1937, 300 U.S. 5, 57 S.Ct. 330, 81 L.Ed.;

G.C.M. 24849, 1946-1 Com. Bull 66, 67-68” Cotlon v. Commissioner,

228 F.Rptr.2d 186, 188.

aa a lla

11

ment of income unless the assignor is entitled at the

time of assignment to receive the income at a future

date and is vested with such a right... . Consequently,

the cases cited by the dissent, Lucas v. Earl, 281 U.S.

111 (1930), Helvering v. Horst, 311 U.S. 112 (1940),

and Helvering v. Eubank, 311 U.S. 122 (1940), all of

which held that “one vested with the right to receive

income [does] not escape the tax by any kind of antici-

patory arrangement, however skillfully devised,”

Harrison v. Shaffner, supra, at 582 (emphasis sup-

plied) are inapposite here.

Teschner v. Commissioner, supra, at 1009-1110.

The proper application of the rule set down in Lucas v.

Earl, supra, requires the taxpayer to have a vested and

unrestricted claim to compensation. The Sixth Circuit, in

Cold Metal Process Co. v. C.1.R., 247 F.2d 864, 872, 873

(6th Cir. 1957), stated:

In Harrison v. Schaffner, supra, 312 U.S. 579, at pages

580 and 582, 61 S.Ct. 759, the Supreme Court stated

that the rule applicable to an anticipatory assignment

of income applies when the assigner is entitled at the

time of the assignment to receive the income at a future

date and is vested with such a right.

Question No. 2. Whether, in the circumstances described

above, the individual taxpayer, subsequent to his entering

into the contract with the licensing corporation, can execute

a contract with the NBA teams without becoming liable

for federal income taxes on the payments thereafter made

by the NBA team to the licensing corporation for the

taxpayer’s services.

On this issue Petitioner’s position is positive because

there is no requirement that a contract be executed by the

licensing corporation so long as the taxpayer observes his

12

contractual obligations to the licensing corporation while

performing for the NBA teams.

The Seventh Circuit has recognized this position, stating

in Foglesong v. Commissioner, 621 F.2d 865 (7th Cir. 1980) :

The Tax Court here also places much emphasis on the

absence of a written employment contract and/or

covenant not to compete between taxpayer and the

corporation. The elevation of form over substance im

this analysis is manifest. (emphasis supplied)

Foglesong, supra, at 872.

Foglesong was addressing the Tax Court requirement of

a written employment contract between the sole share-

holder and a licensing corporation which he owned. The

same analysis would apply to a contract between the licens-

ing corporation and the NBA teams as recognized in R. €

L., Inc. v. Commissioner, 84 F.2d 721 (1936), discussed

below.

The Ninth Circuit is apparently divided from the Seventh

Circuit by holding in this case that the “crucial” fact is

Petitioner’s execution of the contract with the NBA teams

rather than Interlit’s or PMSA’s execution of the contract

with the NBA teams.

The applicable law has been a constant since the deci-

sion in R. & L. Inc. v. Commissioner, supra. In that case,

Mr. E. V. Richards had a contract with Metro-Goldwyn.

The corporate minutes of R. & L. contained a resolution

that E. V. Richards was to turn over the earnings and

commissions of Metro-Goldwyn to R. & L., Inc. Commis-

sions were paid by Metro-Goldwyn directly to E. V. Rich-

ards. E. V. Richards endorsed these commission checks

over to his corporation, R. & L., Inc. There was no assign-

ment of the contract between Metro-Goldwyn Corp. and

E. V. Richards, and no novation was shown. It is doubtful

a a

13

that Metro-Goldwyn even knew that R. & L., Ine. existed.

The court held that the commissions received by E. V.

Richards were compensation for R. & L., Ine.’s services

performed by the corporation through its employee, and

found that the individual taxpayer signing the contract

was not liable for federal income taxes on payments made

thereafter by Metro-Goldwyn for his services.

In this case, the August 16, 1974 contract between Peti-

tioner and PMSA is a personal services contract. In

exchange for guaranteed compensation, Petitioner agreed

that PMSA would have the exclusive right to license his

professional athletic services to others. PMSA assigned

this license right to Interlit. Interlit licensed Petitioner’s

services to the Warriors and the Bullets. The Warriors

and the Bullets paid all money due for Petitioner’s services

to Interlit. The IRS contends that Petitioner should be

taxed on the money paid by the Warriors and Bullets to

Interlit rather than be taxed upon the compensation paid

to Petitioner under the August 16, 1974 PMSA contract.

The Court below imposed an income tax liability on

Petitioner for money paid by the Warriors and the Bullets

to someone other than Petitioner (e.g., Interlit), on the

sole grounds that no contract was executed between PMSA

or Interlit and the Warriors or Bullets. The requirement

of such a contract, and the Court below’s subsequent impo-

sition of tax liabilities on Petitioner, deviates from the law

established as early as 1936 in R. & L., Inc. v. Commis-

sioner. (See also Shellabarger v. Commissioner, 38 F.2d

566 (1930).)

So long as Petitioner recognizes and observes his con-

tractual obligations and responsibilities with PMSA and

Interlit (the substance), there is not, and has not been since

1936, any requirement that PMSA or Interlit execute a

contract with the NBA teams (the form).

14

CONCLUSION

For all of the reasons stated above, this Petition for

writ of certiorari should be granted.

Respectfully submitted,

Rosert L. DuNNETT

Dunnett, Bays & O’ Con NELL

Attorneys at Law

50 University Ave.

P.O. Box 1847

Los Gatos, CA 95031

(408) 354-3520

(Appendices follows)

Appendix A

United States Court of Appeals

For the Ninth Circuit

No. 82-7505

Tax Nos. 10335-79

11668-80

Charles Johnson,

Petitioner-Appellant,

Vs.

Commissioner of Internal

Revenue,

Respondent-Appellee.

[Filed April 16, 1984]

MEMORANDUM

Appeal from the United States Tax Court

Argued and Submitted March 13, 1984

Before: HUG and FERGUSON, Circuit Judges,

and BYRNE,’ District Judge.

Appellant, Charles Johnson, appeals a ruling by the Tax

Court that during the taxable years 1975, 1976, and 1977

he was the true earner of certain compensation paid by

the San Francisco Warriors basketball team (“Warriors”)

and was, therefore, taxable thereon. Johnson asserts that

since he had conveyed the exclusive rights to his services

to a third party before he entered into a contract with the

Warriors, the compensation paid by the Warriors under

that contract was income to the third party rather than

to himself.

*The Honorable William M. Byrne, Jr., United States District

Judge for the Central District of California, sitting by designation.

A-2

This case is essentially similar to a previous case decided

by this court involving the same appellant, Johnson v.

United States, 698 F.2d 372 (9th Cir. 1982), reh. and reh.

en banc denied (1983). That case involved the taxable year

1978 and a contract with the Washington Bullets basket-

ball team in addition to one with the Warriors. We held

that the compensation paid under those contracts was in-

come attributable to Johnson because “neither the War-

riors nor the Bullets had contracted with [the third party].

They had contracted directly with [Johnson] for his serv-

ices as their employee on salary.” /d. at 374. The same

crucial fact is operative in the present case, and the out-

come must be the same.

The decision of the Tax Court is therefore AF-

FIRMED.**

**The panel has concluded that the issues presented by this

appeal do not meet the standards set by Rule 21 of the Rules of

this Court for disposition by written opinion. Accordingly, it is

ordered that disposition be by memorandum, foregoing publication

in the Federal Reporter, and that this memorandum may not be

cited to or by the courts of this circuit.

A-3

Appendix B

78 T. C. No. 62

United States Tax Court

Charles Johnson, Petitioner v. Commssioner

of Internal Revenue, Respondent

Docket Nos. 10335-79,

11668-80.

Filed June 7, 1982.

Petitioner, a professional basketball player, executed a

contract with an unrelated corporation whereby he granted

the corporation the right to his services in professional

sports for a limited time, and the corporation agreed to

pay petitioner a monthly sum, Petitioner played for a pro-

fessional hasketball club with which he signed player con-

tracts. The club remitted the compensation for petitioner’s

services to the corporation pursuant to assignments of

contract rights executed by petitioner. However, there

existed no contract between the club and the corporation.

Held, petitioner, rather than the corporation, actually con-

trolled the earning of the amounts paid by the basketball

club, and those amounts are income to him. Laughton v.

Commissioner, 40 B.T.A. 101 (1939), and Fox v. Commis-

sioner, 37 B.T.A. 271 (1938), distinguished.

Harry Margolis and Robert L. Dunnett, for the peti-

tioner.

William E. Bonano and Henry E. O'Neill, for the respon-

dent.

FAY, Judge: Respondent determined deficiencies of

$34,698, $35,747, and $40,832 in petitioner’s Federal income

tax for 1975, 1976, and 1977, respectively. At issue is

whether amounts paid by a professional basketball club

A-4

with respect to petitioner’s services are income to peti-

tioner or to a corporation to which the payments were made.

These cases are consolidated for trial, briefing, and opin-

ion.

FINDINGS OF FACT

Some facts are stipulated and found accordingly.

Petitioner, Charles Johnson, was a resident of Oakland,

Calif., when he filed his petitions herein.

During the years in issue, Charles Johnson (hereinafter

petitioner) was a professional basketball player. He began

playing in the National Basketball Association (NBA) in

the fall of 1972. On September 14, 1972, he signed an NBA

Uniform Player Contract with the San Francisco Warriors

(Warriors). That contract obligated him to play basketball

for the Warriors for one year in return for $17,500. On

October 5, 1973, petitioner signed a second NBA Uniform

Player Contract with the Warriors. That contract, covering

the 1973-1974 NBA season, ran for one year from Septem-

ber 1, 1973, and provided for $40,000 compensation.

Although petitioner’s 1973-1974 contract with the War-

riors did not expire until the fall of 1974, the actual playing

season ended much earlier, and all compensation due peti-

tioner was to be paid by the conclusion of the playing sea-

son. An NBA player may be through playing basketball as

early as March or as late as late May depending on whether

he is involved in the NBA playoffs. However, a player

under contract has certain post-playing season duties such

as keeping in good physical condition and doing requested

promotional work. Nevertheless, once the playing season

is over, a player may “pretty much do anything [he wants]

to do.” Certain provisions of petitioner’s 1973-1974 contract

with the Warriors carried significance after the playing sea-

son. For example, the Warriors could have iraded peti-

tioner, and the Warriors had the right to renew the con-

tract for one year.

A-5

During the summer of 1974 and after the conclusion of

the actual 1973-1974 playing season, petitioner followed the

advice of a friend and contacted Robert L. Dunnett (Dun-

nett), a California attorney, concerning financial planning.

That contact led to petitioner’s signing an agreement on

August 16, 1974, with Presentaciones Musicales, S.A.

(PMSA), a Panamanian corporation. In very general

terms, that agreement (hereinafter the PMSA-petitioner

agreement) gave PMSA the right to petitioner’s services

in professional sports for six years beginning August 16,

1974; gave PMSA the right to control petitioner’s services

with respect to professional sports; and obligated PMSA

to pay petitioner $1,500 per month." On August 20, 1974,

PMSA licensed its rights and obligations under the PMSA-

petitioner agreement to EST International Limited (EST),

a British Virgin Islands limited liability company. Under

that licensing arrangement, EST was obligated to pay any

expenses and to make the payments to petitioner required

under the PMSA-petitioner agreement. EST was to remit

to PMSA 95 percent of the “net revenue” collected by EST

under the PMSA-petitioner agreement.”

Dunnett, representing petitioner, entered into negotia-

tions with the Warriors for a new contract for petitioner’s

services. The Warriors were adamant about having an

NBA Uniform Player Contract signed by the player, and

thus rejected a proposed licensing contract between the

Warriors and PMSA.

Given the Warrior's insistence on an NBA Uniform

Player Contract, petitioner signed such a contract with

the Warriors on August 27, 1974. That contract ran for

‘The PMSA-petitioner agreement and later amendments thereto

are discussed in more detail, infra.

*Sometime before May 12, 1976, EST changed its name to Interlit

( British Virgin Islands) Limited. We shall continue to refer to EST

even though certain payments were made .o Interlit, and Interlit

was a party to certain agreements.

A-6

two years from September 1, 1974, and covered the 1974-

1975 and 1975-1976 seasons. While the stated compensation

for those seasons was $45,000 and $55,000, respectively,

the contract was a “make” contract. Thus, under that con-

tract, petitioner became entitled to the full compensation

for a season only if he was a team member after the De-

cember 2nd falling within that season.

Even though the August 27, 1974, NBA Uniform Player

Contract provided for compensation payments to begin on

November 1, 1974, no regular payments were made under

the contract until June 1975.* The delay in payments re-

sulted from Dunnett’s continuing efforts to have the War-

riors in some way recognize the August 16, 1974, PMSA-

petitioner agreement.* The Warriors refused to sign any

contract or agreement with any person or entity other than

petitioner. However, they did agree to remit the contract

payments to someone other than petitioner, if petitioner

legally assigned the payments.

On April 25, 1975, petitioner executed an Assignment of

Contract Rights assigning all contract payments to EST.

After that assignment, all contract payments were made to

EST.’ Check stubs reflected the payments as being for

petitioner’s services. Federal and state income tax, NBA

Players Association dues, and fines were withheld from the

payments.

*Certain per diem checks for on-the-road expenses were issued

to petitioner during the playing season.

*By letter dated October 28, 1974, petitioner instructed the War-

riors not to make a salary payment to him.

‘Further Assignments of Contract Rights were executed by peti-

tioner in favor of EST oa September 20, 1975, covering the NBA

Uniform Player Contract dated September 1975 and on September

9, 1977, covering the August 1977 NBA Uniform Player Contract.

Furthermore, on June 8, 1977, petitioner authorized release of a

playoff bonus check to EST.

A-7

After payments to EST were arranged, nothing further

developed between petitioner, the Warriors, and either

PMSA or EST. On September 15, 1975, petitioner signed

an NBA Uniform Player Contract with the Warriors cov-

ering the 1975-1976 and 1976-1977 seasons. Compensation

was set at $85,000 and $90,000, respectively.’ On August

29, 1977, petitioner signed an NBA Uniform Player Con-

tract with the Warriors for the 1977-1978, 1978-1979, and

1979-1980 seasons. Compensation was set at $100,000,

$110,000, and $125,000, respectively. Both of these con-

tracts, covering five seasons, were “make” contracts. See

p. 5, supra.

Sometime after December 16, 1977, petitioner was

waived by the Warriors and cleared waivers. On January

24, 1978, he signed an NBA Uniform Player Contract with

the Capital Bullets Basketball Club, Inc. T.A. Washington

Bullets (Bullets) for ten days.’ On January 30, 1978, he

signed an NBA Uniform Player Contract with the Bullets

covering the remainder of the 1977-1978 season and the

1978-1979 and 1979-1980 seasons. It was a “make” contract

with compensation set at $13,104 for the remainder of the

1977-1978 season and at $100,000 for each of the two fol-

lowing seasons. On November 16, 1978, the Bullets and

petitioner entered into an agreement whereby the Janu-

ary 30, 1978, NBA Uniform Player Contract was adopted,

the PMSA-petitioner agreement was acknowledged, and

the Bullets agreed to remit all contract payments to EST.

°The September 15, 1975 contract superseded the August 27,

1974 contract with respect to the 1975-1976 season.

*When petitioner cleared waivers and then signed with the

Bullets, the Warriors claimed they could deduct from the payments

due from them under their contract with petitioner the amounts

paid by the Bullets for the same period. The dispute went to arbi-

tration resulting in a decision against the Warriors. The resulting

payment went to EST.

A-8

All payments with respect to the 1977-1978 season went to

EST. Petitioner left the Bullets in October 1979.

In summary, all payments due under various NBA Uni-

form Players Contracts executed on and after August 27,

1974, went to EST. See n. 3, supra. No payments have been

made to EST since petitioner left the Bulleis.

The PMSA-petitioner agreement gave PMSA the right

to require petitioner to perform services but acknowledged

that any regulations of any professional association would

control. That agreement provided both that “[b]asic com-

mercial and economic control of [petitioner’s] services is

intended to reside in PMSA at all times,” and that peti-

tioner “shall not undertake to perform personal athletic

services of any kind for the duration of this agreement

without the prior written approval of PMSA.” Neither

PMSA nor EST in any way actively participated in ne-

gotiations with the Warriors or in petitioner’s playing of

basketball. At trial, petitioner acknowledged no change with

respect to his working relationship with the Warriors oc-

currcd after the PMSA-petitioner agreement was executed.

As previously noted, the PMSA-petitioner agreement

gave PMSA the right to petitioner’s services in profes-

sional sports for six years and obligated PMSA to pay

petitioner $1,500 per month. The $1,500 per month was

listed as “compensation for initial term [six years]’’ and

was made payable to petitioner for his life.* However, the

agreement provided further:

Should JOHNSON [petitioner] fail to perform ser-

vices under any license arrangement [unless he is

incapacitated] to any professional athletic team or re-

lated athletic endeavor for any consecutive twenty-

four (24) month period, * * *, PMSA may bring this

*PMSA was given an option to renew the PMSA-petitioner agree-

ment for six more years.

A-9

Agreement to an end and shall retain without the nee-

essity of making any further payment of any kind to

JOHNSON all the rights held by PMSA under this

agreement.

Thus, if petitioner, for twenty-four consecutive months,

failed to perform under any athletic license to a profes-

sional team, PMSA was relieved of its obligation to pay

petitioner.

The PMSA-petitioner agreement was amended by a letter

dated September 16, 1976. Two basic changes were made—

the payment to petitioner was increased to $2,000 per

month’ and a previously initiated loan program, discussed

in more detail, infra, was approved. A second amendment

was executed on December 16, 1977. While that amendment

concentrated on the loan arrangement, it also operated as

an exercise of PMSA’s option to extend the original agree-

ment for six years since petitioner’s “current agreement

with PMSA * * * terminates on August 15, 1980.”

In December 1974, PMSA loaned petitioner $10,000

interest free so petitioner could invest in a partnership.

Petitioner later sold his partnership interest and repaid the

$10,000 in December 1975. After the end of the 1974-1975

playing season, petitioner wanted to buy a house, and

PMSA agreed to loan petitioner $74,000 interest free with

payment due on October 1, 1980. The $74,000 was disbursed

to petitioner in $750 monthly increments beginning in Sep-

tember 1975, and one $32,000 advance in November 1975.

Those loans were made part of the original PMSA-peti-

*The original PMSA-petitioner agreement required cost-of-living

increases in the monthly payments to petitioner. However, no such

increases were made between August 1974 and September 1976.

By the September 1976 agreement, petitioner agreed to an increase

to $2,000 per month in lieu of the cost-of-living increases and

agreed to no further increases until August 1978. At the time of

trial, the $2,000 per month amount was still in effect.

A-10

tioner agreement by the September 16, 1976, amendment.”

The December 16, 1977, amendment increased the loan

commitment from PMSA to petitioner to $250,000 and

required petitioner to give security for past and present

loans.

On September 29, 1980, an agreement (hereinafter the

Associated Advisors agreement) was executed by and

between PMSA, EST, petitioner, and Associated Advisors,

a California corporation. Associated Advisors was formed

several years before by Dunnett and lawyers with whom

he practiced. The Associated Advisors agreement recalled

the PMSA-petitioner agreement and the 1976 and 1977

amendments thereto and provided:

Under the terms and conditions of [those] agree-

ments, PMSA (or its assignee) is presently obligated

to pay certain compensation to Johnson [petitioner]

of at least Two Thousand Dollars ($2,000.00) per

month to and through December, 1983.

Pursuant to the Associated Advisors agreement, Associated

Advisors assumed that liability of PMSA and EST, and

acquired all of PMSA and EST’s liabilities and rights

under the previous agreements and amendments.

The Associated Advisor’s agreement noted that peti-

tioner owed PMSA $226,500 which was due by October 1,

1980. Associated Advisors agreed to loan petitioner

$226,500, at 10 percent interest, to repay PMSA, and peti-

On July 1, 1975, petitioner purchased a house in Oakland,

Calif., for $98,000 with financing by Great Western Savings and

Loan Association in Oakland. As of June 15, 1976, only $62,000

remained to be paid. By early 1979, the entire balance due had

been paid. On April 12, 1979, petitioner executed a deed of trust

on his house in favor of PMSA, to secure the loans pursuant to the

December 16, 1977, amendment. The trustor was Seabright Land

Corporation, and its president was Kenneth Reisserer who practiced

in the same office at Dunnett.

A-11

tioner agreed to execute a Deed of Trust in favor of

Associated Advisors. The loan from Associated Advisors

was on the following terms: (1) if petitioner’s services

were licensed for “at least one (1) year before October 1,

1981,” the loan accrues interest until twelve consecutive

unlicensed months pass and is then fully amortized over

five years and payable in monthly increments or (2) if

petitioner’s services are not licensed “for a period of at

least one (1) year before October 1, 1981,” the entire loan

is payable on October 1, 1981. Both at the time the Associ-

ated Advisors agreement was executed and at the time of

trial in August 1981, petitioner’s services were not licensed.

As to the monthly payments due petitioner under the

PMS A-petitioner agreement and amendments thereto, the

Associated Advisors agreement provided:

Advisors and Johnson [petitioner] agree that the

compensation payments to Johnson * * * shall cease

as of October 1, 1981, if Johnson’s services have not

been licensed for a period of at least one (1) year.

If, on or before October 1, 1981, Johnson’s services are

licensed for one (1) year or more, Advisors shall pay

to Johnson all compensation due to Johnson under the

agreements.

Thus, the length of time petitioner received his monthly

payments depended on whether his services were licensed

by October 1, 1981.

On his Federal income tax returns for 1975, 1976, and

1977, petitioner reported no wages or salary, but did report

the payments he received from EST as business income.

He attached to those returns Forms W-2 issued by the

Warriors with respect to his services. Petitioner received

refunds of Federal income tax with respect to 1975, 1976

and 1977. Those refund checks, as well as checks represent-

ing refunds of state income taxes, were specially endorsed

by petitioner to EST. See n. 2, supra. By a statement

A-12

attached to an application for an extension to file for 1975,

petitioner disclosed his reporting position with respect to

personal service income.

In his statutory notices of deficiency, respondent deter-

mined all amounts paid by the Warriors in 1975, 1976, and

1977 with respect to petitioner’s services were income to

petitioner. Thus, he increased petitioner’s income by

$60,894, $67,060, and $70,327 for 1975, 1976, and 1977,

respectively. Those increases reflect the excess of the

amounts paid by the Warriors with respect to petitioner’s

services over the amount paid petitioner by EST with

respect to those services.

OPINION

At issue is whether amounts paid by the Warriors with

respect to petitioner’s services as a basketball player are

income to petitioner or to the corporation to which the

amounts were remitted. Respondent, relying on the rule

of Lucas v. Earl, 281 U.S. 111 (1930), that income must

be taxed to its earner, contends petitioner was the true

earner. Petitioner maintains this is a “loan-out” case

like Fox v. Commissioner, 37 B.T.A. 271 (1938), and

Lucas v. Earl is inapplicable."* We find Lucas v. Earl indis-

1Petitioner makes no contention, given the payments required

to be made to him by EST, that his contractual rights with the

Warriors were sold. The parties debate this case solely on the

“who” aspect of the assignment of income doctrine, and make no

arguments concerning the “when” aspect of that doctrine. See

generally Estate of Stranahan v. Commissioner, 472 F.2d 867 (6th

Cir. 1973), revg. and remanding a Memorandum Opinion of this

Court; Martin v. Commissioner, 56 T.C. 1255 (1971), affd. without

published opinion (5th Cir., Aug. 18, 1972). Thus, we do not decide

whether petitioner received adequate consideration in his dealings

with PMSA and EST. However, we note there is confusion as to

the duration of the monthly payments from EST to petitioner, and

petitioner has offered no clarifying evidence. See Rule 142(a), Tax

Court Rules of Practice and Procedure.

A-13

tinguishable in any meaningful sense and hold for respon-

dent.’?

In Lucas v. Earl, the taxpayer executed an agreement

with his wife that any property acquired by either of

them, including wages salary, would be considered joint

property. The United States Supreme Court accepted the

validity of that contract, but held the taxpayer earned the

salary in issue therein and must be taxed on it. In so

holding, the Court noted:

It [the case] turns on the import and reasonable

construction of the taxing act. There is no doubt that

the statute could tax salaries to those who earned

them and provide that the tax could not be escaped by

anticipatory arrangements and contracts however

skillfully devised to prevent the salary when paid

from vesting even for a second in the man who earned

it. That seems to us the import of the statute [section

61] before us * * *., 281 U.S. at 114-115.

From that quote is derived the oft-cited “first principle

of income taxation: [t]hat income must be taxed to him

who earns it.’”’ Commissioner v. Culbertson, 337 U.S. 733,

739-740 (1949). See also United States v. Basye, 410 U.S.

441, 449 (1973).

However, the realities of the business world prevent

an over-simplistic application of the Lucas v. Earl rule

whereby the true earner may be identified by merely point-

ing to the one actually turning the spade or dribbling the

'2Given our holding, we need not address respondent's alternate

contention that the arrangement between petitioner and the various

entities, other than the Warriors, was a sham. Nor do we address

petitioner's argument, based on Cole v. Commissioner, T.C. Memo.

1973-74, that collateral estoppel requires us to recognize PMSA as

an independent viable corporation. However, for the purpose of

reaching our specific holding herein, we accept petitioner’s charac-

terization of PMSA.

A-14

ball. Recognition must be given to corporations as taxable

entities which, to a great extent, rely upon the personal

services of their employees to produce corporate income.

When a corporate employee performs labors which give

rise to income, it solves little merely to identify the actual

laborer. Thus, a tension has evolved between the basic

tenets of Lucas v. Earl and recognition of the nature of

the corporate business form.”

While the generally accepted test for resolving the “who

is taxed” tension is who actually earns the income, that

test may easily become sheer sophistry when the “who”

choices are a corporation or its employee. Whether a

one-person professional service corporation or a multi-

faceted corporation is presented, there are many cases in

which, in a practical sense, the key employee is responsible

for the influx of moneys. Nor may a workable test be

couched in terms of for whose services the payor of the

income intends to pay. In numerous instances, a corpora-

tion is hired solely in order to obtain the services of a

specific corporate employee.”

18That tension is most acute when a corporation operates a per-

sonal service business and has as its sole or principal employee its

sole or principal shareholder. In those cases where sec. 482 applies,

resort to general sec. 61 principles usually is not necessary since

sec. 482 provides a smoother route to the same “who is taxed”

result. See Pacella v. Commissioner, 78 T.C. (Apr. 14,

1982); Keller v. Commissioner, 77 T.C. 1014 (1981), appeal filed

(10th Cir. Apr. 2, 1982). However, see Rubin v. Commissioner, 51

T.C. 251 (1968), revd. and remanded 429 F.2d 650 (2d Cir. 1970),

decided on remand 56 T.C. 1155 (1971), affd. per curiam 460 F.2d

1216 (2d Cir. 1972), wherein application of sec. 61 and 482 led to

different results. Unless otherwise provided, all section references

are to the Internal Revenue Code of 1954, as amended.

Such instances are commonplace in personal service businesses

such as law, medicine, accounting, and entertainment. See e.g.,

Cole v. Commissioner, supra, n. 12.

A-15

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 in-

come. See Vercio v. Commissioner, 73 T.C. 1246, 1254-1255

(1980). An examination of the case law from Lucas v. Earl

hence reveals two necessary elements before the corpora-

tion rather than its service-performer employee may be

considered the controller of the income.’ First, the service-

performer employee must be just that—an employee of the

corporation who the corpo-ation has the right to direct or

control in some meaningful sense. See Vnuk v. Commis-

stoner, 621 F.2d 1318, 1320-1321 (8th Cir. 1980), affg. a

Memorandum Opinion of this Court; Vercio v. Commis-

sioner, supra. Second, there must exist between the corpo-

ration and the person or entity using the services a contract

or similar indicium recognizing the corporation’s control-

ling position. See Pacella v. Commissioner, 78 T.C, ......

(Apr. 14, 1982); Keller v. Commissioner, 77 T.C. 1014, ap-

peal filed (10th Cir., Apr. 2, 1982)."°

In the case before us, we accept arguendo that the PMSA-

petitioner agreement was a valid contract which required

the payments with respect to petitioner’s performance as a

basketball player ultimately to be made to PMSA or EST.

See n. 12, supra. We also accept arguendo that the PMSA-

petitioner agreement gave PMSA a right of control over

petitioner’s services, although respondent maintains the

agreement’s control provisions systematically were ignored.

‘°Although some of the cited cases deal with trusts rather than

with corporations, their discussion of general sec. 61 principles

applies to both entities, See sec. 1.671-1(c), Income Tax Regs. We

couch our discussion herein in terms of corporations simply because

it comports with the facts before us.

“See also Foglesong v. Commissioner, T.C. Memo. 1976-294,

revd. and remanded 621 F.2d 865 (7th Cir. 1980), decided on

remand under sec. 482, 77 T.C. 1102 (1981), appeai filed (7th Cir.,

Feb. 16, 1982).

A-16

See pp. 7-8, supra. Thus, the first element is satisfied. How-

ever, the second element is lacking, and that is what brings

this case within Lucas v. Earl rather than the cases relied

on by petitioner.

In Fox v. Commissioner, 37 B.T.A. 271 (1938), the tax-

payer was a cartoonist who formed a corporation. He trans-

ferred to the corporation cash and property and assigned

to the corporation copyrights and his exclusive services for

a number of years. The corporation executed a contract

with a syndicate giving the syndicate the right to use the

taxpayer’s cartoons in return for a percentage of gross

sales. The amount the corporation thus received greatly

exceeded the amount the corporation paid the taxpayer for

his services. The Court held the excess amounts were not

the taxpayer’s income. Lucas v. Earl was inapplicable be-

cause the employment relationships existed between the

corporation and the syndicate and between the corporation

and the taxpayer and not between the taxpayer and the

syndicate.”

In Laughton v. Commissioner, 40 B.T.A. 101 (1939),**

the taxpayer, an actor, formed a corporation. He contracted

with the corporation to receive a weekly payment and cer-

tain expense payments in return for his exclusive services.

The corporation executed contracts with two film studios

whereby the taxpayer’s services were loaned to the film

17Petitioner also relies on the Second Circuit Court of Appeals

reversal in Rubin v. Commissioner, supra, n. 15. However, as we

understand the Court of Appeals’ opinion, it merely mandated pref-

erential application of sec. 482. Nevertheless, in Rubin there existed

a contract between the taxpayer's corporation and the entity bene-

fiting from the taxpayer's services.

Laughton v. Commissioner, 40 B.T.A. 101 (1939), was re-

manded by the Ninth Circuit Court of Appeals, 113 F.2d 103 (9th

Cir. 1940), solely for conside»ation of the effect, if any, which

Higgins v. Smith, 308 U.S. 473 (1940), had upon respondent's argu-

ment that the corporation was the taxpayer's agent or alter ego.

A-17

studios,’ The Court heid the taxpayer was not taxable on

the amounts paid to the corporation by the studios because

those amounts were paid “under contracts between it [the

corporation] and the studios” and there simply was no as-

signment of income by the taxpayer. See Laughton v. Com-

missioner, supra at 106-107.

Petitioner herein stands upon vastly different ground

than did the taxpayers in Fox and Laughton. While peti-

tioner had a contract with PMSA, and by assignment, EST,

he also had an employment contract with the Warriors.

Crucial is the fact that there was no contract or agreement

between the Warriors and PMSA or EST. Nor can any oral

contract between those entities be implied. See Pacella v.

Commissioner, supra. The Warriors adamantly refused to

sign any contract or agreement with any person or entity

other than petitioner.” Thus, the existing employment re-

lationships were between petitioner and PMSA/EST and

between petitioner and the Warriors. The relationship be-

tween PMSA/EST and the Warriors necessary for PMSA/

EST to be considered actually in control of the earnings

was not present. As with Mr. Earl, petitioner “was the only

party to the contracts by which the salary * * * [was]

earned * * *.” See Lucas v. Earl, 281 U.S. 111, 114 (1930).

’°Certain contracts executed by the taxpayer prior to formation

of the corporation were assigned to the corporation.

*°The reasons for the Warrior's refusal to so contract is not par-

ticularly relevant. However, many of the Warricr’s concerns may

perhaps be unique to professional sports. But, petitioner was not in

a position where his goal of assured future income was unobtain-

able solely due to his choice of professions. Deferred compensation

arrangements are common in professional sports, and many are

accepted for tax purposes. See J. Weistart & C. Lowell, The Law of

Sports § 7.06 (1979).

*1We do not mean to impy this case necessarily would have been

decided in petitioner‘s favor had a contract been executed between

the Warriors and PMSA or EST. See n. 12, supra.

A-18

Nor may the assignments of earnings executed by peti-

tioner suffice to make PMSA/EST the taxable party. Such

assignments merely demonstrate petitioner’s control over

the earnings such as would an ordinary assignment of

wages to a bank. Nor is it important that petitioner con-

tractually was obligated to pay his earnings to PMSA/

EST. The United States Supreme Court in Lucas ». Earl

accepted the validity of the contract involved therein requir-

ing transmission of one-half to Mrs. Earl, but nevertheless

held Mr. Earl taxable as the true earner.

In summary, we find petitioner, rather than PMSA or

EST, actually controlled the earning of the amounts paid

by the Warriors with respect to petitioner’s services. Thus,

those amounts were income to petitioner under section

61(a)(1).”

To reflect the foregoing,

Decisions will be entered for respondent.

Petitioner, relying on Weimerskirch v. Commissioner, 596 F.2d

358 (9th Cir. 1979), revg. 67 T.C. 672 (1977), maintains respon-

dent's actions with respect to him were arbitrary and capricious, and

the burden of proof should have shifted. Weimerskirch has no appli-

cability herein. Our decision herein is not based on any presumption

of correctness attaching to respondent's notice of deficiency or, to

any great extent, upon the burden of proof. See generally Karme v.

Commissioner, 73 T.C. 1163 (1980), affd. 673 F.2d 1072 (9th Cir.

1982). Indeed, we basically have accepted petitioner's version of

the facts.

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Appendix C

United States Court of Appeals

For the Ninth Cireuit

No. 81-4621

USDC No. CV 81-0086

Charles Johnson,

Plaintiff-Appellant,

Vv.

United States of America,

Defendant-Appellee.

[Filed Dee. 27, 1982)

OPINION

On Appeal from the United States District Court

for the Northern District of California

Hon. Stanley A. Weigel, Presiding

Argued and Submitted: September 16, 1982

BEFORE: MERRILL, FLETCHER and BOOCH-

EVER, Circuit Judges.

MERRILL, Circuit Judge:

Appellant Johnson seeks refund of federal income taxes

for the year 1978 in the sum of $52,606, and appeals from

the district court’s grant of summary judgment for the

government.

I,

Appellant is a professional basketball player. In 1974

he signed a contract with a Panamanian Corporation, Pres-

entaciones Musicales S.A. (“PMSA”), conveying to it the

exclusive rights to his services as a professional athlete

for a term of at least six years. In return, PMSA agreed

to make monthly payments of $1,500.00 (later increased to

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$2,000.00) to appellant for his life. PMSA later assigned

the contract to EST International Limited, a British Vir-

gin Islands corporation which later changed its name to

Interlit.

Appellant played for two National Basketball Associa-

tion teams during 1978: the Golden State Warriors and the

Washington Bullets. He played for the Warriors under a

contract negotiated and executed by him on August 29,

1977. Neither PMSA nor Interlit engaged in negotiations.

Neither was a party to the contract. Appellant’s attorney

attempted to persuade the Warriors to contract with Inter-

lit but on advice of its counsel, the Warriors refused, taking

the position that it would contract with no one but appel-

lant and would not be satisfied with a license from Interlit

for his services.

Appellant then executed an assignment of his contract to

Interlit and the Warriors paid appellant’s salary directly

to Interlit which then paid appellant the sums due under

its contract with him.

In January 1978, the Warriors placed appellant on

waivers and he later signed a two-year contract with the

Bullets. Agan, he negotiated the contract himself and exe-

cuted it himself. Neither PMSA nor Interlit was a party.

In November 1978 appellant, the Bullets, PMSA and Inter-

lit agreed that all sums due appellant under his contract

with the Bullets should be paid directly to Interlit.

In his income tax return for 1978, appellant showed as

income only the sums he had received from Interlit. The

Commissioner gave appellant notice of deficiency declaring

that all sums paid by the Warriors and the Bullets to Inter-

lit, under appellant’s assignments of income, were salary

income of Appellant. Appellant paid the deficiency in the

sum of $52,606.00 and, after the IRS denied his refund peti-

tion, filed this suit for refund. The district court granted

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summary judgment for the United States and appellant

took this appeal.

is

The guiding principle in assignment of income cases is

that income is taxed co the person or entity which in fact

controls the earning of income. Commisioner v. Culbertson,

337 U.S. 733, 739-40 (1949) ; see also United States v. Basye,

410 U.S. 441, 449 (1973) ; Lucas v. Earl, 281 U.S. 111, 114-15

(1930). In Vnuk v. Commissioner, 621 F.2d 1318, 1320 (8th

Cir. 1980), the court stated that the “choice of the proper

taxpayer revolves around the question of which person or

entity in fact controls the earning of the income rather than

the question of who ultimately receives the income,” quot-

ing Vercio v. Commissioner, 73 T.C. 1246, 1253 (1980).

Johnson argues that he was under contract with PMSA

and Interlit for his services and that his services were

“loaned out” to the Warriors and Bullets. Where payment

is for personal services of an individual who purports to

be acting as an employee of a corporation and to have

been “loaned out” to the contracting party, two crucial

questions are presented: (1) whether the corporation has

the right to control the activities of the individual and the

amount of compensation the individual receives for those

activities; and (2) whether this control has been recog-

nized and accepted by the contracting party. Vnuk v.

Commissioner, 621 F.2d 1318, 1320-21 & n. 5 (8th Cir.

1980) Johnson v. Commissioner, 78 T.C. 882, 891 (1982) ; see

Laughton v. Commissioner, 40 B.T.A. 101, 106-07 (1939),

remanded on other grounds, 113 F.2d 103 (9th Cir. 1940) ;

Fox v. Commissioner, 37 B.T.A. 271, 278 (1938).

As the district court determined, the undisputed facts

below indicated that the contracts between appellant and

the two teams did not amount to a licensing agreement

between PMSA or Interlit and the teams; that the teams

had contracted with appellant alone; that appellant was

an employee of the teams rather than of PMSA or

A-22

Interlit; and that appellant, not PMSA or Interlit, con-

trolled the earning of the income sought to be taxed in

1978. The court concluded that appellant was liable for

tax on the entire amount the teams had paid under the

two player contracts.

Appellant disputes the court’s conclusions. The crucial

fact supporting the district court’s holding, however, is

that neither the Warriors nor the Bullets had contracted

with Interlit. They had contracted directly with appellant

for his services as their employee on salary. Indeed, the

Warriors explicitly refused to contract with Interlit and

rejected the acceptance of a license of appellant’s services

from Interlit. Similarly, even in November 1978, when the

Bullets, Johnson, PMSA, and Interlit agreed that all pay-

ments by the Bullets for Johnson’s services would be paid

to Interlit, the parties explicitly acknowledged that the

substance of the agreement was “a contract between

PLAYER and CLUB.” In both Laughton v. Commissioner,

40 B.T.A. 101, 106-07, and Fox v. Commissioner, 37 B.T.A.

271, 278, in which payments to a corporation in return

for services of an individual were held to be income of

the corporation and not the individual, the contracts in

question were with the corporation and not with the indi-

vidual. The distinction is crucial.

We conclude that the district court correctly held that

appellant was taxable for the sums paid to Interlit for his

services.

ITI.

Appellant contends that the Internal Revenue Service

singled him out for audit because of his choice of lawyer.

We find no merit in this contention and rejected precisely

the same argument in Karme v. Commissioner, 673 F.2d

1062, 1064 (9th Cir. 1982) (“No impermissible selectivity

is involved’’).

JUDGMENT AFFIRMED.