Rev. Rul. 87-38

1987-1 C.B. 176, 1987-20 I.R.B. 7.

NONRESIDENT ALIENS; HOCKEY PLAYER FOR U.S. CLUB

Published: May 18, 1987

Section 861.-Income from sources within the United States, 26 CFR 1.861-4: Compensation for labor or personal services

(Also Section 7805; 301.7805-1.)

  Nonresident aliens; hockey player for U.S. club. The salary paid to a professional hockey player, a Canadian citizen and resident, by a U.S. professional hockey club is allocable between sources within the U.S. and without the U.S. Rev. Rul. 76-66 revoked.

ISSUE

  Advice has been requested concerning the method of allocating income between sources within the United States and sources without the United States under the circumstances described below.

FACTS

  The taxpayer, a resident and citizen of Canada, is employed by a professional hockey club (club), a United States corporation. Prior to the regular season the taxpayer reported to and participated in a 30-day training period at a camp of the club located in Canada. The taxpayer entered into a new standard player's contract (contract) while participating in the training camp activities. The taxpayer received a per diem allowance during the period while at the training camp in addition to a per diem allowance and other amounts for playing  in the exhibition games during that period. The contract also provided per diem allowances for each playoff series in which the player's team participated.

  The salary agreed to by the taxpayer under the terms of the standard player's contract, which  exceeded $15,000 per year, could be paid in semi-monthly installments beginning October 1 and ending with the final league game or playoff game. Since the regular playing season is shorter than the 1-year period covered by the contract, the taxpayer had the option to elect and did elect to receive the salary over a 12-month period. Thus, the taxpayer received salary payments during the time period when not actually playing hockey for the club. During this time period, taxpayer engaged in physical activities (such as weight lifting and running) to maintain good physical conditioning. Taxpayer was required by the contract to report to the training camp in good physical condition. During the regular season, the taxpayer played in hockey games both in Canada and in the United States.

  Section 1 of the standard player's contract provides, in effect, that the term of the contract is for one year starting October 1 of the pertinent year and that the payment of the salary under the contract shall be in consecutive semi-monthly installments following the commencement of the regular league schedule of games. However, if the player has not been an employee of the club for the whole period of the club's games during the regular season and any playoffs for which the club qualifies, the player receives a part of the salary determined by the ratio of the number of days of actual employment during the regular season and playoff games for which the club qualifies to the number of days of the pre-season training camp, regular season, and playoff games for which the club qualifies.

  Section 2 of the contract requires the player to report to the club's training camp and to participate in all exhibition, regular season, and playoff games.

  Section 3 of the contract provides, in part, that the player agrees to report and to practice at such time and place as the club may designate and to participate in such exhibition games as may be arranged by the club within 30 days prior to the first league game. If the player fails to report and participate in the exhibition games, a fine not exceeding $500 may be imposed by the club and deducted from the compensation stipulated in the contract.

  Under section 15 of the contract, if the player is suspended, the player agrees that there shall be deducted from the player's salary an amount equal to the exact portion of the salary as the number of days of suspension bears to the total number of days of the pre-season training camp, the regular season, and playoff games for which the club qualifies.

  The taxpayer is not entitled to any benefits under the United States-Canada Income Tax Treaty with respect to the income earned for services performed pursuant to the contract.

LAW AND ANALYSIS

  Section 861(a)(3) of the Internal Revenue Code of 1986 provides, in part, that compensation for labor or personal services performed in the United States shall be treated as income from sources within the United States. This provision is subject to certain exceptions not applicable here. Section 862(a)(3) of the Code provides that compensation for labor or personal services performed without the United States shall be treated as income from sources without the United States.

  Section 1.861-4(b) of the Income Tax Regulations provides, in part, that for taxable years beginning after December 31, 1975, if no accurate allocation or segregation of compensation for labor or personal services performed in the United States can be made, or when the labor or service is performed partly within and partly without the United States, the amount to be included in gross income shall be determined on the basis that most accurately reflects the income's source under the particular facts and circumstances. The regulation provides that in many cases the facts and circumstances will support an allocation on a time basis; that is, 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. Other methods of apportionment may be acceptable under different facts and circumstances.

  In determining the amount of the taxpayer's salary from sources within the United States, it is necessary to determine what consideration is provided by the taxpayer in return for such salary. In Rev. Rul. 76-66, 1976-1 C.B. 189, the Service concluded that the salary paid a player under the standard hockey league contract is paid for services performed only during the regular season.

  The position taken in Rev. Rul. 76-66 was rejected in Stemkowski v. Commissioner, 690 F.2d 40 (2d Cir. 1982), and Hanna v. Commissioner, 763 F.2d 125 (4th Cir. 1985). In these cases, the courts held that the plain language of the contract requires the conclusion that the salary paid a player is for services performed during the pre-season training camp, the regular season, and any playoffs for which the club qualifies.

  The Service has reconsidered the position taken in Rev. Rul. 76-66 and has concluded that it should adopt the position taken by the courts in Stemkowski and Hanna.

HOLDING

  Since the services of the taxpayer during the pre-season training camp, the regular season, and the playoff games were performed partly within and partly without the United States, pursuant to the terms of section 1.861-4(b) of the regulations, an amount is to be included in the gross income of the taxpayer for federal income tax purposes that bears the same relation to the total compensation under the contract for the current taxable year as the actual number of days of performance of the labor or service within the United States during the pre-season training camp, regular season, and playoff game period for the current taxable year bears to the total number of days in the season beginning with the first day of the pre-season training camp, and ending with the last day of the regular season or the last day on which the team plays in a playoff game.

  In the case of a player signing-on after the regular playing season commences, an amount is to be included in the gross income of the taxpayer that bears the same relation to the total compensation under the contract for the current taxable year as the actual number of days of performance of the labor or service within the United States during the regular season and any playoff games for which the club qualifies bears to the total number of days in the period from the date of the beginning of the player's employment with the team to the last day of the regular season or the last day on which the team plays in a playoff game.

  In the case of a suspended player, an amount is to be included in the gross income of the taxpayer that bears the same relation to the total compensation received by the player under the contract for the current taxable year as the actual number of days of performance of the labor or service within the United States, not including the period of suspension, during the pre-season training camp, the regular season, and any playoff games for which the club qualifies bears to the total number of days in the pre-season training camp, regular season, and any playoff games for which the club qualifies, not including the period of suspension.

  These allocations apply to a taxpayer's entire salary received by the taxpayer from his club. Furthermore, days spent in the United States between a regular season and playoff games are considered as days in which services are rendered in the United States as are days spent in the United States between playoff games. These conclusions apply to all open years.

  As noted above, the taxpayer receives a per diem allowance during the period at the training camp in Canada and certain amounts for playing in exhibition games during that period. The per diem payments for attending the training camp are from a source at the location of the training camp. The separate amounts specifically paid for participation in certain exhibition games and any amounts paid for playing in playoff games and the per diem payments made in connection therewith are from a source at the location of those games. These allocation formulas provide general rules, although specific cases may require modifications to the formulas.

  Pursuant to the authority contained in section 7805(b) of the Code, to the extent that this revenue ruling adversely affects taxpayers by allocating more income to United States sources than would be so allocated under Rev. Rul. 76- 66, this revenue ruling will not be applied to taxable years beginning before January 1, 1987.

EFFECT ON OTHER REVENUE RULINGS

  Rev. Rul. 76-66, 1976-1 C.B. 189, is revoked.

Rev. Rul. 87-38, 1987-1 C.B. 176, 1987-20 I.R.B. 7