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Johnson v. Commissioner

United States Tax Court
78 T.C. 882 (1982)


Charles Johnson (plaintiff) was a professional basketball player who played in the National Basketball Association (NBA). In 1974, Johnson signed a contract with Presentaciones Musicales, S.A., a Panamanian corporation (PMSA). PMSA acquired the right to Johnson’s services in professional basketball and in return paid Johnson a monthly salary. PMSA licensed its rights and obligations under its agreement with Johnson to EST International Ltd. (EST). EST thereafter paid salary to Johnson and retained 5 percent of the net revenue while remitting the remainder to PMSA. In August 1974, Johnson attempted to enter into a contract with the San Francisco Warriors. The Warriors rejected the idea of a licensing agreement between the Warriors and PMSA and insisted that Johnson sign an NBA Uniform Player Contract. Johnson thus separately signed a Uniform Player Contract with the Warriors. In April 1975, Johnson assigned all his rights in that contract to EST, and all payments due to him from the Warriors under the contract were paid directly to EST. Johnson remained under contract with the Warriors until December 1977, when he was released by the team and cleared waivers. On his federal income tax returns for 1975-1977, Johnson listed no wages or salary and reported only the payments he received from EST as business income. The Commissioner of the Internal Revenue Service (defendant) determined that the entire amount the Warriors paid for Johnson's services during these years counted as income to Johnson and increased Johnson's income for each of the three years by the excess of the amounts paid to EST by the Warriors over the amounts paid to Johnson by EST. The Commissioner thus found that Johnson's income-tax payments from 1975-1977 were deficient and issued statutory notices of deficiency. When Johnson challenged the deficiency notices, the United States Tax Court considered whether the amounts paid by the Warriors for Johnson's services should count as income to Johnson for tax purposes.

Rule of Law


Holding and Reasoning (Fay, J.)

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