Rev. Rul. 76-66

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.

The taxpayer, a resident and citizen of Canada, is employed as a professional hockey player 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 played during that period.

The salary agreed to by the taxpayer under the terms of the standard player's contract could be paid in semi-monthly installments beginning October 1 and ending with the final league game or play-off game. Since the 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 a salary payment during the time when not actually playing hockey for the club but during the time spent working out to develop and keep the necessary hockey skills. The taxpayer was required by the contract to report to the training camp in good physical condition. During the regular season the taxpayer played 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 1-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. Also, if the player has not been an employee of the club for the whole period of the club's games during the regular season, the player shall receive only part of the salary in the ratio of the number of days of actual employment to the number of days of the league schedule of games.

Section 3 of the contract provides, in part, that the player agrees to report and practice at such time and place as the club may designate and 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' suspension bears to the total number of days of the regular league games.

Under section 19 of the contract the player agrees among other items stipulated therein to play hockey only with the club. The player's promise not to compete is taken into consideration in determining the player's salary.

Section 861(a)(3) of the Internal Revenue Code of 1954 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 before January 1, 1976, 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 by an apportionment on the time basis; that is, there shall be included in the gross income an amount that 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.

Section 1.861-4(b)(1) of the regulations provides a similar rule for taxable years beginning after December 31, 1975, except that the facts and circumstances may permit some other appropriate method of allocation.

Rev. Rul. 74-108, 1974-1 C.B. 248, deals with the source of income regarding a sign-on fee paid by a domestic team of an international professional soccer league to a nonresident alien player as an inducement not to negotiate a player contract with any other team. Rev. Rul. 74-108 holds, in part, that the fee was in essence a covenant not to compete and is not compensation for labor or professional services. The fee has its source in the place where the promisor forfeited his right to act. Rev. Rul. 74-108 also stated that it may be reasonable to allocate the fee on the basis of the relative value of the taxpayer's services within and without the United States or on the basis of the portion of the year during which soccer is played within and without the United States by the player involved. Also, where a reasonable basis for the allocation does not exist, the entire sign-on fee is income from sources within the United States.

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. The terms of the taxpayer's contract indicate that the taxpayer's performance of services during the regular season together with the taxpayer's promise not to play hockey with any other club is the consideration provided by the taxpayer for the salary.

Section 19 of the contract states that the player's promise not to compete is taken into consideration in determining the player's salary.

Section 1 of the contract states that if the player has not been an employee of the club for the whole period of the club's games then the player shall receive only part of the salary in ratio of the numbers of days of actual employment to the number of days of the league's regular season of games. This provision indicates that the salary of the taxpayer is received for the performance of services during the regular season. If the salary were intended to compensate the taxpayer for the performance of services without the regular season of play, such days would be taken into account in determining the taxpayer's salary under section 1 of the contract. Section 15 of the contract provides that if the player is suspended, then the player's salary shall be determined by the same type of ratio as that provided in section 1. Under this section, if the taxpayer participated in the full training period, but prior to the commencement of the regular season was suspended by the club for the entire season, the player would not be entitled to any part of his salary.

Under Rev. Rul. 74-108, any portion of the taxpayer's salary attributable to the taxpayer's promise not to compete may be allocated on the basis of the services rendered to the club by the taxpayer.

Accordingly, in the instant case, the salary paid the taxpayer pursuant to the contract may be allocated on the basis of the services of the taxpayer performed during the regular season.

Since the services of the taxpayer performed during the regular season were 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 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 regular season for the current taxable year bears to the total number of days of the regular season in the current taxable year. Days spent in the United States between regular season games are considered as days in which services are rendered in the United States. This conclusion applies during taxable years beginning before, on, or after January 1, 1976.

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 the per diem payments made in connection therewith are from a source at the location of those games.

Article VII of the United States-Canada Income Tax Convention, T.D. 5206, 1943 C.B. 526, as amended, (1957-2 C.B. 1014) may apply to professional hockey players who are Canadian residents. This section provides that a resident of Canada shall be exempt from United States tax upon compensation for personal (including professional) services performed during the taxable year within the United States if such individual is present therein for a period or periods not exceeding a total of 183 days during the taxable year and either of the two following conditions is met: (a) the individual's compensation is received for such personal services performed as an officer or employee of a resident, or corporation or other entity of Canada or of a permanent establishment in Canada of a United States enterprise, or (b) such individual's compensation received for such personal services does not exceed $5,000.