## Facts

- Gary Sargent and Steven Christoff were professional hockey players for the Minnesota North Stars Hockey Club.
- Each player formed a personal service corporation (PSC) to contract with the Club for the player’s services (and for Sargent, additional consulting services).
- The Club paid the PSCs under written contracts for the use of the players’ services.
- Each PSC paid its player-employee a salary and contributed remaining amounts to the PSC’s qualified pension plan.
- The Commissioner issued notices of deficiency (Sargent: 1978–1981; Christoff: 1980–1982), disallowed the PSCs’ pension deductions, and taxed the players on the full amounts the Club paid to the PSCs.
- The Tax Court upheld the deficiencies by treating the income as earned directly by the players rather than by their corporations.

## Issues

1. Whether the PSCs should be recognized as separate taxable entities rather than disregarded for federal income tax purposes.
2. Whether Sargent and Christoff were bona fide employees of their PSCs, making the PSCs the proper recipients of the Club’s payments.
3. Whether the assignment-of-income doctrine required taxing the players on the Club’s payments and treating the PSC pension contributions as the players’ current income.

## Decision

- The Eighth Circuit reversed the Tax Court.
- The court held that the players were employees of their respective PSCs and therefore should not be taxed on the PSCs’ pension deductions.
- The court concluded the Club’s payments were income to the PSCs under the contracts, and the players were taxable only on compensation paid to them by the PSCs.
- The court treated the employee-status characterization and related tax consequences as mixed questions reviewed de novo; factual findings were reviewed for clear error.
- A dissent would have affirmed the Tax Court.

## Legal Principles

- A properly formed and operated corporation is generally respected as a separate taxable entity unless it is a sham or merely an agent/alter ego for its owner.
- The Commissioner may not disregard corporate form and reallocate corporate income to shareholders without a sufficient legal basis.
- Assignment-of-income concerns turn on who, in substance and under the governing contracts, earns the income; where the service contract is with the corporation and the individual performs as its employee, the corporation is the earner.
- When the corporation is the employer, contributions it makes to a qualified pension plan are corporate deductions and are not automatically included in the employee-shareholder’s current taxable income.

## Conclusion

The court held that the players’ PSC arrangements had legal and economic substance: the PSCs contracted with the team, paid wages, observed corporate operations, and maintained qualified pension plans; accordingly, the PSCs’ pension contributions could not be taxed to the players merely because the players owned the corporations and performed the services.


Sargent v. Comm’r, 929 F.2d 1252 (8th Cir. 1991)