## Facts

- Peter Stemkowski, a Canadian citizen and NHL player for the New York Rangers, was a nonresident alien taxable in the United States only on U.S.-connected income and allowed deductions related to that income.
- For tax year 1971, the IRS issued a deficiency notice disallowing many claimed deductions for lack of proof and lack of connection to a U.S. trade or business as ordinary and necessary expenses.
- Stemkowski’s NHL Standard Player’s Contract required him to play in league, exhibition, and playoff games; report to training camp in good physical condition; maintain physical condition during the season; and participate in requested promotional activities.
- Stemkowski reported NHL salary partly attributable to services performed in Canada and partly in the United States, and claimed miscellaneous deductions including off-season conditioning, publications, telephone and television, promotional and gift expenses, and New York-area living and travel costs.
- The Tax Court upheld the Commissioner on major issues, treated the contract salary as covering only regular-season services for source allocation, and entered a deficiency judgment.
- Stemkowski appealed to the Second Circuit.

## Issues

1. Whether the player contract salary covered only regular-season services or also training camp and playoffs, and how salary should be allocated between U.S. and foreign sources.
2. Whether off-season physical conditioning expenses are deductible under I.R.C. § 162 and how any allowable amount should be allocated between U.S. and foreign source income.
3. Whether claimed deductions for publications, telephone, television, promotional activities, and gifts were ordinary and necessary business expenses and adequately substantiated.
4. Whether sales taxes and disability insurance premiums withheld from salary were deductible as expenses connected with a U.S. trade or business.
5. Whether New York-area living expenses were deductible as “away from home” travel expenses under § 162(a)(2) or were nondeductible personal expenses.

## Decision

- The Second Circuit affirmed in part and reversed and remanded in part.
- It held clearly erroneous the Tax Court’s finding that the contract salary compensated only regular-season services; the salary covered training camp and playoff obligations and had to be allocated over all required service periods.
- It remanded to determine days of training camp and playoff services and to reallocate salary between U.S. and foreign sources accordingly.
- It held off-season conditioning expenses could be deductible in principle under § 162, and remanded for substantiation, classification as business versus personal, and allocation between U.S. and foreign sources.
- It largely affirmed denial of miscellaneous deductions but remanded limited items (including certain hockey-related publications and certain fan-mail response costs) for reconsideration under § 162 and applicable substantiation requirements.
- It affirmed disallowance of deductions for sales taxes and disability insurance premiums.
- It affirmed that New York-area living expenses were nondeductible personal living expenses rather than deductible “away from home” expenses.

## Legal Principles

- For nonresident aliens, U.S. tax applies to income connected with U.S. services; deductions are allowed only to the extent related to that U.S.-connected income.
- Contract-based compensation must be sourced by allocating salary across the periods in which contractually required services are performed; excluding training camp or playoff obligations is improper when the contract requires those services.
- I.R.C. § 162 permits deductions for expenses that are ordinary, necessary, and proximately related to carrying on the taxpayer’s trade or business, subject to substantiation.
- Expenses characterized as personal consumption or personal protection are nondeductible under I.R.C. § 262, even if the taxpayer’s occupation makes the expense subjectively desirable.
- Living expenses at the principal place of employment are nondeductible personal expenses and generally do not qualify as “away from home” travel expenses under § 162(a)(2).

## Conclusion

The court required a realistic sourcing of a professional athlete’s salary by allocating compensation across all contract-required service periods, and it remanded for factfinding on salary allocation and on whether specific asserted athletic and work-related expenses were substantiated, business-related, and properly allocable to U.S. source income, while affirming denial of clearly personal or insufficiently connected deductions.


Stemkowski v. Comm'r, 690 F.2d 40 (2d Cir. 1982)