BEFORE THE UTAH STATE TAX COMMISSION
) Appeal No. 01-0484
v. ) Account No. #####
AUDITING DIVISION OF ) Tax Type: Income Tax
THE UTAH STATE TAX ) Tax Period:
Respondent. ) Judge: Davis
G. Blaine Davis, Administrative Law Judge
For Petitioner: PETITIONER REP 1
PETITIONER REP 2
PETITIONER REP 3
For Respondent: Mr. Gale Francis, Assistant Attorney General
Mr. Brent Taylor, from the Auditing Division
Mr. Kevin Ediger, from the Auditing Division
STATEMENT OF THE CASE
This matter came before the Utah State Tax Commission for an Initial Hearing pursuant to the provisions of Utah Code Ann. '59-1-502.5, on July 21, 2003. At the hearing, the parties requested time in which to file a brief or memorandum. Petitioner was to file on or before August 12, 2003, with Respondent to file on or before September 3, 2003. Respondent filed its memorandum on September 9, 2003, but a brief or memorandum was not received from Petitioner at the scheduled time. Nevertheless, it is obvious that Petitioner prepared the brief and provided counsel for Respondent with a copy thereof, because it is referred to in the memorandum filed by Respondent. Upon contact from the appeals division, a copy of Petitioner's hearing memorandum was received on January 16, 2004.
Petitioner was formerly a professional SPORTS player in the Association 1 ("1"). Petitioner is not a resident of the State of Utah nor is Petitioner domiciled in the State of Utah. Petitioner has never been domiciled in Utah or a resident of Utah.
TEAM 1 is a Utah company based in Utah and operating primarily in the State of Utah.
Petitioner was traded to TEAM 1 from TEAM 2 on August 8, 1996. Petitioner was previously signed to a three-year contract with TEAM 2, and at the time he was traded to TEAM 1, there was one remaining year on the contract with TEAM 2. That contract entitled Petitioner to receive $$$$$ in compensation for the remaining year of the contract.
Under 1's collective bargaining agreement, in order for a team to terminate its contract with a particular player, the team must first place the player on waivers. Players that are placed on waivers between August 15 and the end of the season remain on waivers for 48 hours. Once the 48-hour period has ended, the player is said to have "cleared waivers". When a player has cleared waivers, any other ASSOCIATION 1 team may sign the player to a new contract. However, regardless of whether a player is claimed from waivers or clears waivers, the former team remains responsible for its contractual obligations to the player, and is required to pay an amount equal to the remainder of the player's salary under that contract.
No evidence was presented regarding the amount of time spent in Utah by Petitioner, the number of games, if any, that Petitioner played for TEAM 1, or the number of games, if any, that Petitioner played within the State of Utah. However, TEAM 1 placed Petitioner on waivers on November 15, 1996. After he had cleared the waivers, Petitioner entered into a new contract for less money with TEAM 3. Petitioner played the rest of the 1996-1997 season with TEAM 3. In the following year, Petitioner played about 30 games with TEAM 4. Petitioner has not played in ASSOCIATION 1 since that time.
As a result of its remaining contractual responsibility, TEAM 1 paid Petitioner $$$$$ in 1997, $$$$$ in 1998, and $$$$$ in 1999, for a total of $$$$$.
For the payments received from TEAM 1, Petitioner received a W-2 form showing the full amount of income and Utah withholdings. For each of the years at issue, Petitioner filed a Utah Non-Resident Income Tax Return, and received a refund of 100% of the Utah income taxes which had been withheld by the TEAM 1 and paid to the Utah State Tax Commission.
Petitioner has made representations that, "the taxpayer's contract clearly states that the payments made for the 1994-1997 seasons are compensation." There were other representations made with respect to the contract, but a copy of the contract was not submitted in evidence by Petitioner.
Petitioner did not perform any personal services for TEAM 1 during the years at issue for the money he received for the payment of the final year of his contract.
Utah Code Ann. §59-10-116 provides in relevant part as follows:
(1) For purposes of this section:
(a) "state income tax percentage" means a percentage equal to a nonresident individual's federal adjusted gross income for the taxable year received from Utah sources, as determined under Section 59-10-117, divided by the nonresident individual's total federal adjusted gross income for that taxable year;
. . . .
(2)(a) Except as provided in Subsection (3), a tax is imposed as provided in this section on the state taxable income calculated under this section of a nonresident individual.
(b) The tax under this section shall be calculated by multiplying the nonresident individual's state taxable income by the nonresident individual's state income tax percentage.
. . . .
Utah Code Ann. §59-10-117 provides in relevant part as follows:
(1) For the purposes of Section 59-10-116, federal adjusted gross income derived from Utah sources shall include those items includable in federal "adjusted gross income" (as defined by Section 62 of the Internal Revenue Code) attributable to or resulting from:
. . . .
(b) the carrying on of a business, trade, profession, or occupation in this state.
(2) For the purposes of Subsection (1):
. . . .
(c) Salaries, wages, commissions, and compensation for personal services rendered outside this state shall not be considered to be derived from Utah sources.
. . . .
(f) If a trade, business, profession, or occupation is carried on partly within and partly without this state, items of income, gain, loss, and deductions derived from or connected with Utah sources shall be determined in accordance with the provisions of Section 59-10-118.
. . . .
Utah Code Ann. §59-10-118 provides in relevant part as follows:
(1) As used in this section unless the contract otherwise requires:
. . . .
(c) "Compensation" means wages, salaries, commissions, and any other form of remuneration paid to employee for personal services.
. . . .
(13) Compensation is paid in this state if:
(a) the individual's service is performed entirely within the state; or
(b) the individual's service is performed both within and without the state, but the service performed without the state is incidental to the individual's service within the state; or
(c) some of the service is performed in the state and:
(i) the base of operations or, if there is no base of operations, the place from which the service is directed or controlled is in the state; or
(ii) the base of operations or the place from which the service is directed or controlled is not in any state in which some part of the service is performed, but the individual's residence is in this state.
. . . .
Utah Administrative Code Rule R865-9I-44 provides in relevant part as follows:
A. The Utah source income of a nonresident individual who is a member of a professional athletic team includes that portion of the individual's total compensation for services rendered as a member of a professional athletic team during the taxable year which, the number of duty days spent within the state rendering service for the team in any manner during the taxable year, bears to the total number of duty days spent both within and without the state during the taxable year.
. . . .
. . . .
3. "Duty days" means all days during the taxable year from the beginning of the professional athletic team's official pre-season training period through the last game in which the team competes or is scheduled to compete.
(a) Duty days shall also include days on which a member of a professional athletic team renders a service for a team on a date that does not fall within the period described in 3., for example, participation in instructional leagues, the Pro Bowl, or other promotional caravans. Rendering a service includes conducting training and rehabilitation activities, but only if conducted at the facilities of the team.
(b) Included within duty days shall be game days, practice days, days spent at team meetings, promotional caravans, and preseason training camps, and days served with the team through all postseason games in which the team competes or is scheduled to compete.
. . . .
4. "Total compensation for services rendered as a member of a professional athletic team" means the total compensation received during the taxable year for services rendered:
a) from the beginning of the official preseason training period through the last game in which the team competes or is scheduled to compete during that taxable year; and
b) during the taxable year on a date that does not fall within the period in 4.1), for example, participation in instructional leagues, the Pro Bowl, or promotional caravans.
5. "Total compensation" includes salaries, wages, bonuses, and any other type of compensation paid during the taxable year to a member of a professional athletic team for services performed in that year.
a) Total compensation shall not include strike benefits, severance pay, termination pay, contract or option-year buyout payments, expansion or relocation payments, or any other payments not related to services rendered to the team.
. . . .
Petitioner argues that the payments received from TEAM 1 are not taxable in Utah for two reasons. First, Petitioner contends that the payments received by the taxpayer are, in fact, "compensation" and are therefore covered by the "duty days" formula of Rule R865-9I-44. Since there were no "duty days" in Utah, Petitioner argues that none of the compensation is taxable in Utah. Second, Petitioner argues in the alternative that if the payments are not compensation, then they are not taxable by the State of Utah and are taxable to the taxpayer's state of residency, so again, under Petitioner's arguments, the payments would not be taxable by Utah.
On the other hand, Respondent argues that the payments to Petitioner are not compensation for services so they are not governed by Rule R865-9I-44 under the "duty days" formula. Instead, Respondent argues that the income is a contract buyout payment paid pursuant to Petitioner's contract with TEAM 1, and is therefore income derived from a Utah source within the meaning of Utah Code Ann.§§59-10-116 and 59-10-117.
The Commission has reviewed the facts, the statutes and the rules applicable to this matter. Although the contract was not introduced into evidence, the Commission understands, based upon the representation of the attorneys for the parties, that the contract provided that Petitioner would be paid certain amounts of money based upon his playing SPORT for TEAM 2 or any team which succeeded to the contract rights of TEAM 2. TEAM 1 succeeded to those rights, and had the legal right to require Petitioner to play for TEAM 1 in exchange for the payment set forth in the contract. However, there was apparently a portion of the contract, which required TEAM 1 to make payments to Petitioner if he was waived from the team, even if he never performed any personal services for the team. That is what happened in this case, i.e., TEAM 1 waived Petitioner so he never performed any personal services, but nevertheless, TEAM 1 still made their required contractual payments to Petitioner as a buyout of his contract.
Under Utah law, a resident individual is either anyone who is domiciled in this State for any period of time during the taxable year, or an individual who is not domiciled in the state but maintains a permanent place of abode in this state and spends an aggregate of 183 or more days of the taxable year in this state. (Utah Code Ann. §59-10-103(q).) A nonresident individual is anyone who is not a resident of this state. (Utah Code Ann. §59-10-103(m).) Utah Code Ann. §59-10-104 imposes an income tax on the "state taxable income" of every resident individual. Utah Code Ann. §59-10-116 imposes a state income tax on the "state taxable income" of nonresident individuals. For nonresidents, the taxes are imposed upon the "individual's federal adjusted gross income for the taxable year received from Utah sources . . . . (U.C.A. §59-10-116). (Emphasis added.)
Utah Code Ann. §59-10-117 defines income from Utah sources as income attributable to or resulting from (1) the ownership of real or tangible personal property in this state, or (2) the carrying on of a business, trade, profession, or occupation in this state. The income in question does not result from ownership of real or tangible personal property. Thus, the Division purports to tax this income because PETITIONER is carrying on a profession or occupation in this state.
PETITIONER’S rights to these payments related back to his contract for the 1996-1997 season. That contract was a contract to play for TEAM 1. Under his contract, he was entitled to payment for the last season, even if he was waived. Payments a professional athlete receives are governed by Rule R865-9I-44 (Rule 44). Accordingly, that rule must govern our treatment of this income.
The Division apparently believes that payments made after PETITIONER was waived are attributable to a "contract buy-out". PETITIONER argues, on the other hand, that the payments he was entitled to receive under his contract are not attributable to a "contract buy-out", even though he was waived. Rather, he argues that they are still compensation for services performed. The Commission finds that the payments were not compensation for services performed by Petitioner. It makes no sense to apportion a payment of this type under a "duty-days" formula, when the recipient is receiving income from other teams during the same year and apportioning that income on a "duty-days" formula. He is clearly not on duty for two different teams.
That conclusion, however, does not end the argument. Under the rule, it is clear that contract buy-outs are not compensation for purposes of the duty-days apportionment. The Rule does not say, however, how such payments are to be sourced. The implication of that silence is that the payments are sourced to the residence or domicile of the recipient. This conclusion is consistent with the treatment of such bonuses, buy-outs and other similar provisions in the authorities cited to us.
The California State Board of Equalization has recently reiterated that a "true" signing bonus is allocated in its entirety to the state of the player's residence. In the Matter of the Appeals of Garrison Hearst and Antonio Langham, 2002-SBE-007 (Nov 13, 2002). Michigan also holds that a signing bonus is allocated to the player's state of residency. Mich. Rec. Admin. Bulletin No. 1988-48 (Sept 27, 1988). The Illinois Dept. of Revenue Administrative Law Judge recommended that "[a] signing bonus and [an] option year buy-out provision should not be considered remuneration for services performed and thus should not be allocated to Illinois. . . ." Illinois Dept. of Rev. v. John & Angela Doe, IY 01-06 (Mar. 23, 2001). Louisiana has specifically ruled that severance pay received after a taxpayer has changed his or her state of residence would be sourced to the current state of residence. Louisiana P.L.R. No. 01-004 (Oct 3, 2001). Although the Division would distinguish the rulings, it has cited no case or ruling from any state that would attribute income from such contract payments to the payor state, rather than the state of residence.
The Division acknowledges that PETITIONER received no compensation for personal services performed for TEAM 1 during 1997. They also acknowledge, or at least do not dispute, that he was not present in Utah during 1997. They do not allege that he had any trade or profession other than professional SPORT. They do not dispute that he pursued his profession as a SPORT PLAYER with TEAM 3 after he left TEAM 1 in 1996 and later with TEAM 4. Accordingly, the Division's position is apparently that PETITIONER was carrying on a profession as a SPORT player in Utah (for purposes of U.C.A. §59-10-117) while he was simultaneously carrying on a similar trade for TEAM 3 in Colorado (for purposes of Rule 44). If that is to be the law in Utah, Rule 44 should state it clearly.
In the absence of clearer authority than is provided by our statute or rule, the Commission holds that the income received by PETITIONER was not Utah source income and, accordingly, not subject to Utah tax.
DECISION AND ORDER
Based upon the foregoing, the Commission determines that the income received by Petitioner from TEAM 1 during the years 1997, 1998 and 1999 was not Utah source income subject to income tax in the State of Utah. The audit assessment of Respondent is hereby abated and the Petition for Redetermination is granted. It is so ordered.
This decision does not limit a party's right to a Formal Hearing. However, this Decision and Order will become the Final Decision and Order of the Commission unless any party to this case files a written request within thirty (30) days of the date of this decision to proceed to a Formal Hearing. Such a request shall be mailed to the address listed below and must include the Petitioner's name, address, and appeal number:
Utah State Tax Commission
210 North 1950 West
Salt Lake City, Utah 84134
Failure to request a Formal Hearing will preclude any further appeal rights in this matter.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
DATED this 22nd day of April , 2004.
Pam Hendrickson R. Bruce Johnson
Commission Chair Commissioner
Palmer DePaulis Marc B. Johnson
 The fact that payments were received in 1998 and 1999 is not dispositive. The payments in issue relate to the last year of a three-year contract, i.e., the 1996-1997 season. Thus, the taxability of the payments must be determined by the facts and circumstances that existed during that season. The fact that some payments were deferred over three years, as the Jazz had the right to do under the contract, does not change the source or nature of the payments.
 Our decision, of course, must be based on our own laws. Uniform laws and rules are promulgated, however, to avoid unwarranted double taxation on one hand and "nowhere" income on the other. Accordingly, where we have adopted a uniform rule, it behooves us to review the interpretation of the rule by other states.