My teacher wants me to respond to this tax case and I don't know how to answer her with my thoughts. Please help! (see below)

During the years in issue, Charles Johnson (hereinafter petitioner) was a professional basketball player. He began playing in the National Basketball Association (NBA) in the fall of 1972. On September 14, 1972, he signed an NBA Uniform Player Contract with the San Francisco Warriors (Warriors). That contract obligated him to play basketball for the Warriors for 1 year in return for $17,500. On October 5, 1973, petitioner signed a second NBA Uniform Player Contract with the Warriors. That contract, covering the 1973-74 NBA season, ran for 1 year from September 1, 1973, and provided for $40,000 compensation.

Although petitioner's 1973-74 contract with the Warriors did not expire until the fall of 1974, the actual playing season ended much earlier, and all compensation due petitioner was to be paid by the conclusion of the playing season. An NBA player may be through playing basketball as early as March or as late as late May depending on whether he is involved in the NBA playoffs.

However, a player under contract has certain post-playing-season duties such as keeping in good physical condition and doing requested promotional work. Nevertheless, once the playing season is over, a player may "pretty much do anything [he wants] to do." Certain provisions of petitioner's 1973-74 contract with the Warriors carried significance after the playing season. For example, the Warriors could have traded petitioner, and the Warriors had the right to renew the contract for 1 year.

During the summer of 1974 and after the conclusion of the actual 1973-74 playing season, petitioner followed the advice of a friend and contacted Robert L. Dunnett (Dunnett), a California attorney, concerning financial planning. That contact led to petitioner's signing an agreement on August 16, 1974, with Presentaciones Musicales, S.A. (PMSA), a Panamanian corporation. In very general terms, that agreement (hereinafter the PMSA-petitioner agreement)

gave PMSA the right to petitioner's services in professional sports for 6 years beginning August 16, 1974, gave PMSA the right to control petitioner's services with respect to professional sports, and obligated PMSA to pay petitioner $1,500 per month.[1] On August 20, 1974, PMSA licensed its rights and obligations under the PMSA-petitioner agreement to EST International Ltd. (EST), a British Virgin Islands limited liability company. Under that licensing arrangement, EST was obligated to pay any expenses and to make the payments to petitioner required under the PMSA-petitioner agreement. EST was to remit to PMSA 95 percent of the "net revenue" collected by EST under the PMSA-petitioner agreement.[2]

Dunnett, representing petitioner, entered into negotiations with the Warriors for a new contract for petitioner's services. The Warriors were adamant about having an NBA Uniform Player Contract signed by the player, and thus rejected a proposed licensing contract between the Warriors and PMSA.

Given the Warriors's insistence on an NBA Uniform Player Contract, petitioner signed such a contract with the Warriors on August 27, 1974. That contract ran for 2 years from September 1, 1974, and covered the 1974-75 and 1975-76 seasons. While the stated compensation for those seasons was $45,000 and $55,000, respectively, the contract was a "make" contract. Thus, under that contract, petitioner became entitled to the full compensation for a season only if he was a team member after the December 2 falling within that season.

Even though the August 27, 1974, NBA Uniform Player Contract provided for compensation payments to begin on November 1, 1974, no regular payments were made under the contract until June 1975.[3] The delay in payments resulted from Dunnett's continuing efforts to have the Warriors in some way recognize the August 16, 1974, PMSA-petitioner agreement.[4] The Warriors refused to sign any contract or agreement with any person or entity other than petitioner. However, they did agree to remit the contract payments to someone other than petitioner, if petitioner legally assigned the payments.

On April 25, 1975, petitioner executed an Assignment of Contract Rights assigning all contract payments to EST. After that assignment, all contract payments were made to EST.[5] Check stubs reflected the payments as being for petitioner's services. Federal and State income taxes, NBA Players Association dues, and fines were withheld from the payments.

After payments to EST were arranged, nothing further developed between petitioner, the Warriors, and either PMSA or EST. On September 15, 1975, petitioner signed an NBA Uniform Player Contract with the Warriors covering the 1975-76 and 1976-77 seasons. Compensation was set at $85,000 and $90,000, respectively.[6] On August 29, 1977, petitioner signed an NBA Uniform Player Contract with the Warriors for the 1977-78, 1978-79, and 1979-80 seasons.

Compensation was set at $100,000, $110,000, and $125,000, respectively. Both of those contracts, covering five seasons, were "make" contracts. See p. 884 supra.

Sometime after December 16, 1977, petitioner was waived by the Warriors and cleared waivers. On January 24, 1978, he signed an NBA Uniform Player Contract with the Capital Bullets Basketball Club, Inc., t. a. Washington Bullets (Bullets) for 10 days.[7] On January 30, 1978, he signed an NBA Uniform Player Contract with the Bullets covering the remainder of the 1977-78 season and the 1978-79 and 1979-80 seasons. It was a "make" contract with compensation set at

$13,104 for the remainder of the 1977-78 season and at $100,000 for each of the two following seasons. On November 16, 1978, the Bullets and petitioner entered into an agreement whereby

the January 30, 1978, NBA Uniform Player Contract was adopted, the PMSA-petitioner agreement was acknowledged, and the Bullets agreed to remit all contract payments to EST. All payments with respect to the 1977-78 season went to EST. Petitioner left the Bullets in October 1979.

In summary, all payments due under various NBA Uniform Players Contracts executed on and after August 27, 1974, went to EST. See note 3 supra. No payments have been made to EST since petitioner left the Bullets.

The PMSA-petitioner agreement gave PMSA the right to require petitioner to perform services but acknowledged that any regulations of any professional association would control. That agreement provided both that "Basic commercial and economic control of [petitioner's] services is intended to reside in PMSA at all times," and that petitioner "shall not undertake to perform personal athletic services of any kind for the duration of this agreement without the prior written approval of PMSA." Neither PMSA nor EST in any way actively participated in negotiations with the Warriors or in petitioner's playing of basketball. At trial, petitioner acknowledged that no change with respect to his working relationship with the Warriors occurred after the PMSA- petitioner agreement was executed.

As previously noted, the PMSA-petitioner agreement gave PMSA the right to petitioner's services in professional sports for 6 years and obligated PMSA to pay petitioner $1,500 per month. The $1,500 per month was listed as "compensation for initial term [6 years]" and was made payable to petitioner for his life.[8] However, the agreement provided further:

Should JOHNSON [petitioner] fail to perform services under any license arrangement [unless he is incapacitated] to any professional athletic team or related athletic endeavor for any consecutive twenty-four (24) month period, * * *, PMSA may bring this Agreement to an end and shall retain without the necessity of making any further payment of any kind to JOHNSON all the rights held by PMSA under this agreement.

Thus, if petitioner, for 24 consecutive months, failed to perform under any athletic license to a professional team, PMSA was relieved of its obligation to pay petitioner.

The PMSA-petitioner agreement was amended by a letter dated September 16, 1976. Two basic changes were madethe payment to petitioner was increased to $2,000 per month,[9] and a previously initiated loan program, discussed in more detail, infra, was approved. A second amendment was executed on December 16, 1977. While that amendment concentrated on the loan arrangement, it also operated as an exercise of PMSA's option to extend the original agreement for 6 years since petitioner's "current agreement with PMSA * * * terminates on August 15, 1980."

In December 1974, PMSA loaned petitioner $10,000 interest free so petitioner could invest in a partnership. Petitioner later sold his partnership interest and repaid the $10,000 in December 1975. After the end of the 1974-75 playing season, petitioner wanted to buy a house, and PMSA agreed to loan petitioner $74,000 interest free with payment due on October 1, 1980. The

$74,000 was disbursed to petitioner in $750 monthly increments beginning in September 1975, and one $32,000 advance in November 1975. Those loans were made part of the original PMSA- petitioner agreement by the September 16, 1976, amendment.[10] The December 16, 1977,

amendment increased the loan commitment from PMSA to petitioner to $250,000 and required petitioner to give security for past and present loans.

On September 29, 1980, an agreement (hereinafter the Associated Advisors agreement) was executed by and between 888*888 PMSA, EST, petitioner, and Associated Advisors, a California corporation. Associated Advisors had been formed several years before by Dunnett and lawyers with whom he practiced. The Associated Advisors agreement recalled the PMSA- petitioner agreement and the 1976 and 1977 amendments thereto and provided:

Under the terms and conditions of [those] agreements, PMSA (or its assignee) is presently obligated to pay certain compensation to Johnson [petitioner] of at least Two Thousand Dollars ($2,000.00) per month to and through December, 1983.

Pursuant to the Associated Advisors agreement, Associated Advisors assumed that liability of PMSA and EST, and acquired all of PMSA and EST's liabilities and rights under the previous agreements and amendments.

The Associated Advisors agreement noted that petitioner owed PMSA $226,500 which was due by October 1, 1980. Associated Advisors agreed to loan petitioner $226,500, at 10-percent interest, to repay PMSA, and petitioner agreed to execute a deed of trust in favor of Associated Advisors. The loan from Associated Advisors was on the following terms: (1) If petitioner's services were licensed for "at least one (1) year before October 1, 1981," the loan would accrue interest until 12 consecutive unlicensed months had passed and would then be fully amortized over 5 years and payable in monthly increments or, (2) if petitioner's services were not licensed "for a period of at least one (1) year before October 1, 1981," the entire loan would be payable on October 1, 1981. Both at the time the Associated Advisors agreement was executed and at the time of trial in August 1981, petitioner's services were not licensed.

As to the monthly payments due petitioner under the PMSA-petitioner agreement and amendments thereto, the Associated Advisors agreement provided:

Advisors and Johnson [petitioner] agree that the compensation payments to Johnson * * * shall cease as of October 1, 1981, if Johnson's services have not been licensed for a period of at least one (1) year. If, on or before October 1, 1981, Johnson's services are licensed for one (1) year or more, Advisors shall pay to Johnson all compensation due to Johnson under the agreements.

Thus, the length of time petitioner received his monthly payments depended on whether his services were licensed by October 1, 1981.

889*889 On his Federal income tax returns for 1975, 1976, and 1977, petitioner reported no wages or salary, but did report the payments he received from EST as business income. He attached to those returns Forms W-2 issued by the Warriors with respect to his services.

Petitioner received refunds of Federal income taxes with respect to 1975, 1976, and 1977. Those refund checks, as well as checks representing refunds of State income taxes, were specially endorsed by petitioner to EST. See note 2 supra. By a statement attached to an application for an extension to file for 1975, petitioner disclosed his reporting position with respect to personal service income.

In his statutory notices of deficiency, respondent determined all amounts paid by the Warriors in 1975, 1976, and 1977 with respect to petitioner's services were income to petitioner. Thus, he increased petitioner's income by $60,894, $67,060, and $70,327 for 1975, 1976, and 1977, respectively. These increases reflect the excess of the amounts paid by the Warriors with respect to petitioner's services over the amount paid petitioner by EST with respect to those services.