Rudolph Sims, Arthur Green v. Minister of National Revenue, [1981] CTC 2417, 81 DTC 368

The Chairman:—The appeals of Messrs Rudolph Sims and Arthur Green from assessments in respect of the 1974, 1975 and 1976 taxation years involve the same basic issue.

At the request of counsel for the appellants, the appeals were heard on evidence that was common and applicable to both parties but for the differences in the respective amounts of their respective contracts. Mr Rudolph Sims was not present at the hearing but Mr Arthur Green was present and gave evidence.

Issues:

To dispose of the appeals, the Board must decide whether certain amounts paid by the Ottawa Football Club Limited (hereinafter referred to as the “Ottawa Club”) to Gottlieb & Company in the pertinent taxation years were part of the compensation for the services rendered by the appellants to the Ottawa Club and whether the said payments were made to Gottlieb & Company with the concurrence and for the benefit of the appellants within the meaning of subsection 56(2) of the Income Tax Act SC 1970-71-72, c 63, as amended.

Summary of Facts:

On July 27, 1973, Mr Rudolph Sims signed a contract to play football for the Ottawa Club for the 1973-1974 seasons for a salary of $19,000 a year plus bonuses (Exhibit R-8). Mr Arthur Green signed a one-year contract after the 1973 football season had commenced and received $9,000 for playing 8 games with the Ottawa Club.

At the end of 1973, Sims and Green, both American citizens, returned to the United States. In early spring of 1974 both Sims and Green were approached by Mr Ron Waller to play for the Philadelphia Bell (Philadelphia), a football team in the newly organized and now defunct World Football League (WFL). The appellants trained with “Philadelphia” but both of them should have reported to the Ottawa Club in June of 1974 to play out their options.

In the summer of 1974, the Ottawa Club filed an injunction against the appellants. The appellants then met with Mr Edwin Gottlieb, a lawyer who ws also assistant to the President of “Philadelphia”. It is Mr Gottlieb's evidence that he personally wanted to oppose the injunction but was specifically instructed by the WFL not to do so.

Sims and Green were among other Americans who allegedly did not wish to return to Canada to play out their options. Mr Gottlieb then met with Mr Kenneth Loeb, solicitor for the Ottawa Club, and Mr Frank Clair, its general manager, to discuss and negotiate, if possible, the injunction on Sims and Green et al. No arrangements could be agreed upon to release Sims and Green from playing out their options with the Ottawa Club.

Mr Gottlieb was also president and sole shareholder of Gottlieb & Company, a firm which acted as agent for football players and, according to Mr Gottlieb, was quite successful in finding and making investments for its clients.

Mr Gottlieb testified that having obtained a power of attorney and a representation agreement (Exhibits R-5 and R-6), he negotiated contracts with the Ottawa Club on behalf of Sims and Green, as a result of which the appellants played for Ottawa during the 1974-1975 and 1976 football seasons. The power of attorney and the representation agreement for Mr Green were produced as Exhibits R-5 and R-6.

On August 29, 1974 Mr Sims’ original contract (Exhibit R-8) with the Ottawa Club was amended and the salary previously agreed to was reduced from $19,000 to $11,000 a year (Exhibit R-9). By letter dated August 28, 1974, the Ottawa Club agreed to pay to Gottlieb & Company an amount of $8,000 a year (Exhibit R-10). For the 1975 and 1976 seasons, Mr Sims was to receive a salary of $18,000 for playing for the Ottawa Club (Exhibit R-11).

On July 16, 1974 a contract was signed by which Arthur Green was to play for the Ottawa Club for the 1974 season for a salary of $13,750. Also on July 16, 1974 the Ottawa Club agreed to pay Gottlieb & Company an additional amount of $13,750 (Exhibits R-2 and R-1).

Mr Gottlieb’s evidence is that the consideration for the said payments to Gottlieb & Company was for delivering and keeping the appellants in Ottawa to play out their options with the Ottawa Club.

The payments made as a result of the said contracts and agreements were as follows:

In reassessing the appellants, the Minister of National Revenue added to the appellants’ respective income the amounts paid by the Ottawa Club to Gottlieb & Company in each of the taxation years as being part of the compensation paid to the appellants by the Ottawa Club for the services rendered which were paid to Gottlieb & Company according to the direction and with the concurrence of and for the benefit of the appellants within the meaning of subsection 56(2) of the Act.

Subsection 56(2) of the Act reads as follows:

(2) Indirect payments. A payment or transfer of property made pursuant to the direction of, or with the concurrence of, a taxpayer to some other person for the benefit of the taxpayer or as a benefit that the taxpayer desired to have conferred on the other person shall be included in computing the taxpayer’s income to the extent that it would be if the payment or transfer had been made to him.

Findings:

The amounts involved are not disputed and the issue as to whether the amounts added back to the appellant’s income for the 1974, 1975 and 1976 taxation years are compensation for services rendered by the appellants to the Ottawa Club and paid to Gottlieb & Company with the concurrence of and for the benefit of the appellants is a question of fact. The onus of establishing that they were not is clearly on the appellants and the credibility of the witnesses is essential in satisfying that onus.

It is very difficult indeed for the Board to accept Mr Green’s statement which he repeated on several occasions in giving evidence that he was unaware that Gottlieb & Company received any money in 1974, 1975 and 1976, when in fact Mr Green was signatory to the August 2, 1974 agreement by which the Ottawa Club was to pay Gottlieb & Company $13,750 in 1974 and $15,000 in 1975 (Exhibit R-1). Mr Green also initiated a letter of confirmation to that effect (Exhibit R-4).

Mr Green at first disclaimed any knowledge of a bank account in his name in California in which the amounts paid to Gottlieb & Company by the Ottawa Club were deposited. The evidence was that he had received a letter dated August 13, 1974 in which Mr C James DeHart, vice president of Gottlieb & Company, acknowledges receipt of moneys from the Ottawa Club, pursuant to Mr Frank Clair’s letter and invites Mr Green to send the cheques he received personally from the Ottawa Club to be deposited in his California bank account to meet Mr Green’s budget needs (Exhibit R-7).

Mr Gottlieb, as president of Gottlieb & Company, in identifying the exhibits, confirmed that a clause existed in the power of attorney obtained from Mr Sims and Mr Green by which Gottlieb & Company would receive 10% of all amounts paid to the players personally for services rendered during the duration of the contract. The power of attorney and the representation agreement in respect of Mr Arthur Green were filed as Exhibits R-5 and R-6.

It was Mr Gottlieb’s evidence that the moneys paid by the Ottawa Club to Gottlieb & Company were for delivering Messrs Sims and Green to play out their options with the Ottawa Club. The facts are that the Ottawa Club had served an injunction on Sims and Green and the instructions to Mr Gottlieb by the WFL were not to oppose the injunction. Mr Gottlieb’s allegation that he talked Mr Sims and Mr Green into playing out their options is overridden by the fact that the injunctions against the appellants were at no time waived by the Ottawa Club.

Mr Gottlieb suggested that the appellants played for Ottawa in 1974, 1975 and 1976 at half the standard salary because money meant little to them. This statement was not confirmed by Mr Green. The fact is that the appellants wanted to play football in the United States because the salaries paid there were higher than they were in Canada and indeed Mr Gottlieb testified that the appellants received $30,000 each for signing and training with “Philadelphia” in 1974.

The fact that the appellants received $30,000 each for signing and training with Philadelphia which Mr Gottlieb alleges the appellants were allowed to keep even though they had not played for Philadelphia is immaterial to the instant issue other than indicating that the appellants were not that indifferent to money they received for playing football.

Mr. Gottlieb testified that part of his understanding with the appellants was that they were to play for Ottawa for the 1974, 1975 and 1976 seasons and he would then try to get them on one of the teams of the NFL. Mr Gottlieb alleges that he was instrumental in signing the appellants and that they did play for teams in the NFL in 1977. However in 1974, what real value could have been attached to any promises, assurances or guarantees then given by Mr Gottlieb that he would or could find a berth for the appellants in the NFL in 1977? (Indeed Mr Green returned to play for Ottawa in 1978). Can that consideration by any standards be realistically measured with the price the appellants had to pay in playing football for three consecutive seasons at one half their normal salaries?

Among the other services allegedly rendered by Gottlieb & Company to its clients, namely some 30 football players including the appellants, was to find investment opportunities for the athletes which “were critical to them’. For this purpose, a file and a bank account were opened for each football player represented by the company. Funds received by the players for their services with a football club were deposited in their respective bank accounts and a record kept of withdrawals, expenses, investments, etc. The company received a 10% commission for its services.

It is alleged that for Messrs Green and Sims, the situation was very different in that the moneys received from the Ottawa Club did not belong to the players but were income of the company for services rendered to the Ottawa Club. However, the records of the company for the appellants were the Same and were kept in the same manner as those of other clients and in no way reflected that the payments made by the Ottawa Club and deposited into the appellants’ bank accounts belonged to the company nor can the letter of the vice president of the company to Mr Green be so interpreted (Exhibit R-7).

Mr Gottlieb, in giving evidence, stated that the secretary had made a mistake and apparently so had the vice president of the company. The error was discovered in 1975 as a result of an investigation made by the office of International Operations of the Internal Revenue Office of the United States, at the request of the Government of Canada. With respect to the inquiry, two affidavits sworn by Mr Gottlieb on August 17, 1976 and January 14, 1977 were filed by the company (Exhibits R-12 and R-13) which were accompanied by books and records of Gottlieb & Company.

There are on record (Exhibits R-12 and R-13) a series of bank “deposits” made in the appellants’ accounts at the Manufacturers Bank. In 1975 records of a series of “loans” made by Gottlieb & Company to the appellants’ accounts began to appear in records with respect to and in the amounts of the cheques received by the company from the Ottawa Club.

Other than the above loans or some personal loans which may or may not have been made by Mr Gottlieb personally to the appellants and which are not in issue here, withdrawals made from time to time and for various reasons by the appellants from their respective bank accounts were also treated by Gottlieb & Company as loans made to the appellants. The repayments of these alleged loans by the appellants were then recorded and charged as expenses allegedly incurred by the appellants.

The records also indicate that in 1974 Gottlieb & Company took a 20% commission out of the amounts received from the Ottawa Club, notwithstanding that the power of attorney and the representation agreement stipulated that the appellants were to pay 10% commission to the company. However, the amounts actually aid bv the appellants to the comoanv are the equivalent of a 10% commission, (as stipulated in the representation agreement), on the total of the salaries received by the appellants personally for playing for the Ottawa Club p/us the payments made to Gottlieb & Company, by the Ottawa Club, pursuant to its agreement.

Although Mr Gottlieb still maintained that the moneys received from the Ottawa Club belonged to Gottlieb & Company and not to the appellants, he was unable to give a reasonable and logical explanation as to how or why the company’s records became so complicated and how the vice president and the secretary of Gottlieb & Company could have consistently made the same errors if the amounts received from the Ottawa Club actually belonged to Gottlieb & Company.

In my opinion, the company’s records attached to affidavits R-12 and R-13 substantiate Mr DeHart’s letter to Mr Green (Exhibit R-7) in which there can be no doubt that the payments made to Gottlieb & Company were considered by the company to have been part of the appellants’ remuneration for services rendered to the Ottawa Club and deposited into the appellants’ personal bank account for administrative and investment purposes.

In reviewing the evidence, I have so far come to the conclusion:

1. that the appellants were well aware of what monies were being paid by the Ottawa Club to Gottlieb & Company in 1974, 1975 and 1976 and knew that the monies deposited in their respective California Bank account were part of the normal remuneration they could command as football players for the Ottawa Club.

2. The services that Gottlieb & Company did render to the appellants were normally and adequately covered by a 10% commission and they did not warrant the payment of an additional amount equal to one half of the appellants’ normal yearly salaries as football players.

3. Gottlieb & Company knew that the monies received from the Ottawa Club were in relation to and part of the appellants’ remuneration for playing with the Ottawa Club and were deposited and recorded in the books of the company as belonging to the appellants respectively.

Turning now to the evidence with respect to the Ottawa Club, counsel for the appellants in cross-examination did not succeed in rebutting the evidence of Mr J G Gaudaur, president of the Canadian Football League, Mr Frank Clair, general manager of the Ottawa Football Club and Mr Kenneth Loeb, its solicitor. The pertinent evidence was mostly centred on correspondence relative to the contracts between the Ottawa Club and the appellants and the Ottawa Club and Gottlieb & Company.

As early as September 1974, there was considerable concern on the part of the Ottawa Club and the Canadian Football League as to the nature, the intent and the consequences of the contracts between the Ottawa Club and Gottlieb & Company.

Mr J G Gaudaur sought and obtained an opinion from Mr G D Finlayson of the firm McCarthy & McCarthy, solicitors, which reads as follows: (Exhibit R-14)

McCarthy & McCarthy

Barristers Solicitors

Patent & Trade Mark Agents

September 25, 1974

J. G. Gaudaur, Esq.,

Commissioner,

Canadian Football League, Suite 908,

11 King Street West,

Toronto, Ontario.

Dear Jake:

Re: Ottawa Rough Riders and

Art Green

I have looked over this agreement between the Ottawa Rough Riders and Mr Gottlieb (sic) and I really don’t know what it has to do with Mr Green’s contract. We appear to be finding out about the deal between the Ottawa Rough Riders and the Philadelphia Bell in bits and pieces, but certainly I don’t see how any of the financial responsibilities for that matter can be parcelled out against an individual player.

I don’t know why you would be prepared to register this letter agreement. It seems to me that it is entirely outside of the terms of the football player’s contract and indeed, seems to have nothing to do with the football player at all.

Yours very truly,

McCarthy & McCarthy

(Signed) G. D. Finlayson.

On September 30, 1974, Mr Gaudaur wrote to Mr D Loeb, president of the Ottawa Football Club in which he states in part the following:

CANADIAN FOOTBALL LEAGUE

Suite 908, 11 King Street West, Toronto, Ontario M5H 1A3 Telephone (416) 366-8591

30th September 1974.

Mr. D. Loeb,

President,

Ottawa Rough Rider Football Club,

Suite 602A. 77 Metcalfe Street,

Ottawa, Ontario,

K1P 5L6

Dear David,

You will recall that I undertook to get an opinion from the League Solicitor on the addenda to the contracts of Ottawa Player Green. It is his opinion that any contracts executed between a Club and Player should set forth what the Player is actually getting paid for his playing services. Matters such as this invariably seem to find the light of day. Since you have advised me, in the case of Player Green, that he is in effect, getting paid $27,000 for his playing services, I am put in the position that should anyone ask me to testify as to my understanding of the matter, I would of course have to be guided by what you have told me. What legal consequences there would be insofar as the Ottawa Club is concerned if this matter ever went before the Courts and was found to be an evasion of taxes is not for me to pre-judge or even speculate on.

You have not specifically told me that the cases of Rudy Sims and Al Marcellin are Similar or the same as Green, but I will unless otherwise advised assume that they are, particularly when the contract amendments took place some considerable time after the original contracts were signed.

On July 1, 1975, Mr J G Gaudaur wrote a memorandum to the general managers of the Football Clubs in the NFL part of which reads as follows:

It is realized that at present a Club often finds it necessary to deal with an agent when negotiating for the services of a Player and at times is under pressure to agree to special arrangements with the agent in order to sign the Player.

One such arrangement which has come to our attention, provides that the Club enter into a side agreement with the agent purporting to make payment to him for “delivering” the import Player to the Club. The side agreement is in a letter from the Club to the agent and is attached to the contract. Such side agreement also provides that it may be assigned to any C.F.L. Club. In one such case the side agreement has not been cross referenced as an addendum to the contract nor has it been initialled or signed by the Player. In this instance the side agreement was not accepted as part of the contract and the Club was informed that it was not automatically assignable.

We are informed that in effect, this is intended to be a method by which payment of Canadian income tax by the import Player returning to the United States in the off season, can be avoided legally. In my opinion which is supported by the opinions of our professional advisors, any Club could become vulnerable to charges of consipiracy to defraud the Government of Canada if it entered into such a side agreement, particularly when the sum payable to the agent under the side agreement is substantially higher than an amount that is normally paid to an agent.

We are currently awaiting written confirmation from the League Solicitor as to whether or not by registering a Standard Player Contract with the full knowledge of the existtence (sic) of such a side agreement, the League could be jointly held responsible as “conspiring to defraud the Government of Canada”. If so this office of course, could not register such a contract.

On July 21, 1975, Mr Gaudaur wrote to Mr Frank Clair of the Ottawa Club the following letter:

CANADIAN FOOTBALL LEAGUE

Suite 908, 11 King Street West, Toronto Ontario MSH 1A3 Telephone (416) 366-8591

21st July, 1975.

Mr. Frank Clair,

General Manager,

Ottawa Rough Rider Football Club,

Lansdowne Park,

OTTAWA, Ontario,

K1S 3W7

Dear Frank,

This will acknowledge receipt of your letter of the 18th July 1975, with which you enclosed a copy of an Assignment of Earnings Agreement and a Power of Attorney with respect to Player Arthur Green and a letter of Agreement written from the Ottawa Club to Gottlieb & Company.

Insofar as the Assignment of Earnings Agreement is concerned, I do not consider it to be any function of the Commissioner to investigate the compliance or non- compliance by individual Clubs of the league with the Income Tax Laws of this Country. I have assumed that they are being complied with strictly. It would appear that in this instance there is an attempt to minimize the liability for tax in Canada and if so, I strenuously advise you to seek advice from your tax advisers to the propriety of these arrangements.

Insofar as the Letter of Agreement is concerned between the Ottawa Club and Gottlieb, I note that it provides for asignment to another Club should the Player be traded. You are reminded that so long as the Player signs such an agreement and it is cross referenced to the Player’s contract that it is automaticially assignable to any other Club of the League to which his rights would be assigned. We have checked the contract and find no such cross reference. So that the provisions of the last paragraph of the Letter of Agreement can be carried out it will be necessary to have the contract and the Letter of Agreement cross referenced.

Sincerely,

(Signed) J. G. Gaudaur,

The appellants’ submissions are that the contracts between the Ottawa Club and Mr Sims and Mr Green respectively and the contracts between the Ottawa Club and Gottlieb & Company are clear and unequivocal; that the contracts between the Ottawa Club and Gottlieb & Company are completely independent and severable from the contracts Mr Sims and Mr Green had signed with the Ottawa Club, and finally that the payments which the Ottawa Club was legally obligated to pay to Gottlieb & Company were solely due to and the property of Gottlieb & Company.

Conclusion

Considerable evidence was adduced relative to the concern of the Canadian Football League and the Ottawa Club as to the effect a subsequent assignment of Mr Sims’ and Mr Green’s contracts to another club would have. What salary would the other club pay the players? Who would be responsible for paying Gottlieb & Company under the contracts? What would be the Ottawa Club’s responsibility and liability vis-a-vis the Minister of National Revenue in signing such side agreements?

As interesting as these questions are and whatever the CFL rules in signing up football players may be, they are not, in my opinion, material to the basic issue in these appeals. Before the Ottawa Club can be said to be legally obligated to pay the amounts to Gottlieb & Company and before the latter can be said to be the sole owner of the payments, the validity of the contracts must be established by the appellants.

I accept the fact that the parties to the contracts were at arm’s length but, on the basis of the evidence, I cannot agree with counsel for the appellants that the contracts were clear and unequivocal. The wording of the contracts poses no problem of interpretation but the words do not reflect the intent or the object sought by the contracting parties which is one of the requisites of a valid contract. In my opinion, the evidence clearly established that Mr Green, notwithstanding his verbal testimony, knew that one half of his salary earned for playing with the Ottawa Club was being deposited in his bank account in California and administered on his behalf by Gottlieb & Company. Mr C James DeHart, the vice president of Gottlieb & Company knew that, notwithstanding the contracts, the moneys received from the Ottawa Club belonged to the appellants (Exhibit R-7). Mr Gottlieb, the president of Gottlieb & Company, was unable to provide an adequate explanation for the deposits and withdrawals from the appellants’ bank accounts in California and he had to admit that the company was in fact receiving a 10% commission on the full salaries that should normally have been paid the appellants. Mr Gottlieb was also unable to give an acceptable reason as to why the deposits in the appellants’ bank accounts, after the Office of International Operations’ investigation had taken place, were suddenly shown in the books of the company as loans and further complicated by granting further loans for moneys which had already been identified as previous loans to the appellants. To claim that these were accounting errors is, under the circumstances, insufficient to discharge the onus that the moneys received from the Ottawa Club were owned solely by Gottlieb & Company.

The evidence is clear and abundant that at no time did the Ottawa Club consider the payments made to Gottlieb & Company to be anything other than part of the remuneration for services rendered by the appellants.

The contracts therefore do not reflect the true intent or object of the agreements and, in my opinion, they are invalid and not binding on third parties, particularly in this instance, the Minister of National Revenue.

I also have serious reservations as to the existence of a legal and reasonable consideration in all of the contracts. The alleged services rendered by Gottlieb & Company to the Ottawa Club in delivering Mr Sims and Mr Green, who were still under a legal injunction, does not appear to me to justify payments by the Ottawa Club of $28,000 and $43,750 respectively. The services rendered by Gottlieb & Company to the appellants are also quite nebulous. The appellants were forced to return to Ottawa and play out three seasons with the hope but no guarantee that the company could one day arrange to have them play in the NFL. It would appear to me that a 10% commission on their normal salaries would have been a legal and reasonable consideration without having to forfeit one half of the normal salaries they were offered by the Ottawa Club.

I conclude therefore that the four contracts entered into by the appellants, the Ottawa Football Club and Gottlieb & Company are not valid and not binding on the Minister of National Revenue; that the amounts paid by the Ottawa Football Club to Gottlieb & Company were part of the compensation paid to the appellants for services rendered to the Ottawa Club for the taxation years 1974, 1975 and 1976 and that the said payments were made pursuant to the direction and concurrence of the appellants to Gottlieb & Company for the benefit of the appellants, within the meaning of subsection 56(2) of the Income Tax Act, SC 1970-71-72, c 63, as amended.

For these reasons, the appeals of Mr Rudolph Sims and Mr Arthur Green are therefore dismissed.

Appeals dismissed.