BEFORE
THE
STATE
BOARD
OF
EQUALIZATION
OF
THE
STATE
OF
CALIFORNIA
I
n
the
Matter
of
the
Appeal
of
NEW
YORK
FOOTBALL
GIANTS,
INC.
Appearances
:
For
Appellant:
John
F.
O'Dea
Attorney
at
Law
For
Respondent:
Kendall
Kinyon
Counsel
OPINION
This
appeal
is
made
pursuant
to
section
26077
of
the
Revenue
ana
Taxation
Code
from
the
action
of
the
Franchise
Tax
Board
in
denying
the
claim
of
the
New
York
Football
Giants,
Inc.,
for
refund
of
franchise
tax
in
the
amount
of
$1,117.41
for
the
income
and
taxable
year
1968.
We
are
called
upon
to
interpret
various
provisions
of
the
Uniform
Division
of
Income
for
Tax
Purposes
Act,
Revenue
and
Taxation
Code
sections
25120
through
25139.
-60-
Appeal
of
New
York
Football
Giant
s,
I
nc.
The
New
York
Football
Giants,
Inc.,
appellant
herein,
is
a
corporation
organized
under
the
laws
of
New
York
and
having
its
commercial
domicile
in
that
state.
It
operates
a
professional
football
team
in
the
National
Football
League
(NFL).
Each
year
appellant's
team
plays
some
exhibition
games
and
half
its
regular
season
games
at
its
home
stadium
in
New
York.
The
team
also
plays
occasionally
in
California,
and
during
the
appeal
year
it
had
one
game
in
this
state.
On
its
California
corporate
income
tax
return
1
for
the
year
in
q
uestion,
appellant
apportioned
its
income
between
California
and
other
states
by
using
the
formula
set
out
in
Revenue
and
Taxation
Code
section
25128.
That
section,
which
is
part
of
the
Uniform
Division
of
Income
for
Tax
Purposes
Act
(hereinafter
referred
to
as
"the
Uniform
Act"
or
"the
Act"),
provides:
All
business
income
shall
be
apportioned
to
this
state
by
multiplying
the
income
by
a
fraction,
the
numerator
of
which
is
the
property
factor
plus
the
payroll
factor
plus
the
sales
factor,
and
the
denominator
of
which
is
three.
Respondent
audited
the
return
and
made
certain
adjustments,
described
below,
to
appellant's
business
income,
sales
factor,
and
payroll
factor.
Appellant
contends
that
each
of
these
adjustments
was
improper.
Business
Income
Prior
to
1966
appellant
had
an
exclusive
franchise
to
operate
an
NFL
team
in
New
York.
In
that
year,
however,
the
NFL
merged
with
another
league
and
a
second
team
was
granted
an
NFL
franchise
in
the
same
For
convenience,
respondent
apparently
allows
professional
f
ootball
teams
to
file
corporate
income
tax
returns,
rat
h
er
than
franchise
tax
returns,
provided
they
compute
their
tax
liability
under
the
Franchise
tax
provisions
of
chapter
2
of
the
Bank
and
Corporation
Tax
Law.
-61-
1
Appeal
of
New
York
Football
Giants,
Inc.
area.
Under
the
terms
of
the
merger
the
teams
from
the
other
league
agreed
to
pay
an
indemnity
in
yearly
install
-
ments
to
compensate
appellant
for
the
loss
of
its
exclusive
territorial
rights.
Appellant
received
a
$275,462
payment
under
this
agreement
during
the
year
in
question,
and
the
Internal
Revenue
Service
apparently
treated
the
payment
as
a
capital
gain
for
federal
income
tax
purposes.
The
issue
presented
in
this
portion
of
the
appeal
is
whether
that
payment
should
be
apportioned
among
California
and
other
states
by
formula,
as
respondent
contends,
or
whether
it
should
be
allocated
entirely
to
New
York.
Revenue
and
Taxation
Code
section
25128
requires
all
business
income
to
be
apportioned
by
formula.
The
term
"business
income"
is
defined
in
subdivision
(a)
of
section
25120
as
follows:
"Business
income"
means
income
arising
from
transactions
and
activity
in
the
regular
course
of
the
taxpayer's
trade
or
business
and
includes
income
from
tangible
and
intangible
property
if
the
acquisition,
management,
and
disposition
of
the
property
constitute
integral
parts
of
the
taxpayer's
regular
trade
or
business
operations.
Capital
g
ains,
however,
to
the
extent
they
do
not
constitute
business
income,
are
not
subject
to
formula
apportionment
but
rather
are
specifically
allocated
under
the
provisions
of
Revenue
and
Taxation
Code
section
25125.
In
particular,
subdivision
(c)
of
that
section
provides:
Capital
gains
and
losses
from
sales
of
intangible
personal
property
are
allocable
to
this
state
if
the
taxpayer's
commercial
domicile
is
in
this
state.
Appellant
contends
that
the
payment
in
question
is
not
business
income
and
that,
since
it
is
a
capital
gain,
it
must
therefore
be
allocated
to
the
state
of
appellant's
commercial
domicile
under
section
25125.
In
support
of
this
-62-
Appeal
of
New
York
Football
Giants,
Inc.
position,
appellant
contends
that
the
term
"business
income"
includes
only
income
from
transactions
which
occur
in
the
regular
course
of
the
taxpayer's
trade
or
business.
We
considered
this
issue
in
the
Appeal
of
Borden
,
Inc.,
decided
this
day,
and
decided
it
adversely
to
appellant.
For
the
reasons
expressed
in
that
opinion,
we
conclude
that
the
term
"business
income"
includes
income
from
tangible
and
intangible
property
if
the
acquisition,
management,
and
disposition
of
the
property
constitute
integral
parts
of
the
taxpayer's
regular
trade
or
business
operations,
even
though
the
income
may
arise
from
an
occasional
sale
or
other
extraordinary
transaction.
I
n
this
case,
appellant's
business
is
the
operation
of
an
NFL
franchise.
The
exclusive
nature
of
the
franchise
was
an
important
aspect
of
the
business,
and
was
acquired
or
developed
and
maintained
as
part
of
appellant's
normal
busi
-
ness
operations.
It
undeniably
enhanced
the
value
of
the
franchise
and
contributed
materially
to
the
production
of
business
income.
For
these
reasons
we
conclude
that
the
acquisition,
management,
and
disposition
of
the
exclusive
territorial
right
were
integral
parts
of
appellant's
regular
business
operations,
and
that
the
income
from
its
disposition
therefore
constitutes
business
income.
(Cal.
Admin.
Code,
tit.
18.,
reg.
25120,
subd.
(c)
(2)
(art.
2);
Appeal
of
Velsico
l
Chemical
Corp
.,
Cal.
St.
Bd.
of
Equal
.,
Oct.
5,
1965;
Appeal
of
Borden
,
Inc
.,
supra.)
Sales
Factor
Appellant
receives
a
part
of
its
income
each
year
from
the
sale
of
tickets
to
its
home
games.
Under
the
NFL's
constitution
and
by-laws,
appellant
is
obligated
to
pay
either
:
a
portion
of
such
gate
receipts
or
a
flat
fee
to
the
visiting
team
at
each
home
game.
In
its
apportionment
formula
for
the
year
in
question,
appellant
included
its
entire
home
game
gate
receipts
in
the
denominator
of
the
sales
factor.
Respondent
determined,
however,
that
the
portion
of
the
gate
receipts
paid
to
visiting
teams
should
be
excluded
from
the
sales
factor,
and
adjusted
appellant's
return
accordingly.
-63-
Appeal
of
New
York
Football
Giants,
Inc.
Revenue
and
Taxation
Code
section
25134
defines
"sales
factor"
as
a
fraction
whose
numerator
is
the
taxpayer's
total
sales
in
California
during
the
income
year,
and
whose
denominator
is
the
taxpayer's
total
sales
everywhere
during
that
year.
For
purposes
of
the
sales
factor,
the
term
"sales"
means
"all
gross
receipts
of
the
taxpayer,"
with
certain
exceptions
not
relevant
here.
(Rev.
&
Tax.
Code,
§
25120,
subd.
(e).)
Respondent
appears
to
concede
that
appellant's
entire
home
game
gate
receipts
are
part
of
its
"gross
receipts,"
as
that
term
is
commonly
understood
(see
Artnell
Co.
v.
Commissioner,
400
F.2d
981,
986
(7th
Cir.
1968)),
and
thus
properly
includible
in
the
denominator
of
its
sales
factor
under
a
literal
reading
of
section
25134.
Respondent
argues,
however,
that
it
has
the
discretion
to
require
taxpayers
to
compute
their
sales
factors
in
a
manner
other
than
that
set
out
in
the
statute,
and
that
it
properly
exercised
that
discretion
in
this
case.
In
support
of
its
position
respondent
relies
on
a
prior
decision
of
this
board
involving
the
same
taxpayer,
the
Appeals
of
New
York
Football
Giants,
Inc.,
et
al.,
decided
August
2
7
,
1962.
In
that
case
we
approved
an
adjustment
to
appellant
’
s
sales
factor
identical
to
the
one
at
issue
here
on
the
ground
that
the
adjustment
was
reason
-
able.
The
basis
for
our
decision
was
the
then
well
settled
rule
that
respondent
has
broad
discretion
in
defining
the
factors
to
be
used
in
apportionment
formulas
(El
Dorado
Oil
Works
v.
M
c
C
ol
gan
,
34
Cal.
2d
731
[215
P.2d
4]
(1950),
appeal
dismissed,
340
U.S.
801
[95
L.
Ed.
589](1950)),
and
that
the
burden
is
on
the
taxpayer
to
show
wherein
respondent's
formula
is
arbitrary
and
unreasonable.
(RKO
Teleradio
Pictures,
Inc.
v.
Franchise
Tax
Board,
246
Cal.
App.
2d
812,
819
[55
Cal
.
Rptr.
299](1966).)
After
our
decision
in
the
Giants
case,
however,
California
adopted
the
Uniform
Act.
One
of
the
Act
’
s
provisions,
Revenue
and
Taxation
Code
section
25137,
describes
and
limits
the
circumstances
under
which
discretionary
adjustments
may
be
made
to
the
Act's
allocation
and
apportionment
provisions.
Section
25137
states
:
-64-
Appeal
of
New
York
Football
Giants,
Inc.
If
the
allocation
and
apportionment
pro
-
visions
of
this
act
do
not
fairly
represent
the
extent
of
the
taxpayer's
business
activity
in
this
state,
the
taxpayer
may
petition
for
or
the
Franchise
Tax
Board
may
require,
in
respect
to
all
or
any
part
of
the
tax
-
payer's
business
activity,
if
reasonable:
Because
of
the
adoption
of
the
Uniform
Act,
our
decision
in
the
prior
Giants
case
is
no
longer
controlling.
The
stated
purpose
of
the
U
n
iform
Act
is
"to
make
uniform
the
law
of
those
states
which
enact
it."
(Rev.
&
Tax.
Code,
§
25138.)
Taxpayers
subject
to
the
Act
are
required
to
allocate
and
apportion
their
income
in
accordance
with
its
provisions.
(Rev.
&
Tax.
Code,
§
25121.)
Discretionary
adjustments
to
the
statutory
allocation
and
apportionment
procedures
are
now
authorized,
only
under
exceptional
circum
-
stances,
that
is,
only
where
those
procedures
do
not
fairly
represent
the
extent
of
the
taxpayer
'
s
business
activity
in
this
state.
(Amoco
Production
Co.
v.
Ar
n
old,
supra;
Keesling
and
Warren,
California's
Uniform
Division
of
Income
for
Tax
Purposes
Act,
15
U.C.L.A.
L.
Rev.
156,
171
(1967
)
.)
In
order
to
insure
that
the
Act
is
applied
as
-65-
Separate
accounting;
(a)
(b)
The
exclusion
of
any
one
or
more
of
the
factors
;
(c)
The
inclusion
of
one
or
more
addi
-
tional
factors,
which
will
fairly
represent
the
taxpayer's
business
activity
in
this
state;
or
(d)
The
employment
of
any
other
method
to
effectuate
an
equitable
allocation
and
apportionment
of
the
taxpayer's
income.
This
section
authorizes
exceptional
allocation
and
apportion
-
ment
methods
only
where
the
methods
specified
in
the
Uniform
Act
do
not
fairly
represent
the
extent
of
the
taxpayer's
in-state
business
activity.
(Kennecott
Copper
Corp
.,
et
al.,
v.
State
Tax
Commission
,
27
Utah
2d
119
[49
3
P
.2d
632](1972),
appeal
dismissed,
409
U.S.
973
[34
L.Ed.
2d.
237]
(1972);
Donald
M.
Drake
Co.
v.
Department
of
Revenue
,
236
Or.
26
[500
P
.2d
1041]
(1972);
Amoco
Pro
duction
Co.
v.
A
rnold
,
213
Kan.
636
[518
P.2d
453](1974).)
Appeal
of
New
York
Football
Giants,
Inc.
uniformly
as
possible,
we
hold
that
the
party
who
seeks
to
deviate
from
the
statutory
formula,
whether
the
taxpayer
or
the
taxing
agency,
will
bear
the
burden
of
proving
that
such
exceptional
circumstances
are
present.
(Donald
M.
Drake
Co.
v.
Department
of
Revenue,
supra,
263
Or.
at
32
[500
P.2d
at
1044]
(1972).)
As
pointed
out
above,
appellant
computed
its
sales
factor
for
the
appeal
year
precisely
as
required
by
Revenue
and
Taxation
Code
section
25134.
There
is
nothing
in
the
record
in
this
case
to
suggest
that
computing
the
sales
factor
in
this
manner
did
not
fairly
represent
the
extent
of
appellant's
business
activity
in
California.
We
therefore
conclude
that
respondent
erred
in
making
the
adjustment
in
question
to
appellant's
sales
factor.
(Donald
M.
Drake
Co.
v.
Department
of
Revenue,
supra.)
Payroll
Factor
The
final
issue
concerns
the
computation
of
appellant's
payroll
factor.
That
factor
is
defined
in
Revenue
and
Taxation
Code
section
25132
as
a
fraction
whose
numerator
is
the
total
compensation
paid
by
the
taxpayer
in
California
during
the
income
year,
and
whose
denominator
is
the
total
compensation
which
the
taxpayer
paid
everywhere
during
that
year.
Under
Revenue
and
Taxation
Code
section
25133,
compensation
is
deemed
to
have
been
paid
in
this
state
if:
-66-
(a)
The
individual's
service
is
per
-
formed
entirely
within
the
state;
or
(b)
The
individual's
service
is
per
-
formed
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
(
1
)
the
base
of
operations
or,
if
there
is
no
base
of
operations,
the
place
from
which
the
service
is
Appeal
of
New
York
Football
Giants,
Inc.
directed
or
controlled
is
in
the
state,
or
(2)
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.
Appellant
contends
that
the
compensation
it
paid
to
its
employees
should
be
attributed
entirely
to
New
York,
and
that
the
numerator
of
its
payroll
factor
should
therefore
be
zero.
Respondent
argues
that
since
appellant
’
s
team
played
one
game
in
this
state
during
the
appeal
year,
a
portion
of
the
compensation
paid
b
y
appellant
should
be
attributed
to
California
based
on
the
number
of
working
days
its
employees
spent
in
this
State.
We
agree
with
respondent.
Under
a
literal
reading
of
section
25133,
appellant
concededly
paid
no
compensation
in
this
state
during
the
appeal
year.
As
we
explained
above,
however,
Revenue
and
Taxation
Code
section
25137
allows
reasonable
adjustments
to
the
allocation
and
apportionment
provisions
of
the
Uniform
Act
if
those
provisions
do
not
fairly
reflect
the
extent
of
the
taxpayer's
business
activity
i
n
this
state.
Computing
appellant's
payroll
factor
in
the
manner
prescribed
in
the
Uniform
Act
would
assign
its
entire
payroll
to
New
York.
This
would
clearly
not
reflect
the
fact
that
appellant's
team
plays
a
number
of
games
outside
New
York,
including
occasional
games
in
California.
Respondent's
approach,
on
the
other
hand,
is
based
on
the
reasonable
premise
that
compensation
should
be
partially
attributed
to
each
state
where
the
taxpayer's
employees
have
rendered
services.
It
is
also
consistent
with
the
method
used
to
apportion
the
income
of
individual
football
players.
(See
Appeal
of
Dennis
F.
and
Nancy
Partee,
Cal.
St.
Bd.
of
Equal.,
Oct.
6,
1976.
)
We
accordingly
find
no
error
in
the
adjustment
to
appellant's
payroll
factor.
(Rev.
&
Tax.
Code,
§
25137.)
-67-
Appeal
of
New
York
Football
Giants,
Inc
.
ORDER
Pursuant
to
the
views
expressed
in
the
opinion
of
the
board
on
file
in
this
proceeding,
and
good
cause
appearing
therefor,
IT
IS
HEREBY
ORDERED,
ADJUDGED
AND
DECREED,
pursuant
to
section
26077
of
the
Revenue
and
Taxation
Code,
that
the
action
of
the
Franchise
Tax
Board
in
denying
the
claim
of
the
New
York
Football
Giants,
Inc.,
for
refund
of
franchise
tax
in
the
amount
of
$1,117.41
for
the
income
and
taxable
year
1968,
be
modified
in
accordance
with
the
views
expressed
in
this
opinion.
In
all
other
respects
the
action
of
the
Franchise
Tax
Board
is
sustained.
-68-
ATTEST:
Done
at
Sacramento,
California,
this
3d
day
of
February,
1977,
by
the
State
Board
of
Equalization.
,
Executive
Secretary
