Was a guaranteed payment to a nonresident performer California-source income when no services were requested or performed and the contract allowed work in California or New York?

Plain-English summary

California Legal Ruling 123 held that a guaranteed payment to a nonresident performer was not California-source income when the company requested no services and the performer did no work for the payment.

The contract allowed any requested services to be performed in either California or New York. That possible New York performance prevented treating the payment as compensation for services that necessarily would have occurred in California.

A worldwide promise not to perform similar services for other companies also did not give the payment a California source.

Facts addressed by the ruling

A entered into a personal-service agreement with a motion-picture company.

The agreement allowed the services to be performed in California or New York. If the company did not call upon A to perform any services before the termination date, A would receive a specified payment.

The company never exercised the option to require services. It paid A the guaranteed amount after withholding California personal income tax.

A filed a refund claim and was a nonresident before the contractual right to the payment arose at termination.

Why the personal-service sourcing rule did not apply

Former section 17951 and its regulations sourced compensation to California when paid for personal services performed in the state.

Here, no services were performed for the amount paid.

The contract also did not require California performance. Had services been requested, they could have occurred in New York instead.

The payment therefore lacked the California-service connection required by the historical rule.

Why the negative covenant did not create source

The agreement prevented A from performing similar services for other companies.

But the restriction was not limited to California; it applied everywhere. The ruling concluded that this worldwide negative covenant did not convert the guaranteed payment into California-source income.

Why former section 17596 did not apply

The motion-picture company knew well before termination that it would not perform its side of the agreement by requesting A's services.

FTB nevertheless found former section 17596 inapplicable. A had no contractual right to the income until the termination date and had become a nonresident before that date.

What this means for you

Nonresident performers

Under the historical ruling, a guaranteed no-service payment was not automatically sourced to California merely because California was one possible place of performance.

Motion-picture companies

The contract's permitted work locations, the trigger for payment, the actual services performed, and the scope of restrictive covenants affected sourcing.

Accountants and tax professionals

Identify what the payment compensates, whether any services occurred, where performance was permitted, when the right to payment vested, the taxpayer's residence at that time, and the scope of any negative covenant.

Common questions

Q: Did A perform any services for the payment?

A: No.

Q: Were all potential services required to occur in California?

A: No. The contract allowed performance in California or New York.

Q: Did the negative covenant create California-source income?

A: No. It prohibited competing services everywhere, not only in California.

Q: When did A acquire the right to payment?

A: At the contract's termination date, after A had become a nonresident.

Q: Did the company's advance decision not to use A trigger former section 17596?

A: No, according to the ruling.

Citations and references

• Former Cal. Rev. & Tax. Code §§ 17596 and 17951

Source

• Landing page: California FTB Legal Rulings
• Official HTML: Legal Ruling 123

Original ruling text

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California Franchise Tax Board Legal Ruling 1954-123 May 4, 1954

Payments to a nonresident under a personal service contract are not from sources within California when no services were performed under the contract for such payments.

Nonresidents: Income From California Sources

A, a nonresident, entered into an agreement with X Motion Picture Co. to perform certain personal services in either California or New York. The agreement provided that if A was not called upon to perform any services prior to the termination date, he would be paid a certain amount. The option was never exercised and A was paid the amount less an amount withheld for California Personal Income Tax. A claim for refund of the amount has been filed. Advice is requested whether the payment was from California sources.

Section 17951 and the corresponding regulations provide that payments for personal services performed in California have their source in California.  Since no services were performed for the amounts paid, the amounts did not have their source in California. A agreed to perform his services either in New York or California. Since he may have performed the services in New York, such contingency prevents the contention that the payments were for services that would have been performed in California. Nor would the fact that the contract contained a negative covenant preventing A's performing similar services for other companies give the amounts a California source. Under the agreement A not only agreed not to engage in such services in California but not to perform such services anywhere else. The further fact that X Co. knew well in advance they were not going to perform on their part does not bring into application Section 17596 and thus give the amount a California source. Under the contract A had no right to the income until the termination date and since he became a nonresident prior to that date Section 17596 is not applicable.

Last updated: 09/24/2025