Must an out-of-state professional team file a California return and pay minimum franchise tax for a year when it plays a game in California but receives no gate revenue?

Plain-English summary

An out-of-state professional athletic team is doing business in California for every taxable year in which it enters the state to play a league game. The result does not depend on whether the visiting team receives any share of the gate receipts.

Because Revenue and Taxation Code section 25141 treats an entity operating a professional athletic team as a corporation, a qualifying visiting team must file a California Corporation Franchise or Income Tax Return and pay the applicable minimum franchise tax for each year in which it plays a California game. The ruling stated that the minimum tax was $800 when it was issued in 2019; the current amount should be verified.

The ruling applies the rule to four scheduling patterns:

• Several California games in one calendar year: The team files and pays minimum tax for that year.
• One season spanning two calendar years, with California games in both: The team files and pays for both taxable years. It does not matter that the games belong to the same league season.
• Long gap followed by a California postseason game: The team files and pays for the earlier year containing a California regular-season game and for the later year containing the California playoff game, but not for intervening years with no California games.
• A preseason exhibition game only: The exhibition game still counts. The team files and pays for that taxable year even though the result does not affect postseason eligibility.

Section 25141 also contains reciprocal apportionment rules for California and out-of-state teams, but the filing and minimum-tax conclusion applies even where the visiting team receives no direct gate revenue from the California game.

What this means for you

Out-of-state professional teams

Track California appearances by taxable year, not only by league season. A schedule that crosses December 31 can create filing and minimum-tax obligations in two years. Include preseason and postseason appearances in the review.

Sports leagues and team finance departments

Do not use revenue-sharing arrangements as the nexus test. Under the ruling, the act of entering California to play the league game is enough even when the home team keeps 100% of gate receipts.

Accountants and tax professionals

Confirm that the client meets section 25141's definition of a professional athletic team, including the employment, league-size, and attendance requirements quoted in the ruling. Then identify every taxable year containing a California league game and verify the current return and minimum-tax rules.

Common questions

Q: Does a visiting team avoid California filing if it receives no ticket revenue?
A: No. The ruling requires filing and minimum tax even when the California host keeps all gate receipts.

Q: Does one league season create only one tax-year obligation?
A: Not necessarily. If the team plays California games on both sides of year-end, it is doing business in California in both taxable years.

Q: Does a playoff game count?
A: Yes. A California postseason game creates doing-business status for the taxable year in which it occurs.

Q: Does a preseason exhibition game count?
A: Yes. The ruling says it is immaterial that the game is not a regular-season game.

Q: What about years when the team plays no games in California?
A: On the ruling's facts, the team was not doing business in California under section 23101(a) in those years and had no filing or minimum-tax duty based on game play.

Citations and references

• Cal. Rev. & Tax. Code § 23101(a) (doing business)
• Cal. Rev. & Tax. Code § 23153(a)-(b) (minimum franchise tax)
• Cal. Rev. & Tax. Code § 18601(a) (corporation return filing)
• Cal. Rev. & Tax. Code § 25141(a)(3) (professional athletic team definition)
• Cal. Rev. & Tax. Code § 25141(c)-(e) (out-of-state team apportionment, reciprocity, and corporate treatment)
• Stats. 1983, ch. 961, § 3 (legislative intent discussed by the ruling)

Source

• Landing page: California FTB Legal Rulings
• Official PDF: Legal Ruling 2019-03

Original ruling text

STATE OF CALIFORNIA
chair Betty T. Yee | member Malia M. Cohen | member Keely Bosler
FRANCHISE TAX BOARD
Legal Division MS A260
PO Box 1720
Rancho Cordova, CA 95741-1720

December 19, 2019

LEGAL RULING – 2019-03

SUBJECT: California Tax Return Filing Requirements and Minimum Tax Obligations of an Out-Of-State Professional Athletic Team (California Revenue and Taxation Code ("CRTC") Section 25141)

ISSUE

Whether an out-of-state professional athletic team (“out-of-state team”) has a California tax return filing requirement and is subject to minimum tax imposed under CRTC sections 23151 and 23151.1, where the out-of-state team does not share in the gate revenue generated from games played in California? SITUATION ONE

Taxpayer is a "professional athletic team" as defined in CRTC section 25141(a)(3) 1. Taxpayer is a calendar year taxpayer. Taxpayer's home territory is located outside of California. The league in which Taxpayer plays has a season that begins in October of Year 1 and ends in May of Year 2. The league in which Taxpayer participates provides that a team hosting a league game is entitled to 100 percent of the gate receipts for that game and visiting teams do not share any of the gate receipts.

1 CRTC section 25141(a)(3) defines a "professional athletic team" as "any entity which has all of the following characteristics:
(A) Employs concurrently during the taxable year five or more persons, who are compensated for being participating members of an athletic team engaging in public contests.
(B) Is a member of a league composed of at least five entities which are engaged in the operation of an athletic team and which are located in this and other states or in other countries.
(C) Has total minimum attendance in the aggregate for all contests wherever played during the taxable year of 40,000 persons.

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In Season 1, between October and December of Year 1, Taxpayer visits California multiple times to play league games against California-based teams from the same league. Taxpayer does not come to California to play any league games in Year 2.

SITUATION TWO

Assume the same facts as Situation One except that in addition to Taxpayer's visits to California in Year 1, the league schedule also requires Taxpayer to play one league game in California during Year 2 of Season 1.

SITUATION THREE

Assume the same facts as Situation One except the league's "regular" season lasts from September through December of the same year. If a team has a sufficient regular season win-loss record to enter the playoffs, the team will play one or more "post- season" games in January of the following year. In Season 1, Taxpayer enters California to play a game in Year 1. Taxpayer does not have any post-season games in Season 1 and thus plays no games in January of Year

2. In Season 2 and 3, Taxpayer has no games in California. In the regular season of
   Season 4 (September through December of Year 4), Taxpayer does not enter California to play any games. However, Taxpayer has a successful regular season and visits California for a Season 4 post-season game in January of Year 5. Taxpayer does not play any other games in California in Year 5.

SITUATION FOUR

Assume the same facts as Situation One. During a taxable year, Taxpayer plays no "regular season" games in California. However, pursuant to the league schedule, Taxpayer does play a pre-season "exhibition game" 2 in California against a team based in California.

LAW & ANALYSIS

In California, taxpayers are subject to tax return filing requirements if they are doing business in this state. Specifically, CRTC section 23101, subdivision (a), defines "doing business" as "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit." CRTC section 23153, subdivisions (a) and (b), provide that every corporation doing business within California shall be subject to the minimum franchise tax, which is currently $800, and CRTC section 18601, subdivision (a), provides that such corporations have an obligation to file a California Corporation Franchise or Income Tax Return. For purposes of the minimum tax obligation, CRTC

2 An "exhibition game" is a game in which the win or loss does not contribute to a team's inclusion or exclusion in the post-season.

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section 25141(e) provides that any "entity which operates a professional athletic team shall be treated as a corporation." CRTC section 25141 is the controlling authority governing California income and franchise taxation of professional athletic teams and generally provides for reciprocal apportionment rules for professional athletic teams based within California and those based outside of California. Specifically, with respect to out-of-state teams, CRTC section 25141(c)(1)(B), (c)(2)(B), and (c)(3)(B) assigns a three-factor apportionment formula in which all factors are deemed to be zero. However, if an out-of-state team's home state allocates or apportions business income of California teams playing in that state, subdivision (d)(2) provides that business income of the out-of-state team playing in California will be subject to the same allocation or apportionment method in California as the method imposed on the California teams in that state. The Legislature enacted CRTC section 25141 in 1983 as a direct response to Boston Hockey Professional Association, Inc. v. Franchise Tax Board, (December 29, 1982, C317618 [nonpub.opn.]) ("BHPA I"). BHPA I is a non-precedential opinion, in which the Court of Appeal held that a National Hockey League team was not doing business in California because the non-revenue generating games it played in California were not unitary with its revenue generating home games and because the team in question did not otherwise receive direct pecuniary gain from their participation in California games. When enacting CRTC section 25141, the Legislature explicitly stated its intent to supersede BHPA I, and to not disturb the unitary concept, and to not limit the out-of- state teams' minimum tax obligations. 3 Accordingly, an out-of-state team is required to file a California tax return and to pay an applicable minimum tax for each taxable year in which the out-of-state team plays any league games in California, even if the out-of-state team does not share in the gate revenue generated from such games.

HOLDING – SITUATION ONE

Taxpayer is doing business in California within the meaning of CRTC section 23101(a) in Year 1 because it has entered into California to play a league game in that year. Accordingly, Taxpayer is required to file a California Corporation Franchise or Income Tax Return and to pay a minimum tax for Year 1.

3 Stats. 1983, ch. 961, section 3.
(Subsequent to the enactment of CRTC section 25141, in 1986, a Los Angeles trial court nonetheless extended the holding of BHPA I to California's minimum tax requirements in Boston Hockey Professional Association, Inc. v. Franchise Tax Board, (Super. Ct. L.A. County, 1986, No. C-557918,) ("BHPA II"). However, BHPA II only dealt with a taxable year prior to the operative date of CRTC section 25141.)

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HOLDING – SITUATION TWO

Taxpayer is doing business in California within the meaning of CRTC section 23101(a) in both Year 1 and Year 2 because it has entered into California to play league games in each taxable year; it is immaterial that the visits are part of the same season of game play in Taxpayer's league. Accordingly Taxpayer is required to file a California Corporation Franchise or Income Tax Return and to pay a minimum tax for Year 1 and Year 2.

HOLDING – SITUATION THREE

Taxpayer is doing business in California within the meaning of CRTC section 23101(a) in Year 1 because it has entered into California to play a league game in that year. Taxpayer is not doing business within the meaning of CRTC section 23101(a) in California in Year 2, Year 3, or Year 4 because Taxpayer did not enter California to play league games in any of those years. Taxpayer is doing business in California within the meaning of CRTC section 23101(a) in Year 5 because, to play its post-season game, it has entered into California to play a league game in that year. Accordingly Taxpayer is required to file a California Corporation Franchise or Income Tax Return and to pay a minimum tax for Year 1 and Year 5.

HOLDING – SITUATION FOUR

Taxpayer is doing business in California within the meaning of CRTC section 23101(a) in the year because it has entered into California to play a league game in that year. It is immaterial that the game is not a regular season game. Accordingly Taxpayer is required to file a California Corporation Franchise or Income Tax Return and to pay a minimum tax for the taxable year.

DRAFTING INFORMATION

The principal author of this legal ruling is Kathy Shin of the Franchise Tax Board, Legal Division. For further information regarding this ruling, contact Ms. Shin at the Franchise Tax Board, Legal Division, P.O. Box 1720, Rancho Cordova, California 95741-1720.