Opinion
No. 79-685
Decided February 6, 1980.
Taxation — Franchise tax — Computation — Net income method — Payroll factor — R.C. 5733.05(B)(2)(b)(ii) — "Base of operations," construed.
APPEAL from the Board of Tax Appeals.
This is an appeal by Cincinnati Bengals, Inc. (hereinafter appellant), from a decision of the Board of Tax Appeals, which affirmed the determination of the Tax Commissioner. The board held that 100 percent of appellant's payroll should be apportioned to Ohio in computing the R.C. 5733.05(B) apportionment formula to determine the Ohio franchise tax liability of the corporation for the years 1973 and 1974.
Appellant, an Ohio corporation with its principal place of business in Cincinnati, operates a professional football team, a member of the National Football League. Appellant's principal sources of income are its proportionate share of receipts from television networks and live-gate ticket sales.
The football players are seasonal employees. During training camp and the pre-season schedule, the players are paid stipulated amounts pursuant to a collective bargaining agreement. Each player's regular season pay is governed by the provisions of his Standard Player Contract. Under the contract, the player is paid on a per-game basis. If the player chooses not to play in a game, he is not paid for that game and receives no pay for the days on which he attended practice in preparation for the game. In order to be paid, the player must make himself available for the games unless he is excused for medical reasons.
During the 1971 football season (1973 franchise tax year), appellant played a total of six pre-season games, of which three were played outside Ohio. For the 1972 football season (1974 franchise tax year), appellant played a total of six pre-season games, of which two were played outside Ohio. For both the 1973 and 1974 franchise tax years, appellant played a total of 14 regular season games, of which six were played outside Ohio.
Appellant also employs officers, coaches and supervisory personnel who travel with the team to game sites, including those outside Ohio.
In addition to the above employees, the appellant employs a number of part-time employees commonly referred to as scouts. These employees travel throughout the country observing and evaluating prospective professional football players. While the scouts do some work in Ohio, they are required to observe players throughout the country.
For the years at issue herein, appellant computed and paid its Ohio franchise tax under the net income method set forth in R.C. 5733.05(B). On its returns for both taxable years, appellant allocated 100 percent of its property to Ohio, but allocated portions of its payroll and sales to other states.
Subsequent to audit and review of these returns, the Tax Commissioner, appellee herein, issued two franchise tax assessments to appellant. Timely applications for review and correction were filed. Thereafter, in separate certificates of determination for each report year, the commissioner determined that the entire compensation paid to the players should be apportioned to Ohio in accordance with R.C. 5733.05(B)(2)(b)(ii).
On December 9, 1977, appellant filed notices of appeal with the Board of Tax Appeals. On April 30, 1979, the board affirmed the commissioner's determination.
The cause is now before this court upon an appeal as a matter of right.
Messrs. Taft, Stettinius Hollister, Mr. Stephen M. Nechemias and Mr. James H. Brun, for appellant.
Mr. William J. Brown, attorney general, and Mr. John C. Duffy, Jr., for appellee.
Appellant, in its sole proposition of law, asserts that compensation paid to the football players and part-time scouts for games played and services performed outside the state of Ohio does not constitute compensation paid in the state of Ohio for purposes of determining the franchise tax "payroll factor," pursuant to R.C. 5733.05(B)(2)(b).
Appellant improperly applied R.C. 5733.05(B)(2)(b) by not allocating 100 percent of the corporation's payroll to Ohio for purposes of calculating the franchise tax.
The Ohio franchise tax is an excise tax levied against a corporation "* * * for the privilege of exercising its franchise during the calendar year for which such amount is payable * * *." R.C. 5733.01(A). The tax rates are determined by R.C. 5733.06. The tax rates, as described in R.C. 5733.06, are applied to the value of the issued and outstanding shares of stock, pursuant to R.C. 5733.05. The value of the issued and outstanding shares of stock is determined by either the "net worth" method (R.C. 5733.05[A]) or the "net income" method (R.C. 5733.05[B]). For the years in question, appellant computed its Ohio franchise tax under the "net income" method. The amount of appellant's payroll allocated to Ohio is relevant in determining the amount of the franchise tax.
R.C. 5733.06 states, in pertinent part, as follows:
"The tax hereby charged each corporation subject to this chapter shall be the sum of divisions (A) and (B) of this section or division (C) of this section, whichever is greater:
"(A) Four percent upon the first twenty-five thousand dollars of the value of the taxpayer's issued and outstanding shares of stock as determined under division (B) of section 5733.05 of the Revised Code.
"(B) Eight percent upon the value so determined in excess of twenty-five thousand dollars; or
"(C) Five mills times that portion of the value of the issued and outstanding shares of stock as determined under division (A) of section 5733.05 of the Revised Code."
Initially, it is noted that appellant did not raise the issue of allocation of its scouts' compensation in its notices of appeal to the Board of Tax Appeals. Accordingly, that issue is not before this court. Gochneaur v. Kosydar (1976), 46 Ohio St.2d 59, 66.
The remaining critical issue is whether compensation to appellant's football players which is allocable to non-Ohio games is compensation paid in Ohio for purposes of determining the amount of appellant's Ohio franchise tax.
R.C. 5733.05(B)(2)(b)(ii) provides, in pertinent part:
"Compensation is paid in this state if: * * * (3) some of the service is performed within this state and either the base of operations, or if there is no base of operations, the place from which the service is directed or controlled is within this state * * *."
It is undisputed that some of the service, such as the playing of some of the games, is within Ohio. The second prong of the test is whether there is a "base of operations" or the "direction and control" of the corporation is within Ohio.
We agree with the board's holding that appellant's "base of operations" is within Ohio.
In the mechanics of operating a professional football team which represents Cincinnati, appellant most definitely has its "base of operations" in Ohio. Pre-season training and a majority of the practice sessions are in Ohio. The players are briefed as to football strategy and the overall game plan for each upcoming game in Ohio. A majority of the games, both pre-season and the regular season, are played in Ohio. The players return to Ohio immediately following all games played outside Ohio. In addition to the foregoing, most of the administrative decisions concerning the players, such as how they are transported, when they meet, where they play, and even what and where they eat, are controlled and coordinated from appellant's base of operations in Cincinnati.
Accordingly, the decision of the Board of Tax Appeals, determining that Ohio is the players' base of operations, is not unreasonable or unlawful, and is, therefore, affirmed.
Decision affirmed.
CELEBREZZE, C.J., HERBERT, W. BROWN, P. BROWN, SWEENEY, LOCHER and Holmes, JJ., concur.