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In a unanimous ruling Wednesday, the Commonwealth Court told the Eagles football team its arguments against two city tax assessments just won’t fly. At issue in The Philadelphia Eagles Football Club v. City of Philadelphia were former owner Norman Braman’s use of an Eagles corporate jet with respect to the Philadelphia wage tax and business privilege taxes assessed against the team for the years 1986 and 1992. The club sought relief of $63,932.19 in wage taxes and $730,705.19 in business privilege taxes. The Eagles also petitioned for a refund of $250,197 they claimed they overpaid in business privilege taxes. All of the Eagles’ claims — except with respect to certain deductions on its corporate plane — were denied. Frank Paiva, deputy city solicitor, major tax enforcement division, represented the city; Alice Beck and Joseph Bright of Wolf Block Schorr & Solis-Cohen were counsel to the Eagles organization. “In the case before us, the tax board did not find that the Eagles, Inc. acted in good faith, without negligence and no intent to defraud,” said the court. The panel of five judges included President Judge Joseph T. Doyle and Judges Dan Pellegrini, Rochelle S. Friedman, Bonnie Brigance Leadbetter and James R. Kelley, who authored the 40-page opinion. In addition to affirming the tax board finding, the court denied the Eagles’ prayer for relief on interest and penalties. WAGE TAX Norman Braman owned and operated the Eagles’ organization for the tax years in question. In 1991, he was paid an annual salary of $5 million. The Eagles claimed 75 percent of that salary, or $3.75 million, as an exclusion. The Eagles justified this on the basis that Braman, a Florida resident, spent only 25 percent of his time in Philadelphia. During an audit by the city of Philadelphia, according to the opinion, the Eagles presented no records to substantiate the time Braman worked in Philadelphia. The auditor assessed Braman’s wage tax at 40 percent, using as a guide the amount of time the team owner had spent in Philadelphia for the previous five tax years. The Eagles challenged that assessment, and Braman worked with his accountant to reconstruct his whereabouts during 1991. According to Kelley, the two reviewed Braman’s diaries, airplane, hotel and other travel documents and compiled the information into four summarized timesheets, which Braman submitted to the tax board. The board, however found the sheets to be unmoving, calling them mere “estimations of [Braman's] activities with some inaccuracies and conflicting information.” “The tax board did not find the summaries to be wholly reliable to substantiate the taxpayer filing of 25 percent,” said Kelley. Instead, he said, the tax board determined Braman spent 30.5 percent of his time in Philadelphia. AIRPLANE The board further ruled Braman’s non-business use of the Eagles’ plane should have been treated as compensation to Braman and a deductible expense to the Eagles. It reclassified Braman’s non-business flights as additional compensation, allowing a deduction for the club. In a cross-appeal, Philadelphia said the tax board erred. Kelley disagreed. “The Wage Tax defines `Salaries, Wages, Commissions and Other Compensation’ to include `all salaries, wages, commissions, bonuses, incentive payments, fees and tips that may accrue or be received by an individual, whether indirectly or through an agent and whether in cash or in property, for services rendered,’ with certain exclusions,” he said. “Clearly, Mr. Braman’s use of Eagles Inc.’s airplane for vacation, medical, commuting, and other personal use constitutes `other compensation.’ Therefore, the costs and depreciation associated with these flights should be included within [Braman's] income for purposes of the wage tax and subject to the 30.5 percent apportionment.” The Eagles had a separate bone to pick with the tax board over the plane, claiming the board failed to deduct all airplane expenses in computing the BPT under its selected filing method. Under Method I, which the Eagles used, net income is “the net gain from the operation of a business after provision for all allowable costs and expenses actually incurred in the conduct thereof …” According to the opinion, the Eagles used Generally Accepted Accounting Practices as its method of accounting and deducted 100 percent of the operating expenses and depreciation of the plane. The tax board agreed that the plane was a proper business expense but did not think all use of the plane constituted a “necessary business expense.” Based on log books, the board found that only 28.86 percent of the 1991 use of the plane was for “Eagles business.” The remaining 71.14 percent was used for commuting, vacation, charter and other personal reasons. The tax board concluded and the trial court agreed that only expenses and depreciation attributable to “valid business related expense for purposes of the BPT” could be deducted. Deductions for non-business related flights were disallowed. Kelley agreed. “Deductibility for standard accounting purposes as a legitimate business expense … does not necessarily equate to deductibility for tax purposes. Eagles, Inc. ignores the language which provides only `allowable costs and expenses’ are deductible for purposes of the BPT,” Kelly said. The inclusion of the word “allowable” made it clear that only business-related expenses are allowable deductions for Method I filers under the BPT, he said. The court allowed expenses and depreciation on the plane only to the extent of its 28.86 percent legitimate business use during 1991. BPT AND COPYRIGHT The Eagles’ disagreement with the city over the BPT led the court into a careful analysis of copyright law. Under the Philadelphia code, the city may impose a business privilege tax on the gross receipts and net income of “every person engaging in any business in the city,” the court said. “Gross receipts” for BPT purposes includes “all patent, copyright and trademark royalties.” Included in the Eagles’ receipts was income the organization received from a contract the National Football League held with a television network. Under the contract, the network received the exclusive right to televise all games of the 28 teams in the NFL. In exchange, the Eagles shared revenue received by the NFL with all other NFL member teams. The Eagles received 1/28 of the network contract income for all tax years in question. The Eagles wanted to characterize the income as fees for services rendered, that is, fees for having played football, rather than royalties “resulting from the licensing of a property right.” The latter characterization is subject to full taxation under Section 322 of the BPT regulations. “Contrary to Eagles, Inc.’s position, this payment is not a fee for services rendered, but for the transfer of the right to telecast,” said Kelley. “While the obligation to play the game is a component of the contract, the transfer of the right to broadcast the game is the crux of the contract. Eagles, Inc., as a member of the NFL, is not being paid media receipts by the network to simply play the game, but for the exclusive right to telecast the game. “A game that is played but not telecast by the network is of no value to the network.” Kelley noted that the contractual relationship between the networks and NFL clubs has previously been characterized as a “contract for the sale or transfer of broadcast rights” in several cases and is well-settled. The Eagles next argued that media receipts received are not “copyright royalties,” because the right to broadcast is not a right attendant to copyright. Kelley disagreed, citing the 1976 Copyright Act. In congressional notes, he said, the act specified it protected “the live transmissions of sporting events when they are recorded simultaneously with transmission.” Under the act, sports games clearly fall into the realm of copyrighted material, Kelley said. “The law attempts to foster creation by giving copyright owners exclusive rights to reproduce the work, prepare derivative works, distribute copies of the work, and publicly perform or display the work. These five rights are commonly referred to as the `bundle of rights.’ The right to `perform’ an audiovisual work means the right `to show its images in any sequence or to make the sounds accompanying it audible,’” he said, quoting from the Copyright Act. “In the case before us, there is no dispute that the broadcasted NFL games are copyrighted works. The only aspect of the copyright that has been transferred is the exclusive license to broadcast the live telecast of the football game,” Kelley said. “The right to broadcast is a right attendant to copyright. The fact that none of the other rights attendant to the copyright were transferred to the network … does not diminish or alter the fact that the exclusive right to broadcast the live telecast was transferred.” In the alternative, the Eagles contended the networks could not possibly be paying the NFL copyright royalties for the use of the copyrighted work because the network, not the NFL, authored the actual game telecast. “While we recognize that the networks, through their creative efforts of recording, directing, producing and broadcasting the live event, have arguably `authored’ the copyrighted work, this authorship does not establish any rights of ownership as the parties have expressly agreed in a written instrument that the NFL, not the networks, owns all of the rights comprised in the copyright,” said Kelley. (emphasis added) “Before a person can derive income from royalties, it is fundamental that he must have an ownership interest in the property whose licensing or sale gives rise to the income.” Clearly, Kelley said, the Eagles were the owner of a copyright. And while the term “royalty” is not defined by the Copyright Act, the Philadelphia Code or the BPT regulations, Kelley said the definition in Black’s Law Dictionary would do just fine: “compensation for the use of or right to use of works protected by copyright.” Since that was what the Eagles got, he concluded the revenue from the NFL contract was reachable by the BPT. APPORTIONMENT The Eagles posited that they were unfairly taxed under the Commerce Clause of the U.S. Constitution, because the city did not apportion the media receipts attributable to football games played outside of Philadelphia. During the time period at issue, the Eagles played one-half of its games in Philadelphia and the remainder at other teams’ venues. Kelley used the four-part standard created in Complete Auto Transit v. Brady, a 1977 U.S. Supreme Court case, to determine the validity of the state tax; he found there was no violation of the Commerce Clause. The standard for determining validity of a tax, Kelley said, requires the taxable activity to have a “substantial nexus” with the state; that the tax be “fairly apportioned” to the taxpayer’s activity; that the tax “must not discriminate against interstate commerce”; and that the tax must be “fairly related to benefits provided by the state.” In this case, he said, “Philadelphia is not only the commercial domicile of Eagles, Inc., but also the home territory of the Eagles team. This presence is more than enough to establish substantial nexus.” As to apportionment, Kelley explained that the gravamen of the relevant test is whether multiple taxation is imposed on a taxpayer. There are two tests for consistency for a properly apportioned tax under Goldberg v. Sweet, a 1989 U.S. Supreme Court case. Kelley found no failure under either of the tests in Goldberg. Kelley said the risk of multiple taxation on the Eagles was “further diminished” by the fact that any receipts attributable to “business conducted at a place of business regularly maintained by the taxpayer outside of Philadelphia” is excluded from taxation under the BPT. But Kelley said that, even though the Eagles team plays half its games outside Philadelphia, that does not amount to the “`maintenance of a place of business outside of Philadelphia’ for purposes of the BPT.” The Eagles argued they should be considered under the “unitary business principle,” which considers affiliated groups of firms as a single business divided into formal, separately incorporated subsidiaries for reasons of legal convenience. But Kelley said this analysis is “highly fact specific.” In addition, in order to avoid apportionment taxes, a business must prove its out-of-state income was earned “in the course of activities unrelated to those carried out in the taxing state,” Kelley said. He added the Eagles did not allege any facts which would support that finding. Continuing his analysis of the four-part fairness test, Kelley found no discrimination against interstate commerce, since there are no “purely local entities” in the field of professional football. “Professional football as structured through the NFL is an interstate activity,” he said. “As a result, there is no comparable competition acting solely within the taxing jurisdiction of Philadelphia to lend a commercial advantage.” Finally, the judge determined there was a “fair relation between a tax and the benefits conferred upon [the Eagles] by the state.” “As a privilege of doing business within Philadelphia, Eagles, Inc. enjoys fire and police protection, along with the advantages conferred by the city’s maintenance of a civilized society,” the judge said. “These are justifications enough for the imposition of a tax. “Accordingly, we conclude that Philadelphia’s tax assessment of 100 percent of Eagles, Inc.’s media receipt was not in violation of the Commerce Clause.” PENALTIES The club asked for a waiver of interest and penalties of unspecified amounts in the opinion. It is mandatory for the city to level penalties and interest when taxes are not paid on time, but it is “purely discretionary” for the city to waive them, Kelley said. The tax review board “may abate in whole or in part interest or penalties, or both, where in the opinion of the board the petitioner acted in good faith, without negligence, and no intent to defraud,” said Kelley. “In the case before us, the tax board did not find that Eagles, Inc. acted in good faith … instead, the tax board found that Eagles, Inc. should have known that it was not reasonable to claim a 100 percent deduction for expenses associated with the airplane when over 70 percent of its use was for purposes other than its own business activities. “Based upon our review of the record and in light of our disposition of the case, we do not find that the tax board committed an abuse of discretion in this regard.”

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