‘Sting’ Case May Alter State Tax for Entertainers

Times Staff Writer

State tax officials say they will meet within the next few weeks to discuss ramifications of a court ruling involving actor Paul Newman that has altered how state income tax is assessed for entertainment industry figures who work in California but don’t live here.

The decision--upheld by the California Supreme Court early last month--has the effect of equating non-resident actors and actresses, musicians, artists and other entertainment personnel with professional athletes in terms of how state income tax is determined.

In court documents in the case--which focused on Newman’s compensation for his starring role in the 1973 film “The Sting” and also involved his wife, actress Joanne Woodward--state officials predicted a near breakdown in California’s ability to tax nonresidents.

In a court petition in which the California Franchise Tax Board sought to persuade first the state Court of Appeal and then the Supreme Court to overturn a trial court ruling in Newman’s favor, state tax officials contended that the change in tax procedure “opens a veritable Pandora’s box.”

If the ruling was allowed to stand, the board contended, the taxing agency might be forced “to set up booths at the gates of Disneyland or at the first tee of Pebble Beach golf links” to nab out-of-state residents who might perform work services while visiting California.

But calm has settled after the state Supreme Court refused, on June 1, to hear an appeal of the decision siding with Newman. State officials and private tax lawyers and accountants agree the case will likely leave the entrance to Disneyland and fairways of Pebble Beach unpatrolled.

Still, tax experts say the Newman decision will dramatically change the way nonresident entertainers of all sorts are assessed California income tax. Directly affected by the new taxation method--in which entertainers will be taxed under a complex apportionment of their so-called “duty days” in California--may be such big names as Robert Redford, Jessica Lange, Robert De Niro, Woody Allen, Mia Farrow and Christopher Walken.

The total number of such taxpayers is unknown. The Franchise Tax Board said about 300,000 people file nonresident California tax returns each year, but the agency could not estimate how many of them work in show business or professional sports. The Screen Actors Guild was also unable to make an estimate, though a spokesman guessed that perhaps 5,000 of the union’s 72,000 members could be affected.

“I don’t think there’s any Pandora’s box. That was just a red herring,” said Irving Axelrad, Newman’s longtime personal attorney who participated in the tax litigation. “This case is important to the motion picture industry. It applies to artists, traveling conductors, musicians, motion picture talent including the stars and the supporting players.” The case originated when Newman, whose principal residence is in Connecticut, sought a refund from the Franchise Tax Board for taxes originally paid on his income from “The Sting” from 1975 to 1977. The money included both his $1-million fee and subsequent royalty payments.

Under a contract typical in the movies, Newman guaranteed his exclusive availability to Universal Pictures during an 11-week period covering filming of the picture in Los Angeles and Chicago--25 days here and two in Illinois.

Newman’s contract stipulated he could do whatever he liked if he was not required on the set, but he had to appear within 24 hours after being ordered to do so by Universal. Among Newman’s other activities was a ski vacation in Utah with Woodward; he also returned to his Connecticut home.

When Newman eventually filed nonresident California tax returns covering his income from “The Sting,” he adhered to existing state tax rules for entertainers that determined his California liability based on the proportion of shooting days in the state--a formula that led to about 93% of his income from the film to be taxable here.

Court records show that when Newman finally filed the return in 1975, two years after “The Sting” was released, he paid $24,639 to California. As he received royalty income from the film subsequently, he paid $7,336 in 1976 and $8,938 in 1977.

But Axelrad said the computation formulas seemed unfair and the Newmans eventually filed for a California refund.

Newman argued that, since his Universal contract prohibited him from accepting other employment for the 11 weeks in question--which, after subtracting holidays, included 54 work days--his California tax liability should only be based on the proportion of that total period he actually spent in the state. Counting shooting, days he happened to remain in California when he was not before the camera and other time he spent here, the California total under that formula worked out to only 55%.

Eventually, the Newmans filed a protest letter seeking a refund. The Franchise Tax Board turned them down. They sued. After a trial in 1987, the Newmans won.

In March of this year, the Franchise Tax Board took the case to the Court of Appeal, which held that the tax agency was being hypocritical by treating nonresident athletes and entertainers differently.

“Newman’s exclusive contract period is the ‘season’ . . . and Newman is the ‘player,’ ” the court held in siding with the film star. Four weeks ago, the California Supreme Court refused to take a appeal by the tax board and turned down a tax agency request to strip the appeals court ruling of its status as a precedent applicable statewide.

The verdict declared that a state taxation scheme devised for professional athletes also appeared to apply to entertainers. In a 1987 case before the state Board of Equalization and in a separate tax board opinion called an “audit ruling,” state officials ruled that Joe Barry Carroll, a Golden State Warrior, was liable for California taxation for every day he spent in the state during the season--whether he was playing in basketball games, traveling, practicing or simply having a day off.

It was in the Carroll case that California tax officials introduced the term duty day , meaning any day on which Carroll was required to be available to his team.

Carroll, who now plays for the New Jersey Nets, had argued his California tax obligation was determined only by the number of game days he spent in the state. The Franchise Tax Board ruling increased Carroll’s tax bill under the same formula the Newmans used to lower theirs.

Randy Vataha, of the Boston-based sports accounting and management firm Bob Woolf Associates, said the Carroll ruling and other tax state decisions have made the task of determining how much athletes owe to various government agencies incredibly complex. “It becomes a bigger and bigger bureaucratic situation,” Vataha said.

“Theoretically, you are going to have to file a state tax return in every state where you play a game. The net is probably not going to change the overall tax situation (in terms of the actual monies collected by each state). I’m not sure it creates any net gain for anyone but the accountants.”

Entertainment industry accounting experts say the implications of the Newman decision may introduce people in the arts to the same tax confusion athletes now face--and that while individual tax bills in specific states may change dramatically, the net effect on total money involved may only be slight.

“My first sense is that it is not going to have tremendous ramifications,” said Matthew Krane of the West Hollywood firm of Bloom and Dekom, which handles business affairs for a number of top stars.

Newman continues to receive royalty payments from “The Sting,” Axelrad said, on which California tax is still being paid on about 55% of the money received. The California court decision is especially advantageous to Newman, Axelrad said, because Connecticut’s only personal levy is on interest, dividends and other so-called “unearned” income. Newman’s film royalties are “earned” income under Connecticut law, Axelrad said.

Stephen Solomon, another local entertainment tax law expert, said that while the effects of the Newman decision are confined to a small number of artists who reside elsewhere and sometimes work in California, the legal principle the case establishes probably applies to artists in almost any medium. The ruling, Solomon said, may benefit rock and classical musicians--especially those who travel to California to record since recording sessions are scheduled in much the same way as film production.