Int'l Artists, Ltd. v. Comm'r of Internal Revenue, Docket Nos. 1569-68

Citation55 T.C. 94
Decision Date22 October 1970
Docket Number1570-68,Docket Nos. 1569-68
PartiesINTERNATIONAL ARTISTS, LTD., PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE,RESPONDENT WALTER V. LIBERACE, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtUnited States Tax Court

OPINION TEXT STARTS HERE

Adam Y. Bennion, Victor L. Walch, A. Calder Mackay, and Richard N. Mackay, for the petitioners.

Myron A. Weiss, for the respondent.

Held, an allocable portion of depreciation and maintenance expenses with respect to property owned by the corporate petitioner is deductible by the corporation. Such property was acquired and used for both personal and business purposes. Allocation determined. Held, further, the individual petitioner, president and dominant shareholder of the corporation, is chargeable with income as a result of his personal use of corporate property to the extent of an allocable portion of the fair rental value of the corporate property.

FAY, Judge:

Respondent determined deficiencies in petitioners' income taxes as follows:

+----------------------------------------------------------------------+
                ¦                                               ¦TYE      ¦            ¦
                +-----------------------------------------------+---------+------------¦
                ¦                                               ¦May 31  —¦Deficiency  ¦
                +-----------------------------------------------+---------+------------¦
                ¦                                               ¦( 1963   ¦$17,652.88  ¦
                +-----------------------------------------------+---------+------------¦
                ¦International Artists, Ltd., docket No. 1569-68¦( 1964   ¦26,264.23   ¦
                +-----------------------------------------------+---------+------------¦
                ¦                                               ¦( 1965   ¦22,429.71   ¦
                +-----------------------------------------------+---------+------------¦
                ¦                                               ¦         ¦            ¦
                +----------------------------------------------------------------------+
                
 TYE
                Dec.31—  
                                                       ( 1962      12,937.75
                Walter V. Liberace, docket No. 1570-68 ( 1963      24,233.20
                                                       ( 1964      23,483.50
                

The issues presented for decision are: (1) Whether the corporate petitioner is entitled to a deduction for depreciation and operating expenses with respect to realty owned by the corporate petitioner and used in part by its controlling shareholder as a personal residence; and, if so, the amount thereof.

(2) Whether the individual petitioner has received a constructive dividend as a result of his use of said realty, in part, as his personal residence; and, if so, the amount so received.

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation of facts, together with exhibits attached thereto, is incorporated herein by this reference.

The individual petitioner herein, Walter V. Liberace (hereinafter sometimes referred to as petitioner), is a well-known musician and entertainer. Petitioner was not married during the period in question. He filed his Federal income tax returns for the calendar years 1962, 1963, and 1964 with the district director of internal revenue, Los Angeles, Calif. Petitioner resided in Los Angeles, Calif., at the time of the filing of the petition in this case.

International Artists, Ltd., the corporate petitioner herein (hereinafter sometimes referred to as the corporation), filed Federal income tax returns with the district director of internal revenue, Los Angeles, Calif., for the fiscal years ending May 31, 1963, 1964, and 1965. Its principal place of business at the time the petition in this case was filed was Los Angeles, Calif.

The corporation was organized in 1954 under the laws of the State of California for the purpose of producing and promoting concerts featuring Liberace as the principal attraction. The corporation derived its income during the taxable years at issue primarily from sources related to Liberace's performance as an entertainer in nightclubs and television appearances and from royalties with respect to the sale of records. Upon its organization a total of 100 shares of stock was issued by the corporation, as follows. 54 shares to petitioner; 27 shares to George Liberace, a brother of petitioner; and 19 shares to John R. Jacobs, Jr., petitioner's business manager. In 1957 the corporation redeemed the stock held by George Liberace. Following the redemption a total of 73 shares remained outstanding, 54 of which were owned by petitioner and 19 by Jacobs. Petitioner owned approximately 74 percent and Jacobs approximately 26 percent of the stock of the corporation during the taxable years in question.

In its articles of incorporation the law office of Jacobs, located in the Taft Building, 1680 North Vine Street, Hollywood, Calif., was designated as the corporation's principal place of business. The books and records of International Artists were kept in this office until 1968, at which time they were transferred to an office at 971 North La Cienega Street, Los Angeles, Calif. Lucille Cunningham, employed as a secretary by the corporation, was placed in charge of the latter office.

The business operations of International Artists were successful during the early 1950's.1 The demand for Liberace performances was relatively great during this period. In addition to this appearances in nightclubs, petitioner led a weekly television show from 1952 to 1955. Partially as a result of overexposure on television, however, petitioner's popularity as an entertainer waned in the latter part of the 1950's, causing gross earnings of the corporation to fall sharply from $50,000 to $6,000 per week. The overexposure on television resulted from frequent reruns of his program following the close of the original television series in 1955.

Petitioner's public image during his period of success in the early part of the 1950's is described by him as one of ‘glamour and elegance.’ This image was conveyed to the public by means of elegant costumes, and unusual musical instruments and stage settings. It was calculated to arouse the interest of the public and draw spectators. The emphasis, in Liberace performances, had been as much upon the visible spectacle of his show as upon his musical talent. Nevertheless, in 1958, at the urging of his business manager, and prompted by his loss of popularity and reduced income, petitioner discarded the elegant image in favor of a more conservative one. His life style shifted from the spectacular to the conventional. However, this change failed to improve the deteriorating financial condition of the business and, in fact, contributed to its further decline. A second television series initiated in 1958 was forced to close after 26 weeks because of Liberace's diminished popularity.

In 1960, in an effort to revitalize the corporate business, the officers of the corporation resolved to reintroduce the previously successful ‘elegant’ image of petitioner. Their efforts in this regard met with success. Corporate gross earnings in the ensuing 5 years steadily climbed from $300,000 per year to in excess of $1 million per year. The image of glamour accomplished by means of Liberace's unusual attire and stage settings was instrumental in capturing the public's interest. In addition, the effects of previous overexposure disappeared with the passage of time.

In 1960, to provide in part for a suitable location for the preparation of the corporate musical productions, as well as to provide a home for Liberace which would enhance his image in the eyes of the public, International Artists acquired a large house, for approximately $95,000, in a residential section of Los Angeles, overlooking the Los Angeles Basin. These premises (hereafter referred to as Harold Way), which are the subject of the controversy in the instant case, are located at 8433 Harold Way in the Hollywood Hills area of Los Angeles. The house was hereupon lavishly decorated and furnished (pursuant to the joint specifications of Liberace and other corporate officers) at a total cost to the corporation of approximately $250,000. Included in the improvements to the home were several items specifically designed to prepare the premises for its intended use in the production of musical programs, such as a soundproof music room, theatrical lighting, a projection room, and a specially designed wardrobe closet. In appearance, however, the home was simply the spectacular personal residence of Liberace. Though used to a substantial extent as a studio and home office of the corporation, as hereinafter described, Harold Way was commonly regarded as the residence of petitioner. A studio was not rented by the corporation, in part because the available studios were regarded by petitioner as ill-equipped for his purposes and because they could not provide the necessary privacy. The corporate resolution pursuant to which the Harold Way premises were purchased provided:

RESOLVED that this corporation purchase the improved real property located at 8433 Harold Way, Los Angeles, California, provided such can be done within a purchase price of $95,000.00 and suitable financing arranged for, and that said purchase, if acceptable to the owners, be completed on or before December 31, 1960.

BE IT FURTHER RESOLVED that the Secretary of the corporation, Mr. John R. Jacobs, jr., is authorized and empowered to negotiate for the purchase of such property, as hereinabove stated, and to execute escrow instructions and other documents reasonably required to complete any purchase agreed upon.

BE IT FURTHER RESOLVED that, in the event the purchase of the Harold Way property is not completed, that Mr. Jacobs be directed to continue investigating other properties in the Hollywood area which might be suitable to meet the needs of the corporation.

The furniture of Harold Way was acquired by the corporation from Liberace, who in addition to his activities as a musician was the proprietor of an antique shop in Los...

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