Bellamy v. Comm'r of Internal Revenue, Docket No. 989-63.

• Decision Date: 27 January 1965
• Docket Number: Docket No. 989-63.
• Parties: RALPH BELLAMY AND ALICE BELLAMY, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

43 T.C. 487

RALPH BELLAMY AND ALICE BELLAMY, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 989-63.

Tax Court of the United States.

Filed January 27, 1965.

Dana Latham, Henry C. Diehl, and Henry J. Steinman, for the petitioners.

Lawrence S. Kartiganer and Michael P. McLeod, for the respondent.

Held, that an amount received by the petitioner did not represent proceeds from the sale of a capital asset, and that such amount is taxable as ordinary income.

ATKINS, Judge:

The respondent determined a deficiency in income tax for the taxable year 1957 in the amount of $44,864.77.

The parties having reached agreement as to certain issues, the issue remaining for decision is whether the sum of $89,000 paid to the petitioner Ralph Bellamy in 1957 was proceeds from the sale by him of property which was a capital asset, resulting in the receipt of long-term capital gain as contended by him, or is taxable as ordinary income as determined by the respondent.

FINDINGS OF FACT

Some of the facts have been stipulated and are incorporated herein by this reference.

The petitioners are husband and wife, now residents of Los Angeles, Calif. They filed a joint income tax return on the cash method for the taxable year 1957 with the district director of internal revenue, New York, N.Y. Hereinafter, Ralph Bellamy will be referred to as the petitioner.

Petitioner is a professional actor and has been engaged in his profession for over 40 years. He is the president of Actors Equity Association and is also a member of the Screen Actors Guild. Prior to October 1, 1949, he appeared on the stage, screen, and radio, but had never appeared on television, which at that time was in its infancy.

On October 1, 1949, petitioner entered into a written employment contract (hereinafter sometimes referred to as the Esty agreement) with William Esty Co., Inc. (hereinafter referred to as Esty), as agent for R. J. Reynolds Tobacco Co. to render his artistic services by performing over a specified period the leading male role in a live television series then entitled ‘Man Against Crime.‘ The contract also contained specific provisions precluding the petitioner from appearing in any other television program during the term of the contract and limiting his right to appear in any radio or television program for a period of 6 months thereafter. The agreement provided in pertinent part as follows:

1. We hereby employ you to render your services as herein described in a series of television programs presently entitled ‘MAN AGAINST CRIME‘ to be broadcast on behalf of and advertising the products of R. J. Reynolds Tobacco Company, its subsidiaries and affiliates (herein collectively called ‘Sponsor ‘). You hereby accept such employment and agree to perform such services in a competent and artistic manner, to the best of your talents and abilities, for and as directed by us.

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4. (a) The term of this agreement shall be for a period of thirteen (13) consecutive weeks commencing with the week ending october 7th, 1949 and ending December 30th, 1949. The said term is herein sometimes called the ‘principal period‘.

5. In full consideration for the services to be rendered by you hereunder and the rights and options granted to us, and in complete discharge of our obligations hereunder, we hereby agree to pay you, and you hereby agree to accept, the sum of Fifteen Hundred Dollars $1500.00) per week during the principal period hereof. Such weekly sums shall be paid to William McCaffrey, as your agent, within ten (10) days after the completion of each broadcast.

6. (a) You hereby grant to us the following exclusive and irrevocable options to extend the term of this agreement for the respective periods hereinafter set forth, upon all of the terms and conditions hereof, except as otherwise hereinafter provided with respect to compensation:

(i) Thirteen (13) consecutive weeks commencing with the week ending January 6th, 1950 and ending with the week ending March 31st, 1950 at Fifteen Hundred Dollars ($1500.00) per week;

(ii) Thirteen (13) consecutive weeks commencing with the week ending April 7th, 1950 and ending with the week ending June 30th, 1950 at Fifteen Hundred Dollars ($1500.00) per week;

(iii) Twenty-six (26) consecutive weeks commencing on a date in October, 1950 to be designated by us at Two Thousand Dollars ($2,000.00) per week; (iv) Thirteen (13) consecutive weeks commencing immediately upon the expiration of the preceding option period described in the foregoing subdivision (iii) at Two Thousand Dollars ($2,000.00) per week;

(v) Thirty-nine (39) consecutive weeks commencing on a date in October, 1951 to be designated by us at Twenty-Five Hundred ($2,500.00) per week.

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8. Each program shall be essentially a live program, with the interpolation of such film or still sequences as we may determine. We shall have the right, without any additional compensation to you, to make television recordings (which term shall mean and include film or motion picture transcription or any other record of the physical form, aural and/or visual, of the said program) of the program by any method. Such recordings, insofar as you are concerned, shall become our sole and absolute property for use as permitted hereunder and may be used for file and reference purposes and for additional, delayed or supplemental coverage, but shall be broadcast only once over such stations which did not carry the original broadcast. Said use shall be subject to the codes, rules and regulations of any Union having jurisdiction, and in no event shall such transcriptions be broadcast later than sixty (60) days after the date of the original broadcast. * * *

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10. (a) You hereby grant to us, the Sponsor and the broadcasting system, the right to use and permit others to use, during the term hereof, and for a period of sixty (60) days thereafter, your name, photograph, likeness, biography, facsimile signature and voice, in and in connection with the television program and the advertising, exploiting and publicizing the products and services of the Sponsor and the said television program, it being understood, however, that such use shall not be made for the purpose of endorsement or testimonial without your written consent.

(b) You agree that during the term hereof you will not use or authorize the use of your name, photograph, biography, likeness or voice, or render any services in advertising, exploiting or publicizing any person, firm, corporation, product, services or commercial enterprise competitive to the Sponsor or its products.

(c) We shall have the exclusive right to issue publicity concerning the television program and your connection therewith, and you agree not to release or authorize the release of any publicity matter concerning the aforesaid television program and the rendition of your services in connection therewith.

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15. Nothing contained in this agreement shall be construed to obligate us to utilize your services or afford you the opportunity of rendering performances on the television programs, and we shall have fulfilled our entire obligation hereunder by paying to you such sums as provided herein.

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20. If this agreement shall remain in full force and effect for its principal period and all option periods, then and in such event during the period of sixty (60) days prior to the expiration of the last option period, you and we will negotiate in good faith for the terms and conditions for an extension of this agreement.

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23. * * *

(b) This agreement is entire and complete and embodies all understandings and agreements between you and ourselves and no representations or warranties of any kind or nature have been made by either you or ourselves, except as in this agreement expressly set forth.

(c) This agreement cannot be changed or modified except by an instrument in writing signed by you and ourselves.

(d) This contract shall be construed in accordance with the laws of the State of New York.

Under the agreement Esty had the right to make kinescope films of the live productions. However, the quality of these films was inferior and would not permit the use and reuse to which television films are subject today. Accordingly, in January 1952, Esty proposed to petitioner that the program be filmed with a high-quality film so that the shows could be rerun extensively. As a consequence the petitioner and Esty executed, on January 7, 1952, an amendment to the agreement which granted Esty additional options to extend petitioner's employment for periods totaling 130 weeks over the period through June 1955, at compensation of $3,500 per week. This amendment provided in part as follows:

2. We shall have the right to broadcast the program as a live program or by means of motion pictures in lieu of live broadcasts as we may from time to time determine. * * *

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3. (a) If we shall elect to broadcast these programs by means of motion pictures, you agree to render all such services as an actor as shall be necessary in acting, performing, rehearsing and taking part in such motion pictures as we may require. * * *

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4. (a) All motion pictures which are produced hereunder shall become and remain our sole and absolute property and during the term hereof and for a period of twenty six (26) weeks thereafter may be used by us for any and all broadcasting purposes for a first use (as hereinafter defined) over each and every station as we may designate from time to time without notice to you in the United States of America, its territories and possessions and Canada and at any times, without restriction or limit whatsoever, and in addition may be used by us for file, reference, promotional, sales and exploitation purposes.

(b) We shall have the further right to the further right to broadcast the motion pictures over stations which shall have begun operations after the expiration of the term of this agreement and the aforesaid twenty...