O'Brien v. Comm'r of Internal Revenue
| Decision Date | 30 November 1955 |
| Docket Number | Docket Nos. 46372-46380. |
| Citation | 25 T.C. 376 |
| Parties | PAT O'BRIEN, ET AL.,1 PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
1. In 1943, Pat O'Brien and three others formed a corporation, Terneen Productions, Inc., all of whose stock they owned, to produce a motion picture in which O'Brien was the star. Terneen signed a distribution agreement with Columbia Pictures Corporation giving it exclusive distribution rights to the picture. Columbia provided part of the financing; the balance thereof was secured from the Bank of America. The picture, ‘Secret Command,‘ was completed in July 1944. In August 1944, Terneen ceased doing business and assigned all of its right, title, and interest in the film to its stockholders, who, in 1945, 1946, and 1947, received payments from Columbia from the distribution of the film. The payments received in 1947 exceeded the fair market value of the film, as reported in 1944. On their returns for 1944, the stockholders estimated the fair market value of Terneen's rights and interest in the film at $150,000 and reported the difference in such amount and their stock investment as a long-term capital gain and paid the tax thereon. Respondent determined that Terneen was not a bona fide corporation and that all sums paid to its stockholders were taxable to them as ordinary income. In the alternative, he determined that Terneen did not dissolve for Federal tax purposes in 1944 but continued in existence until and throughout 1947, and that all sums paid to its stockholders were its income and that the stockholders were liable as the transferees of its assets for the deficiencies determined against it. Held, Terneen was a bona fide corporation for Federal tax purposes. Held, further, it ceased doing business, liquidated, and commenced dissolution for Federal tax purposes in August 1944, and was not thereafter taxable on any profits realized from the picture which it produced. Held, further, the amounts received by petitioners from Columbia in 1947, which amounts were in excess of the fair market value of the film as reported in 1944, were ordinary income.
2. Pat O'Brien was paid a salary of $25,000 for starring in ‘Secret Command.’ The respondent determined that $40,000 of the amount which he received in 1945 from Columbia constituted additional compensation for his performance in the picture. Held, the respondent erred in determining that any amounts received by Pat O'Brien from Columbia constituted compensation for his performance as the star of the picture.
3. On August 29, 1945, petitioner, Phil L. Ryan, sold to RKO Radio Pictures, Inc., his option on the story from which the motion picture ‘Fighting Father Dunn’ was made. He received a 10 per cent interest in the net profits of the picture and a contract to produce the picture at a salary of $30,000. In July 1947, he sold one-half of his 10 per cent interest in the net profits to the director of the film and reported the profit thereon as a long-term capital gain. Held, Ryan's 10 per cent interest in the nets profits of the film was a capital asset and gain realized on the sale of one-half of such interest was properly reported by him as a long-term capital gain. Frank W. Mahoney, Esq., Howard B. Henshey, Esq., and Thomas A. Baird, Esq., for the petitioners.
Sidney J. Machtinger, Esq., for the respondent.
This proceeding involves deficiencies in taxes and additions thereto determined by the respondent under the provisions of the 1939 Code, as follows:
+-------------------------------------------------------------------+
¦ ¦Docket¦ ¦ ¦ ¦Sec. 291 (a)¦
+-----------------+------+------+-----------+----------+------------¦
¦Petitioner ¦No. ¦Year ¦Kind of tax¦Deficiency¦addition ¦
+-----------------+------+------+-----------+----------+------------¦
¦ ¦ ¦( 1945¦Income ¦$25,862.11¦ ¦
+-----------------+------+------+-----------+----------+------------¦
¦Pat O'Brien ¦46372 ¦( 1946¦Income ¦7,049.12 ¦ ¦
+-----------------+------+------+-----------+----------+------------¦
¦ ¦ ¦( 1947¦Income ¦679.03 ¦ ¦
+-----------------+------+------+-----------+----------+------------¦
¦ ¦ ¦( 1945¦Income ¦25,862.11 ¦ ¦
+-----------------+------+------+-----------+----------+------------¦
¦Eloise T. O'Brien¦46373 ¦( 1946¦Income ¦7,034.87 ¦ ¦
+-----------------+------+------+-----------+----------+------------¦
¦ ¦ ¦( 1947¦Income ¦679.02 ¦ ¦
+-----------------+------+------+-----------+----------+------------¦
¦ ¦ ¦ ¦(Income ¦3,769.34 ¦ ¦
+-----------------+------+------+-----------+----------+------------¦
¦ ¦ ¦( 1944¦(D.V.E.P. ¦16,436.65 ¦ ¦
+-----------------+------+------+-----------+----------+------------¦
¦ ¦ ¦( ¦(E.P. ¦74,427.63 ¦$18,606.91 ¦
+-----------------+------+------+-----------+----------+------------¦
¦ ¦ ¦( ¦(Income ¦2,769.07 ¦692.27 ¦
+-------------------------------------------------------------------+
Pat O'Brien and Eloise T. 46374 ( 1945 (D.V.E.P. 3,104.60 776.15
O'Brien, Transferees. ( (E.P. 8,369.55 2,092.39
( 1946 Income 2,113.91 528.48
( 1947 Income 4,283.34 1,070.84
( 1945 Income 10,652.30
Phil L. Ryan 46375 ( 1946 Income 2,188.26
( 1947 Income 2,530.21
( 1944 Income 396.58
( 1945 Income 10,511.87
Gladys Ryan 46376 ( 1946 Income 2,188.26
( 1947 Income 2,530.21
(Income 3,769.34
( 1944 (D.V.E.P. 16,436.65
( (E.P. 74,427.63 18,606.91
( (Income 2,769.07 692.27
Phil L. Ryan and Gladys Ryan, 46377 ( 1945 (D.V.E.P. 3,104.60 776.15
Transferees. ( (E.P. 8,369.55 2,092.39
( 1946 Income 2,113.91 528.48
( 1947 Income 4,283.34 1,070.84
(Income $3,769.34
( 1944 (D.V.E.P. 16,436.65
( (E.P. 74,427.63 $18,606.91
( (Income 2,769.07 692.27
Graydon B. Howe, Transferee 46378 ( 1945 (D.V.E.P. 3,104.60 776.15
( (E.P. 8,369.55 2,092.39
( 1946 Income 2,113.91 528.48
( 1947 Income 4,283.34 1,070.84
Graydon B. Howe 46379 ( 1945 Income 5,080.03
( 1946 Income 828.73
(Income 3,769.34
( 1944 (D.V.E.P. 16,436.65
( (E.P. 74,427.63 18,606.91
( (Income 2,769.07 692.27
Terneen Productions
Inc 46380 ( 1945 (D.V.E.P. 3,104.60 776.15
( (E.P. 8,369.55 2,092.39
( 1946 Income 2,113.91 528.48
( 1947 Income 4,283.34 1,070.84
The respondent determined overassessments in income tax for petitioner Pat O'Brien, Eloise T. O'Brien, Phil L. Ryan, and Graydon B. Howe for the year 1944.
The respondent determined the deficiencies herein on alternative theories. He first determined that Terneen Productions, Inc., was not a bona fide corporation for Federal tax purposes and that all sums received by petitioners Pat and Eloise T. O'Brien, Phil L. and Gladys Ryan, and Graydon B. Howe from Columbia Pictures Corporation under a distribution contract between it and Terneen were taxable to such recipients as ordinary income rather than as capital gains. The first issue is, therefore, whether the respondent erred in that determination. If he did, he determined, in the alternative, that Terneen was a bona fide corporation but that its liquidation in August 1944, and its subsequent dissolution in November 1944, were without substance and should not be recognized for Federal tax purposes. On this theory, he determined that the sums which the O'Briens, Ryans, and Graydon B. Howe received from Columbia during the years in issue were income of Terneen, taxable to it, and that the above-named petitioners were liable as its transferees for the deficiencies which he determined against Terneen for the years 1944 to 1947, inclusive. The second issue is whether he erred in this determination and in determining penalties for Terneen's failure to file tax returns for such years.
On their income tax returns for 1947, the O'Briens and the Ryans reported as ordinary income the sums received from Columbia during that year, which were in excess of the amount which they had reported in 1944 as the fair market value of all assets received by them as the stockholders of Terneen. They now claim that such sums should have been reported as additional capital gains and claim an overpayment of taxes for the year 1947. This issue is whether the sums which the petitioners received in excess of the reported fair market value of the assets of Terneen upon its liquidation were properly reportable by them as ordinary income or as capital gains.
The remaining issues are: (4) Whether the respondent erred in adding $40,000 to the community income of Pat and ...
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