CIR v. Ferrer

Decision Date05 June 1962
Docket NumberDocket 27232.,No. 248,248
Citation304 F.2d 125
PartiesCOMMISSIONER OF INTERNAL REVENUE, Petitioner, v. José FERRER, Respondent.
CourtU.S. Court of Appeals — Second Circuit

David O. Walter, Dept. of Justice, Washington, D. C. (Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Washington, D. C., on brief), for petitioner.

Samuel L. Siegel, New York City (Edwin M. Reiskind, New York City, of counsel), for respondent.

Before FRIENDLY, SMITH and MARSHALL, Circuit Judges.

FRIENDLY, Circuit Judge.

This controversy concerns the tax status of certain payments received by José Ferrer with respect to the motion picture "Moulin Rouge" portraying the career of Henri de Toulouse-Lautrec. The difficulties Mr. Ferrer must have had in fitting himself into the shape of the artist can hardly have been greater than ours in determining whether the transaction here at issue fits the rubric "gain from the sale or exchange of a capital asset held for more than 6 months," Internal Revenue Code of 1939, § 117(a) (1) and (4), 26 U.S.C.A. § 117(a) (1, 4), as the Tax Court held, 35 T.C. 617 (1961), or constitutes ordinary income, as the Commissioner contends. We have concluded that neither party is entirely right, that some aspects of the transaction fall on one side of the line and some on the other, and that the Tax Court must separate the two.

In 1950 Pierre LaMure published a novel, "Moulin Rouge," based on the life of Toulouse-Lautrec. He then wrote a play, "Monsieur Toulouse," based on the novel. On November 1, 1951, LaMure as "Author" and Ferrer, a famous actor but not a professional producer, as "Manager" entered into a contract, called a Dramatic Production Contract, for the stage production of the play by Ferrer.

The contract was largely on a printed form recommended by the Dramatists Guild of the Authors League of America, Inc. However great the business merits of the document, which are extolled in Burton, Business Practices in the Copyright Field, in C. C. H., 7 Copyright Problems Analyzed (1952) 87, 109, for a court, faced with the task of defining the nature of the rights created, it exemplifies what a contract ought not to be. Its first six pages include eleven articles, some introduced by explanatory material whose contractual status is, to say the least, uncertain. Here the last of these pages was preceded by three single-spaced typewritten pages of "Additional Clauses," one with a still further insert. Finally come 15 pages of closely printed "Supplemental Provisions," introduced by explanatory material of the sort noted. We shall thread our way through this maze as best we can.

By the contract the Author "leased" to the Manager "the sole and exclusive right" to produce and present "Monsieur Toulouse" on the speaking stage in the United States and Canada, and gave certain rights for its production elsewhere. Production had to occur on or before June 1, 1952, unless the Manager paid an additional advance of $1500 not later than that date, in which event the deadline was extended to December 1, 1952. Five hundred dollars were paid as an initial advance against Author's royalties; the Manager was required to make further advances of like amount on December 1, 1951, and January 1, 1952. Royalties were to be paid the Author on all box-office receipts, on a sliding scale percentage basis.

Article Seventh said that "In the event that under the terms hereof the Manager shall be entitled to share in the proceeds of the Motion Picture and Additional Rights hereafter referred to, it is agreed that the Manager shall receive" 40% for the first ten years and diminishing percentages thereafter. Among the additional rights so described were "Radio and Television."

For the beginning of an answer whether the Manager would be so entitled, we turn to Article IV, § 2, of the Supplemental Provisions. This tells us that "In the event the Manager has produced and presented the play for the `Requisite Performances and Terms,' the Negotiator shall pay the Manager" the above percentages "of the proceeds, from the disposal of the motion picture rights." Article VI, § 3, contains a similar provision as to payment by the Author of the proceeds of the "additional rights" including radio and television. The "Requisite Performances and Terms" are defined in Article XIII, § 9(b); we shall say more about the "Negotiator" hereafter.

Further provisions put flesh on these bones. Article IV, § 1(a), says that "The title" to the motion picture rights "vests in the Author, as provided in Article VIII hereof." Article VIII says, even more broadly, "The Author shall retain for his sole benefit, complete title, both legal and equitable, in and to all rights whatsoever (including, but not by way of limitation, the Motion Picture Rights * * * Radio and Television Rights * * *)," other than the right to produce the play. The Motion Picture Negotiator, a person appointed by the Council of the Dramatists Guild, Article V, §§ 1 and 6, has power to dispose of the motion picture rights. However, he may not do this without the written consent of both Author and Manager "prior to the time the play has been playing for any of the respective periods of time referred to in Article XIII, Section 9(b) hereof," Article IV, § 1(b). This prohibition serves a double purpose — it protects the Manager from dilution of the value of the right to produce the play through too early exhibition of a picture, and it promotes realization of the enhancement in the value of the motion picture rights normally resulting from successful dramatic production. Doubtless for similar reasons, the Author could not, without the consent of the Manager, permit the release of radio and television rights until first-class production of the play had ceased. Article V, § 1(b), decrees that the Manager shall "have no right, title or interest, legal or equitable, in the motion picture rights, other than the right to receive the Manager's share of the proceeds * * *" Article V, § 1 (c), lays down that if the Manager deems "himself aggrieved by any disposition of motion picture rights, he shall have no recourse, in law or in equity," against a purchaser, a lessee, or the Negotiator; "the Manager's sole recourse * * * shall be against the Author and only by arbitration as provided hereunder." Article V, § 1(d), says it again: "No claim of the Manager, howsoever arising, shall constitute a cloud on the title to the motion picture rights; and a purchaser or lessee thereof shall have the right to deal freely and exclusively with the Author and Negotiator * * *" Having been somewhat upstaged by these provisions, the Manager then returns toward the center under other clauses. The Negotiator must confer with him, as well as with the Author, on every step in the disposition of the motion picture rights. "It is desirable that the price shall be mutually satisfactory to both Author and Manager," Article V, § 2 (a). If the Manager does not like an offer the Negotiator is planning to accept, he has an opportunity to turn up a better one, ibid. All moneys received for the motion picture rights are to be deposited in a special account, Article V, § 3. An insert to one of the "Additional Clauses" provides that if the Manager desires, the Author, not later than three weeks after the New York opening of the play, will "discuss a proposed deal for the Manager to acquire" the motion picture rights. Finally, another "Additional Clause" prescribes that "All dramatic, motion picture, radio and television rights in the novel MOULIN ROUGE shall merge in and with the play during the existence of this contract," and if the Manager produces and presents the play for a sufficient period, "throughout the copyright period of the play."

Shortly after signature of the Dramatic Production Contract, John Huston called Ferrer to ask whether he would be interested in playing Toulouse-Lautrec in a picture based upon "Moulin Rouge." On getting an affirmative indication, Huston said he would go ahead and acquire the motion picture rights. Ferrer replied, in somewhat of an exaggeration, "When you get ready to acquire them talk to me because I own them."

Both Huston and Ferrer then had discussions with LaMure. Ferrer expressed a willingness "to abandon the theatrical production in favor of the film production, provided that, if the film production were successful, I would be recompensed for my abandoning the stage production." On the strength of this, LaMure signed a preliminary agreement with Huston's corporation. In further negotiations, Huston's attorney insisted on "either an annulment or conveyance" of the Dramatic Production Contract. LaMure's lawyer prepared a letter of agreement, dated February 7, 1952, whereby Ferrer would cancel and terminate the Contract. Ferrer signed the letter but instructed his attorney not to deliver it until the closing of a contract between himself and the company that was to produce the picture; the letter was not delivered until May 14, 1952.

Meanwhile, on May 7, 1952, Ferrer entered into a contract with Huston's company, Moulin Productions, Inc. ("Moulin"), hereafter the Motion Picture Contract. This was followed by an agreement and assignment dated May 12, 1952, whereby LaMure sold Huston all motion picture rights to his novel, including the right to exploit the picture by radio and television. Under this agreement LaMure was to receive a fixed sum of $25,000, plus 5% and 4% of the Western and Eastern Hemisphere motion picture profits, respectively, and 50% of the net profits from exploitation by live television.

The Motion Picture Contract said that Romulus Films Limited, of London, proposed to produce the picture "Moulin Rouge," that Moulin would be vested with the Western Hemisphere distribution rights, and that Moulin on behalf of Romulus was interested in engaging Ferrer's service to play the role of Toulouse-Lautrec. Und...

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