Commissioner of Internal Revenue v. Laughton

Decision Date29 June 1940
Docket NumberNo. 9413.,9413.
Citation113 F.2d 103
PartiesCOMMISSIONER OF INTERNAL REVENUE v. LAUGHTON.
CourtU.S. Court of Appeals — Ninth Circuit

Samuel O. Clark, Jr., Asst. Atty. Gen., and Sewall Key, Paul R. Russell, and Howard D. Pack, Sp. Assts. to Atty. Gen., for petitioner.

Claude I. Parker, John B. Milliken, Loyd Wright, Herschel B. Green, and Harriet Geary, all of Los Angeles, Cal., for respondent.

Before DENMAN, MATHEWS, and STEPHENS, Circuit Judges.

DENMAN, Circuit Judge.

This is a review of a decision of the Board of Tax Appeals holding Laughton not liable for income taxation for moneys paid in the tax years 1934 and 1935 by various American Motion picture producers to Motion Pictures & Theatrical Industries, Ltd., a British corporation, hereafter called Industries, Ltd., all of whose shares, except those qualifying the directors, were owned by Laughton, for services in the United States rendered by that company to the American producers by supplying Laughton, an employee of Industries, Ltd., as an actor in their motion pictures.

Laughton was employed as an actor by the company under an exclusive contract for five years at a salary very much less than that the company received for "loaning" him to the producers. Such hiring and loaning is established practice in the moving picture industry. The Commissioner contends that the corporate entity should be ignored for income tax purposes and the compensation deemed paid directly from the producers to Laughton. The Board held the corporation had a business purpose and hence its entity intervened.

The Board decision was made before the Supreme Court decided Higgins v. Smith, 308 U.S. 473, 60 S.Ct. 355, 84 L. Ed. ___, which we consider controlling this proceeding. In that case Smith, the taxpayer, dominated a corporation of which he owned all the shares through "officers and directors who were his subordinates. * * * While its accounts were kept completely separate from those of the taxpayer, there is no doubt that Innisfail the corporation was his corporate self." 60 S.Ct. 356. That is to say, the corporation was "wholly owned" both as to management by the taxpayer's subordinates and as to stock interest.

Smith, having in mind reducing his taxes, sold to this "corporate self" certain of his shares of stock at a loss, which he claimed as a deduction from his taxable income. It was held that, assuming title had passed to his corporate self, he had such a command of the securities thereafter that "There is not enough of substance in such a sale finally to determine a loss." 60 S.Ct. 357.

In a long discussion the court, inter alia, states that "Indeed this domination and control is so obvious in a wholly owned corporation as to require a peremptory instruction that no loss in the statutory sense could occur upon a sale by a taxpayer to such an entity." 60 S.Ct. 357. That the phrase "wholly owned" in this dictum regarding an instruction to the jury means something more than mere stock ownership is to be inferred from a ruling at the end of the opinion. There certain evidence of past transactions between taxpayer and corporation was admissible because the court thought "it apparent that this evidence was entirely relevant to the present issue; the history of the taxpayer's relations with the corporation shed considerable light on the actual effect of the sale in question." 60 S.Ct. 359.

Later, considering Burnet v. Commonwealth Improvement Company, 287 U.S. 415, 53 S.Ct. 198, 77 L.Ed. 399, in which the sole stockholder so utilized the corporation that it made a book profit and the corporation was held liable as a separate taxable entity, the court says:

"* * * A taxpayer is free to adopt such organization for his affairs as he may choose and having elected to do some business as a corporation, he must accept the tax disadvantages.

"On the other hand, the Government may not be required to acquiesce in the taxpayer's election of that form for doing business which is most advantageous to him. The Government may look at actualities and upon determination that the form employed for doing business or carrying out the challenged tax event is unreal or a sham may sustain or disregard the effect of the fiction as best serves the purposes of the tax statute. To hold otherwise would permit the schemes of taxpayers to supersede legislation in the determination of the time and manner of taxation. It is command of income and its benefits which marks the real owner of property." (Emphasis supplied.) Higgins v. Smith, supra, 60 S.Ct. 358.

It is arguable that the Higgins decision means that no matter what the particular "tax event" may be, if it be more profitable to the tax collector to disregard the intervening corporate entity this must be done. However, it seems to us that if this were the intent of the court it would have said so and not spread its consideration of the cases over many pages of the opinion with such qualifying language as is quoted above.

We take the opinion to mean that the "tax event" is not an unreal attempt to use a corporation for a sham transaction, procuring an...

To continue reading

Request your trial
28 cases
  • Doll v. Commissioner of Internal Revenue
    • United States
    • U.S. Court of Appeals — Eighth Circuit
    • May 11, 1945
    ...S.Ct. 144, 85 L.Ed. 75, 131 A.L.R. 655; Lucas v. Earl, 281 U.S. 111, 114, 50 S.Ct. 241, 74 L.Ed. 731; and see Commissioner of Internal Revenue v. Laughton, 9 Cir., 113 F.2d 103). Where the income is from combined labor and capital a test is the personality who or which "produced" the income......
  • Sargent v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • November 13, 1989
    ...The same is true of our earlier decisions in Laughton v. Commissioner, 40 B.T.A. 101 (1939), remanded for an unrelated reason 113 F.2d 103 (9th Cir. 1940), and Fox v. Commissioner, 37 B.T.A. 271 (1938), and of our recent decision in Haag v. Commissioner, 88 T.C. 604 (1987), affd. without pu......
  • Benningfield v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • September 19, 1983
    ...See Rubin v. Commissioner, 429 F.2d 650 (2d Cir. 1970); Laughton v. Commissioner, 40 B.T.A. 101 (1939), remanded on other grounds, 113 F.2d 103 (9th Cir. 1940); Fox v. Commissioner, 37 B.T.A. 271 (1938). 7. Article I, Section 10 of the Constitution provides in pertinent part, that no state ......
  • Browning v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • November 3, 2011
    ...v. Commissioner, 929 F.2d 1252 (8th Cir. 1991), revg. 93 T.C. 572 (1989); Laughton v. Commissioner, 40 B.T.A. 101 (1939), remanded 113 F.2d 103 (9th Cir. 1940); Fox v. Commissioner, 37 B.T.A. 271 (1938); Estate of Cole v. Commissioner, T.C. Memo. 1973-74. For the reasons set forth in sectio......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT