Commissioner of Internal Revenue v. Laughton
Decision Date | 29 June 1940 |
Docket Number | No. 9413.,9413. |
Citation | 113 F.2d 103 |
Parties | COMMISSIONER OF INTERNAL REVENUE v. LAUGHTON. |
Court | U.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.
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 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.
(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...
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