DeMille v. Commissioner of Internal Revenue, Docket No. 52995
| Decision Date | 31 January 1935 |
| Docket Number | 61291,65122,52996,Docket No. 52995,71952.,71951,61290,65123 |
| Citation | 31 BTA 1161 |
| Parties | CECIL B. DEMILLE, PETITIONER, ET AL., v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
A. Calder Mackay, Esq., for the petitioners.
M. B. Leming, Esq., R. J. Bopp, Esq., and J. H. Miller, Esq., for the respondent.
In these proceedings, which, upon motion, were consolidated, petitioners contest respondent's determinations of deficiencies in income taxes against Constance A. deMille, in the amount of $758.50 for the year 1930; and against the other petitioners as follows:
---------------------------------------------------------------
| | Cecil B. deMille
Year | Cecil B. deMille | Productions, Inc.1
------------------------|------------------|-------------------
1924 __________________ | $47,211.61 | $157,599.66
1925 __________________ | 16,845.75 | 363,605.62
1926 __________________ | 19,026.20 | 334,871.25
1927 __________________ | 32,656.67 | 138,217.60
1928 __________________ | 36,625.42 | 387,599.80
1929 __________________ | 13,126.29 | 104,423.60
1930 __________________ | 23,995.88 | __________________
| ________________ | __________________
Total __________ | 189,487.82 | 1,486,317.53
---------------------------------------------------------------
1 The amounts of deficiencies as here set out, include for each of these years taxes under sec. 220, Revenue
Acts of 1924 and 1926, and sec. 104, Revenue Act of 1928
Beyond various minor changes made by respondent to incomes reflected by their returns filed for these several years, the deficiencies against petitioner Cecil B. deMille, and the corporation (as to the corporation tax at the lower rates) result mainly from respondent's action in disallowing, as deductions from gross income of the corporation, substantial items, claimed as business expenses, and adding these amounts to deMille's individual income, as dividends received by him from the corporation. Included in such items were amounts paid by the corporation as salary to petitioner Constance A. deMille. The issues raised by the pleadings concerning the most of these numerous adjustments made by respondent have been settled by stipulations of the parties, filed within the time permitted therefor. We refer to them here, in explanation of the absence from our findings of any facts concerning these matters.
Respecting the corporate petitioner, the parties have stipulated the amounts of its net taxable income for each of the years here before us, and these are hereinafter set out. Respecting petitioner Cecil B. deMille, the parties agree as to the amount of his net taxable income for each of the years before us, except as to one item. The excepted item is the salary paid Constance A. deMille (wife of Cecil B. deMille) by the corporation petitioner. In 1924 it was $24,700; in each 1925 and 1926, $36,400; and in 1927 up to July 29, $25,608.33. She filed separate returns for these years and reported these amounts. Respondent maintains these payments are taxable to petitioner under the community property laws of California Petitioner contends that they are taxable to his wife in accordance with his agreement with her. Which person is taxable is left for us to decide. It is agreed that if these salary payments are taxable to petitioner, they are to be taxed as ordinary income, and not as dividends.
Respecting petitioner Constance A. deMille, it is stipulated that there is due from her a deficiency in income tax for 1930 of $953.17. An order will be entered accordingly.
Upon recomputation under Rule 50, effect will be given to these several stipulations, which dispose of all issues in these cases but two. Of those issues for our decision the first has been mentioned; it concerns the salaries paid to Mrs. deMille. The second is, whether respondent was correct in imposing upon Cecil B. deMille Productions, Inc., a tax under the provisions of section 220, Revenue Acts of 1924 and 1926, and section 104, Revenue Act of 1928. The corporate petitioner assails this action as to every year here involved and, in addition, urges that the statutory provisions mentioned, and under which respondent has acted, are unconstitutional.
FINDINGS OF FACT.
Cecil B. deMille, a resident of Los Angeles, is an outstanding director and producer of motion pictures. Prior to 1913 he had been active in the theatrical business as an actor, playwright, and producer of shows on the legitimate stage. In that year he joined with Jesse L. Lasky, Samuel Goldwyn, and Arthur Friend, in organizing Lasky Feature Play Co. to engage in the production and exhibition of motion pictures. DeMille's duty in the enterprise, upon which he entered immediately, was to produce the pictures. In this he was assisted to a considerable extent by his wife, petitioner Constance A. deMille, who was an actress, and experienced also in the varied managerial details incident to the staging of plays.
From a small beginning (its first film, "Squaw Man", was made in 1913 at a cost of about $37,000) the Lasky Co. prospered and later merged with other pioneer motion picture concerns to form the Famous Players-Lasky Corporation (hereinafter called Famous Players). Of the enlarged company, deMille was made director general, his duties being, generally, the direction and production of the pictures. Thereafter, due in part to individual ambitions respecting control, difficulties developed within the organization. Goldwyn and Friend were forced out or left the company; so did Bosworth, who was originally interested in one of the merged concerns.
Because of the friction within the organization, and the departure of some of his original associates, deMille felt insecure in his position; feared that he might be ousted. Moreover, he resented, and considered himself hampered by, attempts made, both by fellow executives of the corporation and by representatives of the financial concerns furnishing money for the productions, to restrict his choice and control his judgment respecting types of pictures to be made and to interfere with his conduct of production operations. To assure himself protection, he desired to form an organization of his own, sufficiently financed, so that it might produce pictures independently, freed from interference of the financiers, whether banking interests or distributing companies, and reap the profits, undivided.
To this end, as early as 1918, he talked with various persons in Famous Players and other studios, whom he wished to take into his organization and, with Constance, discussed the matter with their personal attorney, McCarthy. Beyond discussion however, nothing was done in the matter until 1920. That year, by letter of August 14, deMille notified Famous Players-Lasky Corporation that he was terminating his agreements as its employee; that he was determined to realize his ambition to produce his own pictures with his own company; that he had organized a partnership through which to so do; and suggested that they make an arrangement whereby the pictures produced by the new organization might be distributed through Famous Players.
Upon McCarthy's advice, the new organization was a partnership, rather than, as contemplated by deMille, a corporation, and the articles were drawn under date of August 16, 1920. A total of $25,000 cash was paid in; $11,250 by Cecil, who had 45 percent interest, $6,250 by Constance, who had 25 percent interest, $5,000 by Ella King Adams, a relative by marriage, who had 20 percent interest, and $2,500 by McCarthy, whose interest was 10 percent. The firm's name was Cecil B. deMille Productions; its purposes were to produce, exhibit, and otherwise deal in motion pictures; to deal in studios, stories, stage properties, and any other things incidental to the production of pictures; to contract for services either for or by the partnership and to buy, sell, and deal generally in real estate and securities.
The agreement also outlined the duties of the several partners. Cecil was to choose the stories, plan and direct the productions; Constance was to be business manager; Ella Adams was to carry on research work, read and write stories and scenarios for the concern, and McCarthy was to handle its legal matters. The partners agreed that should any one of them withdraw, the others should have the right, (first right going to Cecil) to purchase his interest at the amount of his original investment in the firm. A short time later, in order to protect the firm from a sale of a partner's interest to outsiders, and to assure his control, Cecil obtained written options to similar effect from Adams and McCarthy.
By a separate instrument, deMille contracted to render his services as a director of motion pictures exclusively to the partnership for a term of five years at a salary of $1,500 a week. He was given sole authority in the direction and production of pictures, including the right to select the stories, employ artists, and purchase materials and supplies. He undertook to complete not less than two, nor more than four, pictures each year, so that the partnership might comply with an agreement it made contemporaneously with Famous Players, and was to have at his disposal all the facilities furnished by the latter under that contract. The partnership agreed to insist upon adequate advertising and publicity for the name of deMille in connection with any photoplay which it contracted to produce.
The contract between Famous Players, called the distributor, and the partnership, called the producer, was also dated August 16, 1920. It recited that deMille had previously been employed by Famous Players as a director; that Famous Players wanted more pictures directed by him; that the partnership had...
To continue reading
Request your trial