Fox v. COMMISSIONER OF INTERNAL REVENUE
| Decision Date | 04 February 1938 |
| Docket Number | Docket No. 78834. |
| Citation | 37 BTA 271 |
| Parties | FONTAINE FOX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT. |
| Court | U.S. Board of Tax Appeals |
Frank J. Albus, Esq., and E. V. McKeown, Esq., for the petitioner.
J. R. Johnston, Esq., for the respondent.
In this proceeding petitioner requests a redetermination of a deficiency in income tax of $35,219.35 for 1932. The issues are (1) whether an amount of $104,000 representing payments made by a syndicate to a corporation, all of whose stock was owned by petitioner, for the use of certain cartoons produced by petitioner pursuant to an agreement with the corporation was income to petitioner or was income to the corporation, and (2) whether an amount of $9,482.30 representing royalty payments received by the corporation from contracts assigned to it by petitioner for the use of cartoons produced by petitioner constituted income to him or income to the corporation.
FINDINGS OF FACT.
Petitioner is a newspaper cartoonist having an office at 134 Plandome Road, Manhasset, Long Island, New York. He is the creator of the cartoons known as "Toonerville Trolley," "Tomboy Taylor," "The Terrible Tempered Mr. Bang," "Aunt Eppie Hogg," and others. These cartoons are published in the United States and several foreign countries including Canada and Mexico.
Petitioner had been creating cartoons for a number of years prior to 1924. On February 19, 1924, he caused a corporation, known as the Reynard Corporation, to be formed under the laws of the State of New York, with an authorized capital stock of 100 shares of no par value. Having previously been elected directors of Reynard, petitioner, C. E Kelley, his attorney, and his brother, Barton Fox, held a directors' meeting on March 11, 1924, at which petitioner was elected president, Kelly, secretary, and Barton Fox, treasurer. At the same meeting the directors accepted an offer of Fox wherein he proposed that, in consideration of Reynard issuing 98 shares of its capital stock to him and one share each to Kelley and Barton Fox, he would pay and transfer to Reynard $5,000 in cash, certain bonds of a par value of $55,000 and of a market value of about $44,000, and two parcels of real estate situated in Nassau County, New York. Immediately following the acceptance of petitioner's offer, the directors took a recess during which the cash and bonds were delivered by petitioner and the 100 shares of Reynard's capital stock were issued in the amounts and to the parties designated in the offer. The real estate mentioned in petitioner's offer was not transferred to Reynard because the wife of petitioner refused to release her dower interest in it. After the foregoing transfers to Reynard, petitioner had remaining real estate of a value of about $35,000, stocks and bonds of a value of $4,000 or $5,000, and an amount in cash in excess of that paid over to Reynard.
Following their recess the directors on the same day authorized Kelley on behalf of Reynard to execute a proposed contract of employment with petitioner wherein petitioner assigned to Reynard the copyrights to all the cartoons theretofore published and copyrighted in his name, and agreed to render to Reynard his exclusive services as an artist and author from that date until March 31, 1927, to furnish Reynard each week for publication on week days beginning April 1, 1924, and ending on March 31, 1927, six daily cartoons of the kind theretofore drawn by him and throughout the term of the contract to furnish Reynard each week for publication as a Sunday page beginning May 4, 1924, and ending March 31, 1927, one full page drawing of the same or similar characters. In addition petitioner agreed to approve certain contracts of the same date between Reynard and the Bell Syndicate, Inc., a corporation engaged in distributing features to newspapers throughout the United States and foreign countries, for the syndication of the daily cartoons and Sunday pages to be furnished by him. For the foregoing petitioner was to receive from Reynard a salary of $2,500 a month throughout the term of the agreement beginning April 1, 1924. The contract was signed by the parties on that date and by reason of a subsequent extension petitioner has continued to render service to Reynard under it.
Immediately following their authorization of the execution with petitioner of the above mentioned contract, the directors authorized the execution of two contracts by Reynard with the Bell Syndicate, Inc., hereinafter referred to as the Bell Syndicate, for the syndication of the daily cartoons and Sunday pages to be furnished to Reynard by petitioner. Under the two contracts the Syndicate was to pay Reynard a certain percentage of the gross amount of the sales to newspapers of the right to publish the cartoons and pages, with a total guaranteed minimum under the two contracts of $1,500 a week. The contracts also provided that if, by reason of illness or other disability of petitioner, Reynard should be unable to furnish the cartoons and Sunday pages as therein provided, then the Syndicate would not be required to pay Reynard the amounts provided for and that, if Reynard should be unable to furnish them for a continuous period of more than four weeks in any one year, then the period of such failure should be added to the term of the agreements. The two contracts, which were negotiated with the Syndicate by Kelley and petitioner jointly, were signed on March 11, 1924.
On November 30, 1926, Reynard entered into another contract with the Bell Syndicate for the syndication of cartoons and Sunday pages to be created by petitioner for the period from April 1, 1927, to March 31, 1930, under which the minimum weekly amount to be paid by the Syndicate was increased from $1,500 to $2,000. This contract as later amended was extended to March 31, 1934, by contracts dated October 14, 1927, January 11, 1930, and November 9, 1931. Under the various contracts between Reynard and the Syndicate, the latter agreed to copyright the cartoons and Sunday pages in whatever name Reynard should direct and to require all newspapers in which they should be published to run a copyright notice in the name of petitioner or such other party as Reynard should direct. Petitioner never owned any stock in the Bell Syndicate and never was employed by it.
The Bell Syndicate paid the stipulated royalties provided for in the contracts to Reynard, which deposited them in its bank account. Reynard reported the amounts in its income tax returns and paid the tax shown to be due by such returns. Reynard also filed capital stock tax returns for such years as the law required and paid the tax shown to be due on such returns.
On June 18, 1926, petitioner personally entered into an agreement with R K O Radio Pictures, Inc., (then named R-C Pictures Corporation) wherein petitioner granted to R K O Radio Pictures, Inc., hereinafter called R K O, the exclusive right to make motion pictures featuring the juvenile characters in his cartoons. The agreement was for a period of one year from the date thereof but gave R K O successive annual options to extend it for a period of five years. For the right thus granted R K O agreed to pay petitioner $12,000 a year and $1,000 for each picture over 12 begun during each year. On February 26, 1931, the contract was amended to provide for a payment to petitioner of $1,000 for each picture commenced during the period April 1, 1931, to March 31, 1932, but not less than $6,000 during that period. On March 30, 1932, the life of the contract was extended to May 1, 1933, with an option to R K O to extend it for an additional year from that date. The total annual payments to be made by R K O under this extension were the same as provided for in the amendment of February 26, 1931.
On July 13, 1921, petitioner personally entered into a contract with George Borgfeldt & Co., wherein petitioner for a stipulated royalty granted to the company the sole right to use in the manufacture and sale of toys certain characters in his cartoons. By subsequent agreements dated December 29, 1922, October 21, 1927, January 1, 1930, and December 3, 1931, this contract was extended to December 31, 1932. On October 7, 1927, petitioner personally entered into a contract with the company in which for a stipulated royalty petitioner granted to the company the exclusive right to use in the manufacture and sale of toys, dolls, and figures a certain other character appearing in his cartoons. This agreement by its terms was to be effective until December 31, 1930, and thereafter was to be automatically renewed from year to year unless one of the parties gave notice of a desire to cancel it.
About January 19, 1926, petitioner personally entered into a contract with Fred A. Wish, Inc., on a royalty basis for the use for advertising and merchandising purposes of certain characters created by petitioner.
Down to April 1, 1932, petitioner received the payments under the contracts with R K O, George Borgfeldt & Co., and Fred A. Wish, Inc., and devoted them to his own use. The contracts with the three corporations being in force on April 1, 1932, petitioner by a written instrument assigned them to Reynard on that date. In doing this petitioner was following the advice of his personal attorney, who was also attorney for Reynard. The attorney had informed him that this should be done since under the contract between petitioner and Reynard and in view of the rights Reynard had in the copyrights and trade marks covering petitioner's creations, there was some doubt as to whether he could legally contract with the three corporations respecting their use of the characters. The payments made after April 1, 1932, by the three corporations under the contracts were included by Reynard in its income tax returns.
Petitioner conducted the affairs of Reynard. Kelley and Barton Fox, who served without salary as secretary and treasurer, respectively,...
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