Hill v. Comm'r of Internal Revenue

Decision Date23 March 1967
Docket NumberDocket No. 1179-65.
Citation47 T.C. 613,153 U.S.P.Q. 757
PartiesJACKSON HILL AND IRENE HILL, PETITIONERS v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
CourtU.S. Tax Court

OPINION TEXT STARTS HERE

Martin Sosin, for the petitioners.

James J. Cotter, for the respondent.

Petitioner was employed as a writer-producer by KTTV at an agreed salary and an agreement that in addition to this salary he was to have a 5-percent interest in certain receipts from TV programs to which he was assigned. KTTV sold a series which had been written and produced by petitioner and paid petitioner 5 percent of its net profit from the sale. Held, the amount received by petitioner from KTTV representing 5 percent of that company's net profit from the sale of the TV series was ordinary income and not capital gain.

SCOTT, Judge:

Respondent determined a deficiency in petitioners' income tax for the calendar year 1962 in the amount of $13,350.24.

The issue for decision is whether an amount received by one of petitioners, representing a portion of the receipts by the company by which he was employed from the sale of a television production was taxable as capital gain or ordinary income.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Jackson Hill and Irene Hill, during the year 1962, were husband and wife residing in Van Nuys, Calif. They filed a joint Federal income tax return for the calendar year 1962 with the district director of internal revenue, Los Angeles, Calif.

Jackson Hill (hereinafter referred to as petitioner) was employed by the Times-Mirror Broadcasting Co. (hereinafter referred to as KTTV) from sometime in 1954 to July 31, 1961, as a writer and/or producer of various television programs or series to which he might be assigned.

Petitioner's employment agreement with KTTV when he commenced working for that company was an oral agreement. He was to write and produce any show to which he was assigned and for his services he was to receive a weekly salary. There was also to be an arrangement whereby petitioner would receive 5 percent of ‘any property’ on which he worked. Petitioner understood that he was to receive the 5 percent as an inducement to work on these properties. Petitioner also understood that he could assign the 5-percent interest he was to receive or sell it.

In 1958 KTTV originated the idea of a television series under the title, ‘Divorce Court,‘ and assigned petitioner to write and produce the series. On August 1, 1958, a memorandum agreement concerning the ‘Divorce Court series was reached between petitioner and KTTV. This memorandum agreement covered a period of 5 years cancelable by KTTV on or before 30 days prior to the end of each year. It provided that petitioner's duties were to perform as ‘producer and/or writer on any programs to which KTTV’ might assign him. The memorandum agreement set forth a schedule of petitioner's compensation on a weekly basis for each of the 5 years, and following this schedule was the statement that ‘Additionally, Hill is to receive 5% of the net profits accruing to KTTV as a result of any multimarket sale of any program to which he is permanently assigned. We'll have to work out this clause rather carefully when you return from vacation.’ The memorandum agreement further stated that petitioner's services were exclusive to KTTV. This memorandum agreement was initialed by Robert Breckner, who at the time was program director of KTTV. Breckner was the office of KTTV who had represented that company in negotiations with petitioner at the time of petitioner's original employment by KTTV. The memorandum agreement was signed as approved by petitioner.

The memorandum between petitioner and KKTV was referred to H. Bruce Baumeister who at the time as resident counsel for KTTV passed upon all legal matters for that company and either drew or approved all contracts entered into by the company. Baumeister, after receiving a copy of the memorandum agreement between petitioner and KTTV from Robert Breckner, prepared a document which was to be a formal contract between KTTV and petitioner which he submitted to petitioner for signature. The contract drafted by Baumeister provided for a profit participation by petitioner with respect to any show or series which he wrote or directed but that petitioner was to have no title to any of the products. The agreement also provided for a certain percentage for writing a series or show and a certain percentage for directing such series or show. The contract drawn by Baumeister was not executed by petitioner and no formal agreement was ever entered into between petitioner and KTTV. Petitioner was of the opinion that the proposed agreement did not make clear the arrangements which he had with KTTV.

Petitioner's assignment to write the ‘Divorce Court series was the same type of assignment as he had received with respect to a number of other series. The original assignment contemplated a series running for 13 weeks. Of the other series to which petitioner was assigned only one ran over 13 weeks and it was nevertheless a failure.

‘Divorce Court demonstrated potential as a successful series and ran well over 13 weeks. ‘Divorce Court was a different type of writing from other series petitioner had written and produced. Generally, for an hour series, the script petitioner wrote would run from 50 to 60 pages, but his ‘Divorce Court script would run approximately 14 pages and this method of writing contemplated the use of the actors' own characters to blend their own personalities into the show, which in petitioner's opinion made the show look real. The method of writing of the ‘Divorce Court series was the most important element of the show. In producing ‘Divorce Court petitioner interviewed and chose the actors, directed their rehearsals, organized the crews responsible for the sets and lighting, and even to a large extent directed the publicity.

Several times during the years 1958 through 1960, petitioner received 5 percent of the net proceeds generated from the exhibition of ‘Divorce Court on KTTV and 5 percent of amounts received from the leasing of the series ‘Divorce Court to other television stations. He reported these amounts on his income tax returns for the years in which they were received as ordinary income. Petitioner had no money investment in the ‘Divorce Court series.

On June 29, 1961, a sales agreement was executed between KTTV and Storer Broadcasting Co. whereby KTTV assigned all right, title, and interest in the ‘Divorce Court series to Storer Broadcasting Co. This agreement contained among others the following provisions:

(1) As of the effective date, Storer Broadcasting Company hereby purchases from Times-Mirror Broadcasting Company and Times-Mirror Broadcasting Company hereby sells to Storer Broadcasting Company, all of its right, title and interest in and to the one-hour television series entitled DIVORCE COURT, including but not limited to the format, title, master tapes and syndication copies, and all proprietary interest of Times-mirror Broadcasting Company therein.

(2) The purchase price to be paid by Storer Broadcasting Company shall be $1,105,000, payable $500,000 upon the effective date of this agreement, and the remainder in four (4) equal monthly installments on September 15, 1961, October 15, 1961, November 15, 1961, and December 15, 1961.

(7) Times-Mirror Broadcasting Company warrants that it is the owner of all right, title and interest in the series and in the title and format and as such has the right to assign all such property to Storer Broadcasting Company. Further, Times-mirror Broadcasting Company agrees to hold Storer Broadcasting Company harmless from any and all claims relating to any breach of the warranty mentioned in the preceding sentence, and from any and all claims against Storer Broadcasting Company as to its right, after the effective date of this agreement, to distribute and exhibit the aforesaid television series as the owner thereof.

Petitioner was not a party to the agreement between KTTV and Storer Broadcasting Co. There was presented to him a release to Storer Broadcasting Co., but he never executed the release. During the course of the negotiations between KTTV and Storer Broadcasting Co., Petitioner was informed of the price which was being considered in the negotiations. His discussions were with Robert Breckner. Petitioner's approval of the negotiations was not specifically requested.

In March 1962 petitioner received a check for $40,728.67 from KTTV accompanied by a letter which stated:

We enclose our check drawn in your favor in the sum of $40,728.67 for the balance due you for services in connection with the ‘Divorce Court TV series sold to Storer Broadcasting Company. The amount reflects the usual deductions, including that for income tax withholding.

On the previous payments which petitioner had received from exhibitions or leasing of the ‘Divorce Court series there had been income tax withholding deductions made by KTTV.

At the time Storer Broadcasting Co. was negotiating for the purchase of the ‘Divorce Court series, the negotiators on behalf of that company knew that petitioner was the producer and writer of the program. Petitioner's name appears on every show. At the time Storer Broadcasting Co. was negotiating for the purchase of the ‘Divorce Court series that company did not solicit petitioner's services to produce the series for it. There were at the time of the sale approximately 160 tapes of shows ready for exhibition. At the time of the trial of this case petitioner was engaged in producing the ‘Divorce Court series show for Storer Broadcasting Co.

The sales price paid by Storer Broadcasting Co. to KTTV for the series ‘Divorce Court was $1,105,000. The expenses of the sale were $108,614.40, leaving a profit of $996,385.60. KTTV determined that petitioner was entitled to 5 percent of the profit which it computed to be...

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3 cases
  • Edwards v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • May 2, 1968
    ...v. Gillette Motor Transport, Inc., 364 U.S. 130; Holt v. Commissioner, 303 F.2d 687 (C.A. 9); Ralph Bellamy, 43 T.C. 487; Jackson Hill, 47 T.C. 613. These payments seem to me to be ordinary taxable gain in their entirety.FEATHERSTON, J., dissenting: With due deference, I dissent. Code secti......
  • Rothstein v. Comm'r of Internal Revenue
    • United States
    • U.S. Tax Court
    • March 30, 1988
    ...that form. 11 In support of his argument that the payments constituted ordinary income, respondent relies primarily on Hill v. Commissioner, 47 T.C. 613 (1967), and Freese v. United States, 455 F.2d 1146 (10th Cir. 1972). In Hill we held that the taxpayer, who was the producer and writer of......
  • Levy v. Commissioner
    • United States
    • U.S. Tax Court
    • August 19, 1992
    ...asset category if the asset otherwise comes within the definition of similar property under section 1221(3). See Hill v. Commissioner [Dec. 28,384], 47 T.C. 613 (1967); S. Rept. 2375, 81st Cong., 2d Sess. (1950), 1950-2 C.B. 483, 543. We must therefore determine whether the asset held by pe......

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