JONES BEACH THEATRE CORPORATION v. Commissioner, Docket No. 966-64.
| Decision Date | 17 May 1966 |
| Docket Number | Docket No. 966-64. |
| Citation | 1966 TC Memo 100,25 TCM (CCH) 527 |
| Parties | Jones Beach Theatre Corporation v. Commissioner. |
| Court | U.S. Tax Court |
Lawrence A. Blatte and Jules Ritholz, for the petitioner. Rudolph J. Korbel, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined a deficiency in income tax against the petitioner for the fiscal year ended July 31, 1958, in the amount of $13,484.18. The only issue for decision is whether petitioner is entitled to a deduction of $29,866.38 for payments it made in satisfaction of the debts of a predecessor corporation.
Some of the facts have been stipulated and are so found.
The Jones Beach Theatre Corporation (hereafter called petitioner) was organized under the laws of the State of New York on November 15, 1955. It filed its Federal corporation income tax returns for the fiscal years ended July 31, 1956, 1957, and 1958 with the district director of internal revenue, Brooklyn, New York. Since its incorporation the stock of petitioner has been owned equally by Guy Lombardo, Carmen Lombardo, Lebert Lombardo, and Anton Fischer (the Estate of Anton Fischer after his death in October 1957).
Petitioner was formed to continue the business of a corporation known as Guy Lombardo Enterprises, Inc. (hereafter called Enterprises), which was incorporated under the laws of the State of New York on November 24, 1953, with its stock held exactly the same as that of petitioner. Guy Lombardo, leader of the famous Guy Lombardo Orchestra, was the president of Enterprises, and his brothers Carmen and Lebert were its other officers.
During the summers of 1954 and 1955 Enterprises produced a show called "Arabian Nights" at Jones Beach Marine Theatre (hereafter called Marine Theatre), an 8,200-seat, open-air amphitheater located at Jones Beach State Park, Nassau County, New York. Marine Theatre is unique. It was built to be the largest of its kind in the world, with two stages separated by a 100-foot waterway permitting the use of barges and boats in its productions. The rear stage is located 100 feet from the audience, requiring the proscenium (or forward opening) in the front stage to be 150 feet wide, three times that of a normal theatre. The scenery used is 60 to 70 feet high and erected permanently on a turntable 72 feet in diameter. Costumes used in the productions at Marine Theatre must be vivid and durable because of the weather conditions. The scenery has to be anchored down because of high winds. Because of weather limitations, the summer season begins on the last Thursday in June and ends the night before Labor Day, providing approximately 75 performances each year. Rain and even the forecast of it is always a problem because of its effect on attendance. Performances which are cancelled because of rain cannot be rescheduled as matinees and, therefore, the lost ticket sales resulting from nonperformance cannot be recovered.
The 1954 season was financially unsuccessful for Enterprises and during August 1955 several hurricanes seriously hampered activities at Marine Theatre, causing cancellation of all performances from August 9 through Labor Day. Although the Lombardo brothers took no salaries for their services during these years, Enterprises was insolvent at the end of the summer of 1955 and unable to pay its unsecured debts, totaling $29,866.38. In order to recoup their losses, the Lombardo brothers took their orchestra on the road after informing the New York authorities that they were not going to be associated with any further productions at Marine Theatre. While on the road, however, the Lombardos were contacted by the New York State officials (known as the Jones Beach State Parkway Authority and hereafter called Authority) and encouraged to continue the production of summer shows. Representatives of the Authority pointed out that Marine Theatre had a national reputation and that it was in the public interest to continue the productions. Sidney M. Shapiro, general manager of the Authority, personally telephoned Guy Lombardo a number of times on his tour in an effort to persuade him to reconsider. Stanley J. Polek, director of the Authority, made a personal trip to Las Vegas, Nevada, to persuade the Lombardos to produce a show for the 1956 season.
In answer to these requests the Lombardos pointed out that they had already suffered substantial personal losses in connection with their guaranties of some of Enterprises' debts during the 1955 season, and that because of the remaining unpaid bills they could not deal with the same trade, advertising, and stage people. Furthermore, the Lombardos did not want to take the financial risk of bad weather.
In order to induce the Lombardos to produce a show for the 1956 season, the Authority offered them an advance payment of $200,000 with the understanding that the Lombardos would pay the $29,866.38 of bills incurred and left unpaid by Enterprises as a result of the 1955 production. Thus the $200,000 was to be used not only for preproduction expenses for a new show but also to help the petitioner wipe the slate clean on the 1955 show. It is the overall policy of both the Authority and its parent organization, the Long Island State Park Commission, to avoid insolvencies and defaults on legitimate obligations connected with Authority ventures. The Authority deems it important to maintain a good public image and credit rating, and to avoid any unfavorable publicity which might reflect on the Authority and its parent organization. Since the Authority and its parent organization borrow large sums of money from public sources, a good credit rating is important to maintain low interest and borrowing costs. The Authority therefore considered it unwise to make the advance to Enterprise and wanted to deal with a corporation that was free of debt. For this reason the petitioner was organized.
The Authority has an established policy featuring a two-year cycle for the shows presented at the Marine Theatre. A particular show is produced in one year and repeated in the second year. This policy prevailed during the 1952 and 1953 seasons when Mike Todd was the producer, and for the 1954 and 1955 seasons when Enterprises produced "Arabian Nights." It also prevailed during the years 1956 and 1957 when petitioner produced "Show Boat." In the entire history of Marine Theatre no show has ever been repeated a third year.
The musical play "Show Boat" is based upon a novel by Edna Ferber, with music by Jerome Kern and book and lyrics by Oscar Hammerstein. Petitioner presented "Show Boat" during the summer seasons of 1956 and 1957, pursuant to a lease from the author, without acquiring any ownership rights therein. These remained in the author. Petitioner acquired only so-called performance rights. Consequently, orchestrations or adaptations of the show prepared by its performers became the property of the owners.
For the 1956 season the petitioner constructed special scenery, including a big show boat 110 feet long. The scenery was tailor made and unsuitable for use at any other theatre. The orchestrations supplied by the owners were inadequate, so petitioner had to enlarge the orchestrations for a 40-piece orchestra.
By the close of the 1956 summer season the petitioner knew it would repeat the show for the 1957 summer season. The scenery was tied down with ropes and anchored in place, the show boat was covered and protected with paper to keep snow and ice out of it, and the costumes were sent to the dry cleaners for restoration and storage. The orchestrations were stored away, and the owners of "Show Boat" and the costume rental company were notified that petitioner would repeat the show the following season. Petitioner gave notice to the cast and other personnel that the show would be repeated and that they would have first preference for the next year.
The repeat of "Show Boat" for the 1957 season closed Labor Day of 1957. There was never any consideration given to running the show for a third season. The orchestrations which were prepared by petitioner at its own expense were delivered to the owners of "Show Boat" and they were notified that petitioner no longer desired performance rights in the show. The costumes were returned to the rental agency, the scenery discarded, and the show boat dismantled. The scenery and playbill designs, along with the choreography numbers, were discarded.
Petitioner has not received any income from any source subsequent to the close of "Show Boat" in the summer of 1957. Petitioner was incorporated to meet the request of the Authority for a "new corporation" free from debt to receive the $200,000 advance payment. It was organized on the same day the "Show Boat" contract was signed, and it has not conducted any business since it produced "Show Boat."
The Lombardo brothers did not produce a show at Marine Theatre during the summers of 1958 and 1959. In 1960, however, they produced a show entitled "Hit the Deck" through their corporation, G. C. L. Productions. During the summer seasons of 1961 and 1962 G. C. L. produced a show entitled "Paradise Island." Since then G. C. L. has produced two other shows, "Around the World in 80 Days" and "Mardi Gras," the latter in the summer of 1965.
The contracts between Enterprises and the Authority for the 1954 and 1955 summer seasons were negotiated on the basis of a hypothetical break-even point of $750,000, the producer retaining the first $750,000 of ticket sales and thereafter sharing them one-half to the producer and one-half to the Authority.
The contract for the 1956 summer season with petitioner differed substantially from the contracts for the 1954 and 1955 shows. In 1956 the Authority paid $200,000 to the petitioner as an advance. In addition, the petitioner was to retain the first $500,000 in ticket sales; ticket sales between $500,000 and $800,000 were to be shared one-third by ...
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