Twentieth Century-Fox Film Corp. v. Comm'r of Internal Revenue
| Decision Date | 04 November 1965 |
| Docket Number | Docket No. 89631. |
| Citation | 45 T.C. 137 |
| Parties | TWENTIETH CENTURY-FOX FILM CORPORATION, TRANSFEREE, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
William W. Owens and Robert E. Frisch, for the petitioner.
William F. Chapman, for the respondent.
Petitioner's transferor sold one of its films to its controlling stockholder for cash in an effort to avoid being treated as a collapsible corporation. Held, the asset so sold was of a character subject to the allowance for depreciation in the hands of the purchasing controlling stockholder, and, hence, section 1239, denying capital gain on the sale, is applicable.
Respondent determined a deficiency of $67,500 in the income tax of Charles K. Feldman Group Productions (hereinafter referred to as Group Productions or the corporation) for the taxable period January 1 to September 8, 1955. Liability is asserted against the petitioner herein, Twentieth Century-Fox Film Corp., as transferee of Group Productions' assets. Petitioner does not dispute its transferee liability if Group Productions is held liable for the deficiency.
The only issue remaining for decision is whether the gain from the sale by Group Productions to its controlling shareholder of all its rights in the motion picture ‘A Streetcar Named Desire’ is to be treated as ordinary income or capital gain.
Some of the facts have been stipulated and the stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioner is a Delaware corporation organized in 1952 with its principal place of business in New York City. Petitioner is the transferee of the assets of Charles K. Feldman Group Productions.
Charles K. Feldman Group Productions was a California corporation organized in 1937. It filed its Federal income tax return for the taxable period January 1 to September 8, 1955, with the district director of internal revenue in Los Angeles, Calif. At all times in 1955 prior to September 8, 1955, Charles K. Feldman (hereinafter referred to as Feldman) was the record holder of 100 percent of the preferred and 96.25 percent of the common stock of Group Productions. Feldman's ‘occupation’ in 1955 was serving as president of Group Productions and also as president of a talent agency.
In and prior to 1955 the business activities of Group Productions had consisted of the production of motion pictures and the exploitation of motion-picture rights in literary properties. Group Productions would acquire exclusive exploitation rights to literary properties such as books and plays. Sometimes Group Productions would license or sell a literary property to a production company. Sometimes it would prepare a screenplay or motion-picture script and then license or sell the literary property with the prepared script. On only four occasions did Group Productions itself produce a motion picture from one of its literary properties. After completion of production these films were distributed (through an independent distributing organization) and film rental income was received therefrom.
In 1949 Group Productions acquired the exclusive motion-picture rights to Tennessee Williams' play, ‘A Streetcar Named Desire.’ Group Productions thereafter caused four screen adaptations of the play to be prepared and it produced a motion picture (hereinafter referred to as ‘Streetcar’) from the last of said adaptations. Production of the picture was financed in part by Warner Bros. Pictures, Inc., and distribution rights were acquired by Warner Bros. Under the terms of this agreement Group Productions owned the photoplay, the copyright therein, and the films.
The first general release date of ‘Streetcar’ was September 29, 1951, and Group Productions' investment therein was $1,734,421.86. By the end of 1952 Group Productions' investment had been completely amortized and taken as deductions in its Federal income tax returns against its income from ‘Streetcar,‘ and thereafter Group Productions had a tax basis of zero in that property.
Disputes arose between Group Productions and Warner Bros. as to the latter's accounting for the receipts from ‘Streetcar.’ By agreement dated March 8, 1955, the parties settled their disputes. As part of this agreement Group Productions agreed that thereafter and until January 1, 1958, Warner Bros. might distribute and license others to exhibit the photoplay and retain all proceeds therefrom without rendering an accounting to Group Productions. However, this agreement specified that Warner could not generally reissue ‘Streetcar’ in any country or territory and after 45 days from the date of the contract Warner was prohibited from distributing or licensing the exhibition of ‘Streetcar’ in such cities in the United States or Canada where said photoplay has heretofore been exhibited.' Warner Bros. agreed that on January 1, 1958, all of its remaining distribution rights and all its other rights in and to ‘Streetcar’ and the income therefrom should terminate.
By letter dated March 7, 1955, petitioner, Twentieth Century-Fox, made alternative offers to purchase all of the assets of Group Productions subject to its balance sheet liabilities or all of the issued and outstanding stock in Group Productions. Petitioner's offers called for the payment of $1,650,000 as consideration for the purchase of either of these properties. Said alternative offer was to remain open until 15 days after a ruling had been secured from the Commissioner of Internal Revenue determining the tax consequences of the sale of Feldman's stock or the sale of Group Productions' assets pursuant to said offer, or May 15, 1955, whichever was the earlier date. In the offer for assets petitioner allocated $250,000 of the offer to ‘Streetcar.’
By letter dated March 8, 1955, Feldman applied to the Commissioner of Internal Revenue for rulings—
a. That the sale of all its assets by Group Productions to petitioner pursuant to petitioner's offer of March 7, 1955, would, if made subsequent to the adoption of a plan of complete liquidation of Group Productions and within a 12-month period beginning with the date of adoption of such plan, result in no gain or loss to Group Productions by reason of such sale, pursuant to section 337 of the Internal Revenue Code of 1954,1 and that the proceeds of said sale would be treated in the hands of Feldman as gain from the sale or exchange of capital assets held for a period of more than 6 months; and
b. That the proceeds of the sale by Feldman of his stock in Group Productions to petitioner pursuant to petitioner's offer of March 7, 1955, would be treated as gain from the sale of capital assets held for a period of more than 6 months.
Thereafter conferences were held in Washington, D.C., between representatives of the Internal Revenue Service, two of petitioner's attorneys, and the accountant for Feldman and Group Productions. One subject of these conferences was the possibility that Group Productions might be treated as a collapsible corporation under section 341. Ultimately the conferee for the Internal Revenue Service indicated that a favorable ruling on the sale of the shares would be issued if prior to the sale ‘Streetcar’ were purchased from Group Productions for cash. This was reported to Feldman and Feldman expressed a willingness to purchase ‘Streetcar’ from Group Productions for $250,000.
On June 10, 1955, Feldman wrote a letter to petitioner proposing that petitioner's offer to purchase the assets of Group Productions be withdrawn and its offer to purchase the outstanding shares of Group Productions be amended so as to make it conditional upon Feldman's first purchasing ‘Streetcar’ from Group for $250,000 cash. Petitioner amended its offer accordingly.
Feldman in 1955 at the time of negotiations with petitioner intended and desired to dispose of all of his properties in Group Productions.
By letter dated August 12, 1955, the Acting Chief, Corporation Tax Branch, Tax Ruling Division, Internal Revenue Service, advised Feldman that if, prior to the sale of shares in Group Productions to petitioner, he purchased ‘Streetcar’ from Group Productions for $250,000, the sale of his shares to petitioner would meet the requirements of the so-called 70-percent rule set forth in section 341(d)(2) (), and a gain on such sale would be taxable as long-term capital gain.
On September 1, 1955, Feldman purchased from Group Productions all of its right, title, and interest in and to ‘Streetcar’ for $250,000 cash. Prior to this sale of ‘Streetcar’ to Feldman, Group Productions had produced motion pictures and exploited motion-picture rights in literary properties. It did not generally derive its income from the sale of pictures or its interests therein. Group Productions' income from motion pictures had been derived from its share of rentals of such pictures through distributing organizations. Its income from exploitation of motion-picture rights in literary properties was derived either by the production of a picture which then yielded income as mentioned or by the licensing of another producer to use the property to produce a picture.
On September 8, 1955, petitioner purchased all the outstanding capital stock of Group Productions, including the shares owned by Feldman for $1,650,000.
On June 19, 1957, Group Productions adopted a plan of complete liquidation and, pursuant to said plan, was fully liquidated by August 31, 1957. At all times subsequent to the adoption of a plan of liquidation until completion thereof, petitioner was the sole stockholder in Group Productions. Pursuant to the plan of liquidation all of Group Productions' assets were transferred to petitioner. The fair value of the assets received by petitioner upon the liquidation of Group Productions was greater than the liabilities of Group Productions at the time of said liquidation, including the...
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