United Artists Theatre Circuit, Inc. v. Indiana Dept. of State Revenue, Gross Income Tax Div., 1-683A177

• Decision Date: 16 February 1984
• Docket Number: No. 1-683A177,1-683A177
• Citation: 459 N.E.2d 754
• Parties: UNITED ARTISTS THEATRE CIRCUIT, INC., Plaintiff-Appellant, v. INDIANA DEPARTMENT OF STATE REVENUE, GROSS INCOME TAX DIVISION, Defendant- Appellee.
• Court: Indiana Appellate Court

Page 754

459 N.E.2d 754

UNITED ARTISTS THEATRE CIRCUIT, INC., Plaintiff-Appellant, v. INDIANA DEPARTMENT OF STATE REVENUE, GROSS INCOME TAX

DIVISION, Defendant- Appellee.

No. 1-683A177.

Court of Appeals of Indiana,

First District.

Feb. 16, 1984.

Larry J. Stroble, Kenneth H. Inskeep, Barnes & Thornburg, Indianapolis, for plaintiff-appellant.

Linley E. Pearson, Atty. Gen., Joel Schiff, Deputy Atty. Gen., Indianapolis, for defendant-appellee.

ROBERTSON, Judge.

United Artists Theatre Circuit, Inc. (United Artists) appeals the denial of its tax refund claim. United Artists filed suit against the Indiana Department of State Revenue for a refund of gross income tax for the 1975, 1976, 1977, and 1978 tax years.

We affirm.

United Artists is a Maryland corporation engaging in the business of exhibiting motion pictures at various theatres it owns throughout Indiana. ¹ It acquires the right to exhibit films by entering licensing agreements with film distributors. There are two types of licenses: fixed rental licenses and percentage licenses. In the first type, the theatre owner pays a fixed charge to the distributor for the right to exhibit the movie. In the second arrangement, the theatre owner pays the distributor a percentage of the gross receipts from the admissions after deducting a house allowance. The percentage licenses can be further delineated to licenses containing trust clauses and those licenses not containing trust clauses.

The Gross Income Tax Act, IND.CODE Sec. 6-2-1-1 et seq., levies a tax upon the receipt of the entire gross income of corporations resident and/or domiciled in Indiana and upon the receipt of gross income derived from activities or businesses or any other source within Indiana by non-resident corporations. Gross income which is derived from interstate commerce is exempt to the extent which state taxation is prohibited by the Constitution of the United States. Reynolds Metals Co. v. Indiana, etc., (1982) Ind.App., 433 N.E.2d 1.

United Artists alleges it overpaid the Department $80,154.94 in gross income taxes. It argues gross income tax should not have been assessed upon the percentage of its receipts which were paid to the distributors pursuant to the licensing agreement. United Artists bases its argument upon two theories: 1) the percentage of the receipts "belonged" to the distributors, and 2) United Artists acted as an agent for the distributors.

Before addressing the merits of this appeal, it is necessary to discuss statutory construction and the standard of review. United Artists contends the statutes must be construed against the Department because any doubt as to the meaning or applicability of the Gross Income Tax act will be construed against the State and in favor of the taxpayer. However, exemptions from tax statutes will be strictly construed against the party claiming the exemption. Indiana Department of State Revenue v. Boswell Oil Co., (1971) 148 Ind.App. 569, 268 N.E.2d 303.

United Artists argues IND.CODE Sec. 6-2-1-1(h) which defines gross receipts, provides that the statutes must be construed in its favor. This section provides:

(h) Except as hereinafter otherwise expressly provided, the term "receipts," as applied to a taxpayer, shall mean the gross income in cash, notes, credits and/or other property which is received by the taxpayer or is received by a third person for his benefit.

United Artists alleges it has accepted payment for the benefit of third persons, the distributors, and thus, the statutes should be construed in its favor.

We believe that IND.CODE Sec. 6-2-1-1(m) resolves this question. This statute defines gross income to include the "gross receipts of the taxpayer received from trades, businesses, or commerce, including admission fees or charges ..." It is obvious that the charging of admission fees is subject to the Gross Income Tax Act, and these transactions all took place in Indiana. Moreover, a strict reading of I.C. 6-2-1-1(h) defines gross receipts to include the gross income received by the taxpayer or by a third person for the taxpayer's benefit. There is no argument that a third person is accepting payment for the benefit of United Artists, but rather United Artists is claiming that it has accepted payment on behalf of third parties. United Artists is arguing that a clearly taxable transaction should not be attributed to them because another party "owns" the receipts. This argument is tantamount to claiming an exemption. Since the transaction is taxable, we believe it is the duty of United Artists to prove that its receipts are collected on behalf of a third party. Thus, United Artists is appealing a negative judgment.

In reviewing negative judgments, this court will only consider the evidence most favorable to the appellee, together with all reasonable inferences to be drawn therefrom. It is only where the evidence leads to but one conclusion and the trial court has reached the opposite result that the decision will be reversed as being contrary to law. Chaney v. Tingley, (1977) 174 Ind.App. 191, 366 N.E.2d 707.

United Artists correctly asserts that a taxpayer is not liable for gross income taxes on receipts received on behalf of a third person. See, Ind. Dept. of Revenue v. Waterfiled [sic] Mtg., (1980) Ind.App., 400 N.E.2d 212; Dept. of Treasury v. Ice Service, Inc., (1942) 220 Ind. 64, 41 N.E.2d 201. United Artists argues the percentage of its receipts paid to the distributors belonged to the distributors immediately upon possession by United Artists pursuant to the licensing agreements. Thus, United Artists claims it never owned this portion of the receipts and should not be liable for taxes thereon. United Artists executed two types of licensing agreements: Agreements containing trust clauses and agreements without such clauses. The agreements containing trust clauses provided that the distributor's percentage of the funds received from the patrons belonged to the distributor and were being held in trust by United Artists. The agreements which did not contain trust clauses were very similar in nature except that they lacked an express trust agreement. These agreements provided the distributor would be entitled to a percentage of the gross receipts collected on a weekly basis. Some of the agreements provided that calculations were to be made on a daily basis.

The trial court found that the film agreements entitled the distributors to a direct share of the admission proceeds. Occasionally, the distributors would receive a fixed rental fee, but the vast majority of the time, the distributors were entitled to receive a percentage of the admissions. The percentage was usually based upon a figure above a fixed dollar amount, which represented a "house allowance" to compensate the theatre owner for its operating expenses, or a lesser percentage without application of a house allowance. The trial court also examined the licensing agreements and noted that the majority of the agreements characterized the payment procedures as rental agreements. The trial court concluded that the licensing agreements were merely a means of securing payment and that any portions of admissions collected and paid on a percentage basis are an expense of doing business. It finally concluded the percentage of admissions paid to distributors constituted gross income of United Artists.

We remain unpersuaded the trial court erred by not finding that the distributors "owned" the percentage of the receipts paid by United Artists. An examination of the licensing agreements reveals the payments were in exchange for a limited right to exhibit the film. The trial court properly determined that the percentage of admissions received by the distributors constituted a rental fee, thus, the determination was that these payments constituted a business expense and were not deductible. Gross income tax is imposed upon total receipts without deductions of any sort including such expenses as the cost of property sold, materials, labor, interest, or any other expense whatsoever. Department of Treasury of Indiana v. Crowder, (1938) 214 Ind. 252, 15 N.E.2d 89. In Gross Income Tax Division, etc. v. Warner Bros., (1954) 233 Ind. 345, 118 N.E.2d 117, our supreme court stated: ²

We cannot see that appellee in the instant case, by reserving to itself the right of visitation on the exhibitor for purposes of determining its rightful license fee, has thus become engaged in the local exhibition of the film which it has licensed to the exhibitor. Nor can we see that the license agreement, providing for a percentage of the exhibitor's admission price as the license fee, changes the character of the transaction. (Emphasis added).

233 Ind. 348, 118 N.E.2d 117.

United Artists argues that the percentage licensing agreements should change the character of the transaction. In the present case, the percentage payment is nothing more than a rental fee. Moreover, the facts reveal that in calculating the distributors' fees, the distributors were not entitled to any money until after allowing a deduction...