Walt Disney Productions v. United States

• Decision Date: 31 July 1973
• Docket Number: 72-1076.,No. 72-1052,72-1052
• Citation: 480 F.2d 66
• Parties: WALT DISNEY PRODUCTIONS, Appellant, v. UNITED STATES of America, Appellee. WALT DISNEY PRODUCTIONS, Appellee, v. UNITED STATES of America, Appellant.
• Court: U.S. Court of Appeals — Ninth Circuit

480 F.2d 66 (1973)

WALT DISNEY PRODUCTIONS, Appellant, v. UNITED STATES of America, Appellee.

WALT DISNEY PRODUCTIONS, Appellee, v. UNITED STATES of America, Appellant.

Nos. 72-1052, 72-1076.

United States Court of Appeals, Ninth Circuit.

May 29, 1973.

Rehearing Denied July 31, 1973.

John Cooley Baity (argued), Richard Sayler, Roy W. McDonald, of Donovan, Leisure, Newton & Irvine, New York City, John J. Wilson, Leon S. Angvire, of Hill, Farrer & Burrill, Los Angeles, Cal., for appellant Walt Disney Productions.

Stephen Schwarz (argued), Tax Div., William D. Keller, U. S. Atty., Scott P. Crampton, Asst. Atty. Gen., Charles H. Magnuson, Mason C. Lewis, Asst. U. S. Attys., Meyer Rothwacks, Chief, Appellate Section, Bennet N. Hollander, Dept. of Justice, Washington, D. C., for appellee United States.

Before TRASK and GOODWIN, Circuit Judges, and EAST,^* District Judge.

ALFRED T. GOODWIN, Circuit Judge:

The government appeals a district court judgment in a tax-refund case allowing Walt Disney Productions to take an "investment credit" on motion-picture negatives produced in 1962. The tax-payer cross-appeals from that part of the judgment which reduced the basis of the films for purpose of the credit.

The district court held that the films were "tangible personal property" within the meaning of Internal Revenue Code of 1954; that they had a useful life of more than eight years; and that they were depreciable. The films were thus eligible for the investment credit. The Commissioner contends that the films were not "tangible personal property" within the meaning of Int.Rev.Code of 1954, § 48(a)(1)(A), and that they did not have a useful life of eight years.

The district court, in allowing Disney to take investment credit, did not allow it to take the credit on the full basis Disney used for depreciation purposes, but limited Disney to "those costs which are directly related to the finished negative," 327 F.Supp. 189, 192-193 (C.D. Cal.1971). This figure was defined by multiplying hourly labor and certain other costs by a fraction the numerator of which was the footage of the final film and the denominator of which was the total footage shot. Disney's cross-appeal challenges this limitation of allowable costs for investment-credit purposes.

I. INVESTMENT CREDIT

The negatives are used to make prints, which are copyrighted, and which are exhibited in theaters or on television. The negatives are not copyrighted. They are tangible, and they are personal property. They thus appear to be eligible for the credit. However, the Commissioner relies on Treas.Reg. § 1.48-1 (f), adopted in 1964, for the proposition that all the costs of production of the negative, except the negligible costs of the raw film, are to be allocated to the intangible copyright eventually procured on the positive print. Treas.Reg. § 1.-48-1(f) provides:

"Intangible Property. Intangible property such as patents, copyrights, and subscription lists, does not qualify as section 38 property. The cost of intangible property in the case of a patent or copyright, includes all costs of purchasing or producing the item patented or copyrighted. Thus, in the case of a motion picture or television film or tape, the cost of the intangible property includes manuscript and screenplay costs, the costs of wardrobe and set design, the salaries of cameramen, actors, directors, etc., and all other costs properly includible in the basis of such film or tape * * *. However, if tangible depreciable property is used in the production of such intangible property, see paragraph (b) (4) of this section."

We recognize that Treasury regulations, even interpretative regulations, "must be sustained unless unreasonable and plainly inconsistent with the revenue statutes," Bingler v. Johnson, 394 U.S. 741, 750, 89 S.Ct. 1439, 1445, 22 L.Ed. 2d 695 (1969). However, we agree with the district court that the quoted regulation is invalid. It is plainly inconsistent with the expressed purpose of the applicable statute as shown by the legislative history.

In attributing all of Disney's labor and production costs of the negatives to the copyrighted print, the regulation defeats the purpose of the credit. For example, the same regulation, if applied to a production machine in an automobile factory, would deny the investment credit on all but the material costs of a machine developed and patented for use in the manufacturing plant although the amount paid to the inventor for the idea of the machine was insignificant and the bulk of the costs of the machine were the ordinary labor and engineering costs of its production. Disney argues that its film negatives, like the hypothetical production machines, are standardized units of depreciable property which Disney uses to produce other products, the positive prints, and that the attribution of all the value of the film to the copyright, like the attribution of all the value of a machine used in production to a patent eventually procured on it, is unwarranted. We agree.

It is evident from a reading of the legislative history of the investment credit that Congress intended the credit to be allowed to those in Disney's position. Exhibit statements of legislative intent that films can qualify as tangible depreciable property are found: in the Senate Finance Committee report on the 1971 restoration of the investment credit;¹ in the discussion in the House on the 1971 Act in a statement by Chairman Mills of the House Committee on Ways and Means in response to a specific question from the floor, 117 Cong.Rec. 34894 (1971); and in the House debates on the 1971 Act conference report, again in a statement by Chairman Mills on the House floor in response to a specific question, 117 Cong.Rec. H-12127 (daily ed. Dec. 9, 1971).

The government urges that this legislative history is irrelevant because the 1971 Act changed prior law, or at least that the history is entitled to little weight because "the views of a subsequent Congress form a hazardous basis for inferring the intent of an earlier one." United States v. Price, 361 U.S. 304, 313, 80 S.Ct. 326, 332, 4 L.Ed.2d 334 (1960). However, although the 1971 re-enactment of the investment credit did change prior law in several ways, see, e. g., Revenue Act of 1971, Pub.L. No....