AAA vs. Comm. 367 U.S. 687 (1961)
Prepaid membership dues received by an auto club one year in advance were includible in income by an accrual basis taxpayer, since they are held under a claim of right without restriction on their disposition.
Automobile Club of Mich. vs. Comm. 353 US 180 (1957)
Membership dues received one year in advance by an automobile club were includible in income in the year received by an accrual basis taxpayer because the dues were held under a claim of right without restriction of their disposition.
Comm. vs. Indianapolis Power & Light Co. 110 S. Ct. 589 (1990)
The U.S. Supreme Court made a distinction between the taxation of refundable deposits. The Court confirmed advance payments are generally taxable and defined "advance payments" as a non-refundable payment. With a nonrefundable payment the payee is "guaranteed" it can keep the money as long as the payee performs its own obligation under the contract.
Michaelis Nursery Inc. 69 TCM (1995) (CCH) 2300, T.C. Memo 1995-143
Sole issue is whether amounts received by Nursery from its customers in connection with the sale of trees should have been recognized as income in the year the payments were received or in subsequent years, when the trees were delivered. Court held that the deposits received by the Corporation were advance payments of income constituting taxable income to the petitioner when received. The corporation enjoyed "complete dominion" over these payments because it had no obligation to repay any amount to the buyers unless the corporation defaulted on its commitment to deliver the trees.
Oak Industries vs. Comm. 96 TC 559(1991)
Held that security deposits received by NST are not includible in petitioners' taxable income because NST did not enjoy "complete dominion" over the deposits when the deposits were made. Also see Buchner vs. Comm. 60 TCM 559 (1991).
Schlude vs. Comm. 372 US 128 (1993)
Prepaid lesson fees were includible in income by an accrual-basis dance studio in the year of receipt and not pro rata over the period during which the lessons were to be given. However, contract installments not becoming due and payable during the year (and not secured by note) were not taxable in that year if the lessons had not yet been given.
Carnegie Productions Inc. vs. Comm. 59 TC 642, Dec. 31,836 (1973)
Taxpayer produced a picture with funds supplied by another company. The agreement stated that on completion of the film all rights thereto, except taxpayer's share in any income from its distribution, vested in the company supplying the funds. Court held that the taxpayer did not acquire a basis or interest in the motion picture on which to claim depreciation or investment credit. No liability for interest had accrued and no indebtedness had been established. Court found that taxpayer in this situation was contracted to make the film. The burdens and benefits of ownership had not been shown to have passed to the taxpayer.
Cory vs. Comm. 23 TC 775 Dec. 20,842 (1955), aff'd, 230 F. 2d 941 (2d Cir. 1956)
The well-known philosopher and writer, George Santayana, had given the taxpayer various autobiographic works for the taxpayer's sole and exclusive exploitation. Taxpayer had entered into an agreement with Scribner's and Sons to publish the works. Taxpayer treated the transaction as a sale of the rights and reported the proceeds as a long-term capital gain. The Commissioner determined the transaction to be a license, not a sale. The Court found the transaction to be a license for the following reasons:
- The publishing rights granted were not all exclusive as the taxpayer has stated
- Amounts to be paid to the taxpayer were entirely dependent on the success of the book
- Even though the rights granted to Scribner's could be assigned, the petitioner right to the flow of income produced there from would never be impaired
- No provision existed whereby the property would ever become the property of Scribner's regardless of how much money was paid to the taxpayer
- Even though the publishing rights which were granted were exclusive, the interest retained by the petitioner were of substance and not merely a naked title as in the Field and Herwig cases
- Any infringement on the rights would affect the petitioner's profits as well as Scribner's
Fields vs. Comm. 14 TC 1202 Dec. 17,698 (1950)
Taxpayer sold the motion picture rights in the plays "My Sister Eileen" and "Doughgirls" for $225,000 (No mention of additional amounts). Court held that the granting of the rights was a sale of a property interest. The Court also held that the sale proceeds were taxable as ordinary income and not as a capital gain because the movie rights were not property used in a trade or business. Rather, the movie rights were property held primarily for sale to customers in ordinary course of trade or business, in part of the copyright assigned and not a license.
Goldsmith vs. Comm. 44-2 USTC 9365, 143 F2d 466 (2d Cir. 1944), 323 U.S. 774 (Cert. denied)
- Taxpayer wrote the play which was eventually named "What a Life." The key character was Henry Aldrich. The play was copyrighted. Play was successfully produced for Broadway and ran for two (2) years
- Taxpayer wrote a dramatic sketch entitled the "Aldrich Family", which was broadcast coast to coast on radio network
- Taxpayer entered into an agreement with Paramount Pictures to assign/ transfer to Paramount world wide motion picture rights and other related rights in "What a Life."
- Taxpayer received income from Paramount in 1938 and 1939 and reported it as capital gain from sale of capital asset
Taxpayer contended that he sold part of the rights carried by his copyright.
Commissioner said that the assignment was a license and not a sale. The Court sustained the Commissioner for the following reasons:
- Partially because of the decision reached in Witmark & Sons vs. Pastime Amusement Company 298 Fed 470 (irrelevant whether transaction called a transfer or assignment)
- Partially because of the similarity to the Sabatini case (No sale of property unless assign title to copyright)
This case was affirmed on appeal:
In the concurring opinion the two judges stated the following:
Paramount only obtained the right of an exclusive license to the motion picture rights since: a) Paramount only acquired a piece of the separable bundle of rights known as copyrights and therefore no sale took place.
That the assignment of the motion picture rights to Paramount was a sale (a piece of the rights could be sold) but it was in the course of a trade or business and therefore ordinary anyway.
Herwig vs. U.S. (ct cl) 105 F Supp 384. (1952)
Taxpayer granted, conveyed and assigned the exclusive motion picture rights in the literary property "Forever Amber" for $125,000 in cash and additional payments not to exceed $75,000.
The court found this to be a sale based on the following:
- The copyright was divisible (Quoting the Goldsmith and the Wodehouse cases)
- The beneficial interest in the motion picture rights had been passed to the motion picture company and only naked, legal title was remaining with the taxpayer
The naked legal title was not as important for tax purposes as the beneficial interest. Therefore, the gain from the sale was taxed as a capital gain, not as ordinary income.
Lasky vs. Comm. 22 TC 13 (1954)
Amounts due to the taxpayer were paid in return for his movie rights in the film, "Sergeant York." The Court ruled that this payment was ordinary and not capital in nature.
Misbourne Pictures Ltd. vs. Johnson, 189 F.2d 774 (2nd Cir. 1951), 51-1 U.S. Tax Cas. (CCH)
Samuel Goldwyn, Inc. ("Goldwyn") allowed Misbourne Pictures to use the services of David Nivens to do a picture to be filmed in England. Goldwyn was to get the option to acquire the exclusive right to distribute the film in certain territories including the U.S.
Goldwyn exercised the option and paid a stipulated, up-front advance (recoupable out of Misbourne's share of net distribution revenue). Any net distribution profit was to be split 55 percent to Misbourne and 45 percent to Goldwyn.
Misbourne was an English corporation and treated the amount as a sale of the film rights, since it allowed Goldwyn to acquire:
- The original negative with sound track
- The exclusive right to exhibit the picture in the U.S. and most of the world which Misbourne argued would have been implied if the negative would have just been transferred for cash
The court held that the contract was a license and the payment by Goldwyn was an advancement of royalties. The court argued that:
- The essential right passed was the right to distribute, not ownership of the negative
- Goldwyn distributed the film for the benefit of both parties
- The payment was recouped quickly and became merely an advance for royalties in the film
Sabatini vs. Comm., 98 F.2d 753 (2d Cir. 1938), 38-2 U.S. Tax Cas. P9470
Taxpayer granted motion picture rights to five (5) books to certain U.S. motion picture company. The motion picture company acquired worldwide rights for a stated period of time for the sum of $20,000.
The BTA Court found this to be a sale saying that it was made for a lump sum and Sabatini did not get any subsequent rents or royalties income. The Court of Appeals reversed this and called it a license since it was only for a limited period of time. The lump sum was not seen as being any different from a series of payments.
Bailey vs. Comm. 90 TC 558, Dec. 44,676
Taxpayers claimed deductions and investment credit in connection with motion pictures through their interest as limited partners in either of two partnerships. Court held:
- Taxpayer did not acquire a depreciable interest but purchased a contractual right to payment based on the success of the respective pictures
- The basis in the contractual right was depreciable
- The partnership was engaged in for profit
- Notes signed were not included in the depreciable basis
- Interest deduction disallowed on the notes used to purchase contractual rights to films
- Income forecast method had to be used to depreciate the contractual right
- Investment credit was allowed to taxpayer on the cash he put up to purchase the contractual right
Brown, H. vs. Comm. 56 TCM 638, Dec. 45,167 (m), TC Memo 1988-527, aff'd, 1990 U.S. App. LEXIS 20426 (9th Cir. 1990)
Taxpayer was limited partner in partnership which purchased film for cash and non recourse note.
- Partnership was engaged in for profit because at the time of purchase the projections were favorable
- A depreciable interest was not purchased, only a contractual right to future income based on the success of the film
- Non recourse note was not includible in basis of the right because taxpayers could not prove that note was expected to be paid
- Interest on the note was not deductible
- Investment credit was allowed on the cash invested
- Syndication costs of the partnership including legal tax opinion was held to be capital in nature and not deductible.
Carnegie Productions Inc. vs. Comm. 59 TC 642, Dec. 31,836 (1973)
Taxpayer produced a picture with funds supplied by another company. The agreement stated that on completion of the film all rights thereto, except taxpayers share in any income from its distribution, vested in the company supplying the funds. Court held that the taxpayer did not acquire a basis or interest in the motion picture on which to claim depreciation or investment credit. No liability for interest had accrued and no indebtedness had been established. Court found that taxpayer in this situation was contracted to make the film. The burdens and benefits of ownership had not been shown to have passed to the taxpayer.
Durkin vs. Comm. 87 TC 1329 Dec. 43,548, aff'd, 872 F. 2d 1271 (7th Cir.), cert. den., 493 US 824 (1989)
Grossman vs. Comm. 87 TC 1329 Dec. 43,548, aff'd, 872 F. 2d 1271 (7th Cir.), Cert. den., 493 US 824 (1989)
Taxpayer claimed deductions and investment credit from two limited partnerships which had purchased motion pictures. Court held:
- The partnerships did not acquire a depreciable interest in the films. It acquired a contractual right to income based on the future success of the film because although title was transferred, control of films was not transferred
- The basis of the contractual rights are depreciable
- The partnership should not have used gross receipts when depreciating under the income forecast method. Net receipts (net of distribution and advertising costs) should have been used
- Partnership should have included an estimate for television network revenue under the income forecast method where an agreement had been reached but no contract signed
- Partnership S could not use the double-declining balance method to depreciate its contractual right since it was intangible. Straight-line method was allowed over six (6) year life
- Long term notes signed were not bona fide and not includible in depreciable basis of the right
- Short term notes were bona fide and therefore were includible in the depreciable basis of the right
- Taxpayers were allowed investment credit on the cash invested and the bona fide notes. They were determined to have an ownership interest in a part of the film
Gregory vs. Helvering 293 US 465 (1935)