Court Opinion

ID: 4601309
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:27:21.160475+00
Date Added: 2024-06-11T07:52:28.440618
License: Public Domain

FONTAINE FOX, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Fox v. CommissionerDocket No. 78834.United States Board of Tax Appeals37 B.T.A. 271; 1938 BTA LEXIS 1057; February 4, 1938, Promulgated *1057  1.  The petitioner, a cartoonist and president and owner of all the stock of a corporation, agreed to furnish it certain cartoons each week for a stipulated monthly compensation.  The corporation thereupon for a minimum weekly consideration gave a syndicate the right to use the cartoons for syndication purposes.  The minimum amount received by the corporation annually from the syndicate was greatly in excess of the stipulated compensation paid petitioner.  Held, that the situation was not so exceptional as to require the disregard of the separate entity of the corporation and the taxing to petitioner of the amount received by the corporation from the syndicate.  2.  Petitioner had royalty contracts with third parties respecting the use of cartoons in their business.  During the taxable year he assigned these contracts to the corporation.  Held, that the royalties thereafter paid pursuant to the contracts did not constitute income to petitioner.  Frank J. Albus, Esq., and E. V. McKeown, Esq., for the petitioner.  J. R. Johnston, Esq., for the respondent.  HILL *271  In this proceeding petitioner requests a redetermination of a deficiency*1058  in income tax of $35,219.35 for 1932.  The issues are (1) whether an amount of $104,000 representing payments made by a *272  syndicate to a corporation, all of whose stock was owned by petitioner, for the use of certain cartoons produced by petitioner pursuant to an agreement with the corporation was income to petitioner or was income to the corporation, and (2) whether an amount of $9,482.30 representing royalty payments received by the corporation from contracts assigned to it by petitioner for the use of cartoons produced by petitioner constituted income to him or income to the corporation.  FINDINGS OF FACT.  Petitioner is a newspaper cartoonist having an office at 134 Plandome Road, Manhasset, Long Island, New York.  He is the creator of the cartoons known as "Toonerville Trolley," "Tomboy Taylor," "The Terrible Tempered Mr. Bang," "Aunt Eppie Hogg," and others.  These cartoons are published in the United States and several foreign countries including Canada and Mexico.  Petitioner had been creating cartoons for a number of years prior to 1924.  On February 19, 1924, he caused a corporation, known as the Reynard Corporation, to be formed under the laws of the State*1059  of New York, with an authorized capital stock of 100 shares of no par value.  Having previously been elected directors of Reynard, petitioner, C. E. Kelley, his attorney, and his brother, Barton Fox, held a directors' meeting on March 11, 1924, at which petitioner was elected president, Kelly, secretary, and Barton Fox, treasurer.  At the same meeting the directors accepted an offer of Fox wherein he proposed that, in consideration of Reynard issuing 98 shares of its capital stock to him and one share each to Kelley and Barton Fox, he would pay and transfer to Reynard $5,000 in cash, certain bonds of a par value of $55,000 and of a market value of about $44,000, and two parcels of real estate situated in Nassau County, New York.  Immediately following the acceptance of petitioner's offer, the directors took a recess during which the cash and bonds were delivered by petitioner and the 100 shares of Reynard's capital stock were issued in the amounts and to the parties designated in the offer.  The real estate mentioned in petitioner's offer was not transferred to Reynard because the wife of petitioner refused to release her dower interest in it.  After the foregoing transfers to Reynard, *1060  petitioner had remaining real estate of a value of about $35,000, stocks and bonds of a value of $4,000 or $5,000, and an amount in cash in excess of that paid over to Reynard.  Following their recess the directors on the same day authorized Kelley on behalf of Reynard to execute a proposed contract of employment with petitioner wherein petitioner assigned to Reynard the copyrights to all the cartoons theretofore published and copyrighted *273  in his name, and agreed to render to Reynard his exclusive services as an artist and author from that date until March 31, 1927, to furnish Reynard each week for publication on week days beginning April 1, 1924, and ending on March 31, 1927, six daily cartoons of the kind theretofore drawn by him and throughout the term of the contract to furnish Reynard each week for publication as a Sunday page beginning May 4, 1924, and ending March 31, 1927, one full page drawing of the same or similar characters.  In addition petitioner agreed to approve certain contracts of the same date between Reynard and the Bell Syndicate, Inc., a corporation engaged in distributing features to newspapers throughout the United States and foreign countries, *1061  for the syndication of the daily cartoons and Sunday pages to be furnished by him.  For the foregoing petitioner was to receive from Reynard a salary of $2,500 a month throughout the term of the agreement beginning April 1, 1924.  The contract was signed by the parties on that date and by reason of a subsequent extension petitioner has continued to render service to Reynard under it.  Immediately following their authorization of the execution with petitioner of the above mentioned contract, the directors authorized the execution of two contracts by Reynard with the Bell Syndicate, Inc., hereinafter referred to as the Bell Syndicate, for the syndication of the daily cartoons and Sunday pages to be furnished to Reynard by petitioner.  Under the two contracts the Syndicate was to pay Reynard a certain percentage of the gross amount of the sales to newspapers of the right to publish the cartoons and pages, with a total guaranteed minimum under the two contracts of $1,500 a week.  The contracts also provided that if, by reason of illness or other disability of petitioner, Reynard should be unable to furnish the cartoons and Sunday pages as therein provided, then the Syndicate would not*1062  be required to pay Reynard the amounts provided for and that, if Reynard should be unable to furnish them for a continuous period of more than four weeks in any one year, then the period of such failure should be added to the term of the agreements.  The two contracts, which were negotiated with the Syndicate by Kelley and petitioner jointly, were signed on March 11, 1924.  On November 30, 1926, Reynard entered into another contract with the Bell Syndicate for the syndication of cartoons and Sunday pages to be created by petitioner for the period from April 1, 1927, to March 31, 1930, under which the minimum weekly amount to be paid by the Syndicate was increased from $1,500 to $2,000.  This contract as later amended was extended to March 31, 1934, by contracts dated October 14, 1927, January 11, 1930, and November 9, 1931.  Under the various contracts between Reynard and the Syndicate, the latter *274  agreed to copyright the cartoons and Sunday pages in whatever name Reynard should direct and to require all newspapers in which they should be published to run a copyright notice in the name of petitioner or such other party as Reynard should direct.  Petitioner never owned*1063  any stock in the Bell Syndicate and never was employed by it.  The Bell Syndicate paid the stipulated royalties provided for in the contracts to Reynard, which deposited them in its bank account.  Reynard reported the amounts in its income tax returns and paid the tax shown to be due by such returns.  Reynard also filed capital stock tax returns for such years as the law required and paid the tax shown to be due on such returns.  On June 18, 1926, petitioner personally entered into an agreement with R K O Radio Pictures, Inc., (then named R-C Pictures Corporation) wherein petitioner granted to R K O Radio Pictures, Inc., hereinafter called R K O, the exclusive right to make motion pictures featuring the juvenile characters in his cartoons.  The agreement was for a period of one year from the date thereof but gave R K O successive annual options to extend it for a period of five years.  For the right thus granted R K O agreed to pay petitioner $12,000 a year and $1,000 for each picture over 12 begun during each year.  On February 26, 1931, the contract was amended to provide for a payment to petitioner of $1,000 for each picture commenced during the period April 1, 1931, to March 31, 1932, but*1064  not less than $6,000 during that period.  On March 30, 1932, the life of the contract was extended to May 1, 1933, with an option to R K O to extend it for an additional year from that date.  The total annual payments to be made by R K O under this extension were the same as provided for in the amendment of February 26, 1931.  On July 13, 1921, petitioner personally entered into a contract with George Borgfeldt & Co., wherein petitioner for a stipulated royalty granted to the company the sole right to use in the manufacture and sale of toys certain characters in his cartoons.  By subsequent agreements dated December 29, 1922, October 21, 1927, January 1, 1930, and December 3, 1931, this contract was extended to December 31, 1932.  On October 7, 1927, petitioner personally entered into a contract with the company in which for a stipulated royalty petitioner granted to the company the exclusive right to use in the manufacture and sale of toys, dolls, and figures a certain other character appearing in his cartoons.  This agreement by its terms was to be effective until December 31, 1930, and thereafter was to be automatically renewed from year to year unless one of the parties gave*1065  notice of a desire to cancel it.  About January 19, 1926, petitioner personally entered into a contract with Fred A. Wish, Inc., on a royalty basis for the use for advertising *275  and merchandising purposes of certain characters created by petitioner.  Down to April 1, 1932, petitioner received the payments under the contracts with R K O, George Borgfeldt & Co., and Fred A. Wish, Inc., and devoted them to his own use.  The contracts with the three corporations being in force on April 1, 1932, petitioner by a written instrument assigned them to Reynard on that date.  In doing this petitioner was following the advice of his personal attorney, who was also attorney for Reynard.  The attorney had informed him that this should be done since under the contract between petitioner and Reynard and in view of the rights Reynard had in the copyrights and trade marks covering petitioner's creations, there was some doubt as to whether he could legally contract with the three corporations respecting their use of the characters.  The payments made after April 1, 1932, by the three corporations under the contracts were included by Reynard in its income tax returns.  Petitioner conducted*1066  the affairs of Reynard.  Kelley and Barton Fox, who served without salary as secretary and treasurer, respectively, gave him advice and assistance in much the same way as prior to the formation of Reynard.  Reynard had a bank account and petitioner was the only one authorized to sign checks drawn on it.  Reynard conducted business in its own name and in addition to filing Federal tax returns also filed New York State tax returns.  Reynard had certain employees that assisted petitioner.  They answered telephone calls and helped him in keeping his personal accounts and in preparing the drawings he was to furnish Reynard.  Reynard had a regular set of books of account which were kept by a firm of attorneys.  While petitioner, his attorney, and Barton Fox frequently discussed the affairs of Reynard in an informal way, formal corporate meetings were held only at irregular and generally at long intervals.  About 1925, without prior formal authorization of the board of directors, petitioner negotiated a loan on behalf of Reynard to purchase certain land upon which to erect a dwelling to be used exclusively by him as a summer residence.  Certain other funds afterwards borrowed on behalf of*1067  Reynard were used in constructing the dwelling.  In all the corporation expended about $70,000 in providing the dwelling and a studio, together with other improvements, for the use of petitioner.  During the calendar year 1932 Reynard received $104,000 under its contract with Bell Syndicate and from April 1, 1932, to December 31 of that year received a total of $9,482.30 under the contracts with R K O, George Borgfeldt & Co., and Fred A. Wish, Inc., and reported the applicable portion of such amounts in its income tax returns for the fiscal years ended March 31, 1932, and 1933.  In *276  determining the deficiency the respondent held that the foregoing amounts constituted income taxable to petitioner.  In addition to including the $9,482.30 in petitioner's income, he also increased it by $74,000, representing the difference between the amount received by Reynard under the contract with the Bell Syndicate and the $30,000 cash salary paid by Reynard to petitioner and reported by him in his return.  OPINION.  HILL: Petitioner, relying on the contract between Reynard and the Bell Syndicate, contends that the amount received by Reynard from the Syndicate constituted income to*1068  Reynard; that it was properly reported by Reynard in its returns and no portion of it was income taxable to him.  The respondent's position is that his determination is correct and can be sustained on either of two grounds - first, that Reynard was a mere dummy and its identity should be ignored, and, second, that since the $104,000 paid by the Syndicate was compensation for the creative efforts of petitioner it is taxable to him under the rule of the decision in . The income in question, having been received by Reynard pursuant to its contract with the Bell Syndicate, is taxable to Reynard under the applicable act unless there is a special situation requiring that it be taxed to petitioner.  The rule regarding a corporation and its stockholders as separate taxable entities was stated in , as follows: As a general rule a corporation and its stockholders are deemed separate entities 1 and this is true in respect of tax problems. 2 Of course, the rule is subject to the qualification that the separate identity may be disregarded in exceptional situations where it otherwise*1069  would present an obstacle to the due protection or enforcement of public or private rights. 3 * * * Here all the contracts regarding the use of the cartoons for syndication purposes and extending over*1070  a number of years were between Reynard and the Bell Syndicate.  While petitioner signed them, it was in his capacity as president of Reynard and not in his personal capacity.  Such other business transactions as Reynard had, involving considerable sums in investments in real estate, stocks, and bonds, were carried on in its name.  Federal and state tax returns were filed for *277  it from the time of its organization.  And even before this Board it contested respondent's determination of its tax liability for the fiscal years ended March 31, 1930, and 1931, as appears at . In addition its contest of respondent's determination of its tax liability for the year ended March 31, 1932, is involved in Docket No. 78835.  Respondent's determination there is based on an inclusion in the income of Reynard of a portion of that involved here.  In fact down to the instant proceeding Reynard's separate identity has been generally respected by petitioner and has been recognized by all who had dealings with it.  Respondent's position in respect to disregarding its separate entity is not entirely consistent with his determination.  If Reynard's identity is to be disregarded*1071  for the purpose of including in petitioner's income the amount it received from the Bell Syndicate, it would seem that it should be disregarded for the purpose of including in petitioner's income all other items of income received by Reynard as well as its deductions, including security losses.  This respondent has not done nor asked in his answer to have done.  Respondent contends that, since the income from the Bell Syndicate contract resulted from the personal efforts of petitioner, it is income of the petitioner within the intendment of the income tax laws, and asks us to find that this was such an exceptional situation as to warrant the disregard of Reynard's separate identity to that extent.  He cites no decision, comparable in facts, and we know of none, in which such action has been taken.  We do not think the facts here warrant disregarding Reynard as a separate entity.  Nor do we think they fall within the purview of the decision in  In that case the question was whether an attorney was taxable for the whole of his salary and fees earned by him in the tax years or only upon one-half, by reason of an agreement with his wife by*1072  which his earnings were to be received and owned by them jointly.  The court was of the opinion that the case turned upon the construction of the taxing act.  It said: "The statute could tax salaries to those who earned them and provide that the tax could not be escaped by anticipatory arrangements and contracts however skillfully devised to prevent the same when paid from vesting even for a second in the man who earned it." This was deemed to be the meaning of the statute as to compensation for personal service and the husband who earned the income was held to be subject to the tax.  See . Respondent admits that there was no contractual relationship existing between petitioner and the Bell Syndicate and that no assignment *278  of future earnings was involved in any of the contracts.  This being true, we fail to see where , has any application.  Petitioner produced certain cartoons for Reynard.  For these it paid him a stipulated compensation, which was taxable to the petitioner as such.  For the use of the cartoons for syndication purposes the Bell Syndicate paid Reynard a stipulated*1073  minimum amount, which was taxable to Reynard as income arising from the use made by it of the cartoons.  With respect to the royalties of $9,482.30 paid by R K O, George Borgfeldt & Co., and Fred A. Wish, Inc., for the use in their respective businesses of certain characters created by petitioner, he contends that, having assigned his contracts with those corporations to Reynard on April 1, 1932, and thereby having transferred all of his rights under them to Reynard, such rights became its property and the subsequent income therefrom was its income.  The parties have not discussed in their briefs the question of petitioner's right to enter into the contracts in view of the contract he had with Reynard.  We therefore assume that he had such right.  It is well settled that an assignment of income does not relieve the assignor of the tax thereon. ;. But where an income producing property is assigned or transferred the income subsequently arising therefrom is not taxable to the assignor. *1074 ;; certiorari denied, ; ; certiorari denied, ; . Here the rights petitioner had under the contracts with the three corporations constituted property.  Cf. When he transferred the contracts to Reynard these rights became its property and whatever income thereafter arose from them was income to it and not to petitioner.  Respondent takes the position that , is applicable on the ground that this was an assignment of contract interests arising out of the performance by petitioner of services in the past.  The contracts between petitioner and the three corporations were for the privilege of using certain characters or cartoons in the business of the respective corporations and not for the services of petitioner.  So far as the record shows petitioner has never been in the employment of any of them.  But, conceding that the contracts were*1075  connected with the past services of petitioner, the rule in , would not be applicable, as it applies only to the assignment of future earnings and not to the assignment of assets resulting from past earnings. ; certiorari denied, . Reviewed by the Board.  Decision will be entered for the petitioner.Footnotes1. ; ; ; ; . ↩2. ; ; ; . ↩3. ; ; ; . ↩