Court Opinion

ID: 9638727
Source: CourtListenerOpinion
Date Created: 2023-08-22 15:52:00.446978+00
Date Added: 2024-06-11T18:10:09.143646
License: Public Domain

PHILLIPS, Circuit Judge
(dissenting).
Approximately 86 per cent of the gross income of Affiliated Enterprises, Inc.,1 in the year 1934, approximately 95 per cent of its gross income in 1935, and approximately 98 per cent of its gross income in the year 1936 was received from stated weekly payments of from $5 to $10 per week per theater and this income was not dependent upon the extent of the use of the advertising system by the theater. Nor was it dependent upon the amount of receipts collected by the theater as a result of the use of the system.
The taxpayer employed distributors in 26 key cities in the United States, who aided and instructed the theaters in the operation of the system. The taxpayer paid to the *669distributors in 1934, $27,706.67, in 1935, $87,-224.30, and in 1936, $184,712.91. The taxpayer also agreed to furnish the theaters with the services of attorneys to defend them against lottery charges growing out of the use of the system. It employed 41 attorneys in approximately 30 cities in 1936. It expended for attorneys’ fees in 1934, $5,846.-52, in 1935, $16,835.99, and in 1936, $33,594.-53. If a proper allocation of the amounts received by the taxpayer is made for the services of distributors and attorneys, 80 per cent of the gross income of the taxpayer for the years in question was not received for the use of the system.
Rent is a fixed sum or property amounting to a fixed sum to be paid at stated times for the use of property.2 Tt is ordinarily demandable whether or not the tenant actually enjoyed the use and possession of the subject matter rented.3
In the law of patents and copyrights, the term “royalty” imports a share of the proceeds derived from the use of the patented device or process or the copyrighted article paid to the person having a proprietary or creative interest in the patent or copyright, or a share paid in proportion to the use of the patented device or process or the copyrighted article.4
In Western Union Tel. Co. v. American Bell Tel. Co., 1 Cir., 125 F. 342, 348, 349, the court said: “Royalties are commonly understood as meaning something proportionate to the use of a patented device; in other words, a kind of excise. * * * Rentals in their ordinary signification are not limited as royalties in their ordinary signification ; that is, to something proportionate to the use of the patented device. The word ‘ordinarily’ means specific sums paid annually, or at other stated periods, for the right to use a patented device, whether it is used" much or little or not at all.”
Art. 351-2(1) of Tr.Reg. 86, promulgated under the Revenue Act of 1934, provides: “The term 'royalties’ includes amounts received for the use of or for the privilege of using patents, copyrights, secret processes and formulas, good will, trade marks, trade brands, franchises, and other like property. It does not include rents, * * * received by an operating company.”
The same provision is found in, Art. 351-2(1) of Tr.Reg. 94, promulgated under the Revenue Act of 1936.
Section 102 of the House Bill included in the 80 per cent clause, income from rents. The Senate Finance Committee struck out the word “rents.” See Senate Finance Committee Rep., 73d Cong., 2d Sess., S.Rep. 558. The word “rent” was also omitted from the 80 per cent clause in § 351 of the Revenue Act of 1936.
The advertising system itself was not the proper subject of a patent or copyright.5 Only film trailers, instruction sheets, and a special notice furnished to the theaters were copyrighted by the taxpayer. After September 1, 1934, the film trailers were not copyrighted.
The legislative purpose of § 351 of the Revenue Act of 1934 was to prevent tax avoidance by the device commonly called the “incorporated pocket-book,” viz., a corporation formed by an individual who exchanges for its shares his personal holdings in stocks, bonds, or other income-producing property. By this means, while the income from the property is subjected to a corporation tax, a surtax against the individual is avoided by not distributing the income of the corporation.
The tax imposed is in the nature of a penalty.
The taxpayer is an operating company. It seems clear to me that it is not within the spirit of § 351 of the Revenue Acts of 1934 and 1936. Therefore, I do not think it should be held subject to the taxes imposed by those sections, unless it comes clearly within the letter thereof. It is my opinion that the income received by the taxpayer was more akin to rent than to royalties, and, therefore, not within the letter of the sections.
For these reasons, I think the decision of the Board of Tax Appeals should be affirmed and respectfully dissent.

 Duffy v. Central R. R., 268 U.S. 55, 63, 45 S.Ct. 429, 69 L.Ed. 846; M. E. Blatt Co. v. United States, 305 U.S. 267, 277, 59 S.Ct. 186, 83 L.Ed. 167; Int.Rev.Bull., Vol. XV, No. 17, April 27, 1930, Ruling No. XV, 17-80 57 Office Dec. IT 2970.

 Shepard Realty Co. v. United Shoe Stores Co., 193 La. 211, 190 So. 383, 388.

 In re Elsner’s Will, 210 App.Div. 575, 206 N.Y.S. 765; Western Union Tel. Co. v. American Bell Tel. Co., 1 Cir., 125 F. 342, 348, 349; Riley Stoker Corp. v. Jeffrey Mfg. Co., 62 Ohio App. 199, 23 N.E.2d 519, 521.

 Affiliated Enterprises v. Gantz, 10 Cir., 86 F.2d 597; Affiliated Enterprises v. Gruber, 1 Cir., 86 F.2d 958.