*55 Decision will be entered under Rule 50.
Prior to 1947, petitioner, Jack Benny, produced a complete radio show for the American Tobacco Company. Because of mutual dissatisfaction with that arrangement, Amusement Enterprises, Inc., was incorporated in January 1947, and contracted with American to produce a complete radio show for American, exclusive of petitioner's personal services but on which petitioner would appear as the star. Amusement had no contract with petitioner, whose personal services were covered by a contract between him and American. Petitioner owned 60 per cent of Amusement's stock; others, unrelated to him, owned the other 40 per cent. Subsequent to the signing of the contracts with Amusement and petitioner, American contracted with the National Broadcasting Company to broadcast the show from 7 to 7:30 p. m. on Sunday over NBC's nationwide network, which were the facilities and time over which petitioner's show had been broadcast for many years. In addition to producing the radio show for American, Amusement carried on other substantial activities in the entertainment world. In 1948, petitioner and the other stockholders of Amusement sold their stock to the*56 Columbia Broadcasting System for $ 2,260,000, and on their returns for that year reported the gain therefrom as a long-term capital gain. Petitioner's personal services were never discussed during the negotiations for the sale of the stock nor was there any actual or implied promise on his part to effectuate a switch of networks if CBS bought the stock. After the sale, American agreed to switch the program to the CBS network, commencing January 2, 1949. Petititioner's contract with American for his personal appearance on the show was the only contract which he made for his personal services, and that contract continued for 5 1/2 years subsequent to the sale. After the sale, Amusement continued to produce the same show under its contract with American over the CBS network. Respondent determined that $ 2,054,000 of the purchase price paid for Amusement stock was compensation to petitioner for his services. Held, the entire amount paid by CBS to Amusement's stockholders was solely in payment for stock and no part thereof was paid as compensation for petitioner's services subsequent to the sale or for any agreement as to what he would do to effect a switch of networks by American*57 after the sale.
*198 This proceeding involves a deficiency in income tax in the amount of $ 236,382.81 determined against the petitioners for the year 1948. The only issue is whether any part of the amounts paid by the Columbia Broadcasting System, Inc., and Columbia Records, Inc., to the stockholders of Amusement Enterprises, Inc., for the sale of its stock to such corporations, was taxable as ordinary income to petitioner, Jack Benny, *58 as compensation for his services.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference.
During 1948, Jack Benny (hereinafter referred to as petitioner) and his wife, Mary Benny (hereinafter referred to as Mary), were residents of Beverly Hills, Los Angeles County, California. They filed a joint income tax return for such year on the cash basis with the collector of internal revenue for the sixth district of California.
By 1948, petitioner had been in "show business" for some 37 years. For many of those years, he had been an outstanding radio entertainer. His first radio program was sponsored by Canada Dry Ginger Ale in 1932. In subsequent years, he was sponsored by General Motors, General Tires, General Foods, and, commencing in 1944, by the American Tobacco Company (hereinafter referred to as American), manufacturer of Lucky Strike cigarettes. All such programs, except the Canada Dry program, were broadcast over the nationwide facilities of the National Broadcasting Company (hereinafter referred to as NBC). From the late 1930's, his show enjoyed *199 top Hooper rating popularity. During the*59 year in question and for many years prior thereto, petitioner's show had consisted of himself as the star together with the following outstanding supporting performers: His wife, Mary (Mary Livingstone), Dennis Day, Eddie Anderson (Rochester), Phil Harris, and the announcer, Don Wilson. His four script writers were among the best in radio.
On April 10, 1944, petitioner entered into a contract with American Cigarette and Cigar Company, which contract was immediately thereafter assigned to that corporation's parent, American. Such contract provided generally that petitioner would furnish a so-called complete entertainment package radio show for a 3-year period beginning July 1, 1944, with actual broadcasts to run for a period of 35 weeks each year, commencing on the first Sunday in October. American held an option to extend the contract for an additional 3 years after its original term. Petitioner was to provide, as a part of the package show, the services of Mary Livingstone, such additional actors as he deemed necessary, the services of a male vocalist, an announcer, an orchestra leader and 17 musicians, all script, material, and sound effects, and all other items necessary to*60 produce a complete show. Two commercial announcements were provided for, one at the beginning and one at the end of the show, the script for which was to be provided by the sponsor. Petitioner had the option of inserting a so-called comedy commercial midway through the program.
For such package program, petitioner was paid $ 22,000 per week. In addition, American established a "Special Exploitation Account" of $ 200,000 for each year which was available for publicity, advertising, public relations, and payment for the services of guest artists who might appear on the program. American also provided an annual transportation account of $ 50,000. The contract further provided that petitioner would require all permanent members of the show to agree that they would not participate in any other radio program without his written consent; and, he agreed not to give his consent to their appearance on any program advertising tobacco products. The contract provided that American would furnish and pay for all broadcasting facilities. Paragraph 4 of the contract read, in part, as follows:
Sponsor [American] agrees that not later than August 1, 1944, it will enter into a National Broadcasting*61 Company standard network facilities contract, providing for the purchase by Sponsor from the National Broadcasting Company of broadcasting rights over the National Broadcasting Company Red Network for the broadcast periods hereinabove set forth [7 to 7:30 p. m. Sunday]. Sponsor acknowledges, however, that Contractor [Jack Benny] holds exclusively said broadcasting rights for said broadcast periods and that the relinquishment by Contractor to Sponsor of said rights for the term hereof shall not be construed to be a relinquishment by Contractor of said rights for any other period, *200 and in this connection Sponsor agrees not to compete with Contractor in any manner whatsoever for the acquisition of such rights after the term hereof. 1
*62 At the time petitioner signed the contract with American in 1944, he anticipated netting $ 10,000 per week from each broadcast. By the latter part of 1946, however, he was netting considerably less than that amount; and because of that fact and the heavy burden of business arrangements incident to the production of the show, for which he was responsible, he was dissatisfied with the contract.
In August of 1946, he employed a new agent, M. C. A. Artists, Ltd. That corporation was 1 of 3 affiliated corporations controlled by the same stock interests and having common officers. (The 3 corporations will hereinafter be referred to as MCA). Lew Wasserman was president and Taft Schreiber was executive vice president in charge of western operations. The affiliated corporations are considered the largest firm in the agency business.
In the latter part of 1946, MCA informed American's executive vice president, Paul Hahn, of petitioner's dissatisfaction with his contract and his desire that American not exercise its renewal option in 1947. Hahn likewise expressed to petitioner's agent American's dissatisfaction with the contract for a number of reasons: It desired a longer contract for*63 Benny's services; it was dissatisfied with the existing arrangements covering the supporting cast of the program in that two members of the cast, Dennis Day and Phil Harris, had, subsequent to the signing of the 1944 contract, begun their own radio shows with characterizations portrayed thereon substantially identical to those played by them on the Benny program and which had been developed by Benny; it considered the show itself -- the supporting cast and writers -- a highly valuable asset which it desired to preserve intact even in the event that Benny himself might for some reason no longer be its star; and, it also wanted the mid-program "comedy commercial" to become a required and permanent fixture of the show.
Out of the discussion between petitioner's agent and Paul Hahn came the suggestion that American contract with petitioner personally for his own services as the star of the radio show, and that a corporation be formed to produce the show itself. Pursuant to such discussions, Amusement Enterprises, Inc. (hereinafter referred to as Amusement), was incorporated under the laws of California on January 29, 1947, with authorized capital stock of 10,000 shares of no par value. *64 Petitioner was particularly receptive to the suggestion *201 that a corporation be formed to produce the radio show, not only because it appeared to be a means for relieving him personally from a great deal of management activities incident to the production of the show, but also because it afforded him a vehicle for engaging in many phases of the entertainment industry which would provide him a continuing business interest in the event of his retirement as an entertainer.
Petitioner first attempted to interest MCA in subscribing for 50 per cent of Amusement's stock so that Amusement would have experienced business personnel connected with it who were intimately familiar with all phases of the entertainment industry. MCA declined the offer of a stock interest because of a possible conflict of interests which it might then have with artists whom it represented as agent and who might be employed by Amusement. Of Amusement's total shares of stock, 5,000 were issued in March 1947, and such shares were the only issued and outstanding shares during the years in question. Of those 5,000 shares, 3,000 were issued to petitioner; 1,500 to Myrt T. Blum, petitioner's business manager*65 and the president of Business Administration Company, a corporation engaged in managing the business affairs of many actors and entertainers; 250 shares were issued to Sylvan Oestreicher, an accountant and tax expert employed by the New York law firm of Olvany, Eisner & Donnelly; and 250 shares were issued to Loyd Wright, who for many years had been petitioner's attorney, was an outstanding member of the California Bar, had represented many actors, entertainers, motion picture and radio companies, and who was, at the time of the hearing, president of the American Bar Association. The four stockholders paid $ 10 per share for the stock issued to them. The shares of stock issued to Blum, Oestreicher, and Wright were not for services performed by them for petitioner either prior or subsequent to the issuance of such shares to them. The three were paid the full market price for any services which they performed for petitioner both prior and subsequent to the issuance of the stock.
Petitioner at no time held any office in the corporation nor was he one of its three directors. Blum was president and a director, Oestreicher was vice president and a director, and Wright was secretary *66 and a director. Petitioner was particularly desirous of having as directors and as the real operating officials of Amusement men with broad experience in the entertainment field. He was willing to permit them to have a substantial share in the ownership of the corporation to induce them to participate in its affairs.
After its incorporation, Amusement, on March 6, 1947, entered into a contract with American to produce a complete radio show for which American would supply the then star of its current show (petitioner). Such show was to be comparable to the program then being sponsored *202 by American. The term of the contract was to run for a period of 364 consecutive weeks, beginning July 1, 1947. The program was to be broadcast each Sunday for 7 periods of 35 consecutive weeks, each to begin on the first Sunday in October during the years 1947 to 1953, inclusive. The contract provided that if American's contract with the star of its then current program terminated prior to the expiration of its contract with Amusement, for a number of specified reasons, American might terminate its contract with Amusement on 17 days' notice by paying a penalty of not more than $ 75,000. *67 The contract in substance provided that Amusement would provide the same type of package radio show, exclusive of the services of the star, which petitioner had contracted to perform for American in 1944. The mid-program comedy commercial became a required feature of the program, and Amusement also agreed to use its best efforts to obtain exclusive radio contracts with members of the supporting cast. In consideration of its agreement to provide a package radio show, Amusement was to be paid $ 27,500 per week for each show produced. The program was to be broadcast from 7 to 7:30 p. m. on Sunday over the nationwide NBC network.
Also, on March 6, 1947, American entered into a contract with petitioner for his personal services on a radio show to be provided by it, for which petitioner would be paid $ 10,000 per show. The initial term of the contract was 156 weeks, beginning July 1, 1947, with the option of American to extend the period for 104 consecutive weeks after the initial period and for another 104 consecutive weeks after the first option period. The contract provided that the program on which petitioner was to appear was to be broadcast from 7 to 7:30 p. m. on Sunday over*68 the nationwide NBC network. Paragraph 6 of the contract (sometimes hereinafter referred to as the veto clause) provided, in part, as follows:
No change shall be made in any way in the broadcasting time or facilities of the Program, including, but without limiting the generality of the foregoing, day of the week, time of day, the nation-wide network of the National Broadcasting System or place of origination of broadcast, without BENNY's approval. Wherever BENNY's approval is required under the provisions of this agreement, such approval must be in writing to be effective, and BENNY may withhold approval as he in his sole discretion may determine.
Amusement leased premises for its occupancy, opened bank accounts, and signed contracts with the supporting cast and other performers necessary to produce the show for American. It signed contracts for 7 years with Mary Livingstone and Rochester, commencing on July 1, 1947. It had 1-year contracts with Dennis Day and Don Wilson, and a 3-year contract with Phil Harris. It had contracts with its writers for 1 year with renewal options.
*203 In addition to producing the Jack Benny Show, Amusement also produced a summer replacement*69 show, starring Jack Paar, for American and another radio show known as "Let's Talk Hollywood." In 1947 and 1948, it produced a motion picture, "The Lucky Stiff," starring Dorothy Lamour, Brian Donlevy, and Jackie Gleason, at a cost of more than three-quarters of a million dollars. It also acquired small investments in the New York stage productions, "Mr. Roberts" and "Anne of the Thousand Days," and made other investments in various entertainment ventures. Its officers, throughout the period here in question, were active in exploring many possibilities in the entertainment world in which Amusement might invest or participate.
In the summer of 1948, the Columbia Broadcasting System, Inc. (hereinafter referred to as CBS), purchased the Amos & Andy Show, which had formerly been broadcast over NBC. MCA, which was also Amusement's agent as well as petitioner's, was aware that CBS was embarking on a vigorous program of buying radio talent which it, in turn, would lease or sell to sponsors of programs to be produced on its network. This was a radical departure from the practice which it and NBC had pursued for many years of selling radio time to various advertising sponsors, who, in *70 turn, contracted directly with the artists who would appear on such broadcasts.
In September 1948, MCA approached William S. Paley, the chairman of the board of CBS, to find out if CBS would be interested in purchasing the stock of Amusement from its four stockholders. MCA apprised Paley of the contract which Amusement had with American for the production of the Jack Benny Show and that Amusement did, in fact, own that show with the exception of the services of petitioner himself, which were covered by a separate contract between him and American. The suggestion was made that if CBS owned Amusement it would most probably be in a position to effect a switch of the program from NBC to its own network. Paley expressed great interest in the idea and MCA so advised Amusement's stockholders. On September 15, 1948, they thereupon gave MCA exclusive agency rights to represent them for a period of 6 months in negotiations for the sale of Amusement's stock.
MCA continued to discuss the purchase of Amusement's stock with Paley until late in October 1948, when it informed American that such discussions were in progress. American, in turn, notified NBC and requested that petitioner or MCA *71 advise NBC that a sale of Amusement's stock to CBS was under consideration. At that juncture, petitioner also intervened and telephoned from California to Wright, who was then in New York representing himself and the other three stockholders, and asked that negotiations be broken off with CBS temporarily and that NBC be given an opportunity to purchase the stock if it desired to do so. Petitioner felt that such *204 consideration should be shown to NBC in view of his many years on its network and his pleasant relationship with its personnel.
Niles Trammell, the president of NBC, at the outset of the negotiations attempted to discuss the question of petitioner's services in connection with the sale of Amusement stock. He wanted some definite assurance that if NBC purchased the stock it would, as he put it, have a "call on Mr. Benny's personal services." Trammell tried repeatedly to get some provision to that effect into the proposed sales contract. Wright and the MCA negotiators, however, bluntly refused to discuss petitioner's personal services in any way and threatened to break off negotiations immediately if NBC persisted in discussing that question. The question of Benny's*72 personal services had not been discussed during the previous negotiations with Paley and CBS. At the insistence of NBC's counsel, Trammell wanted a clause inserted in the proposed contract of sale that the sale of the stock met the approval of the Commissioner of Internal Revenue as to its "legality." Wright again threatened to break off negotiations at the suggestion that the proposed sale was in any way illegal. A provision was finally inserted in the proposed sale contract to the effect that the transaction would be submitted to the Commissioner of Internal Revenue for a ruling as to whether or not gain on the sale of the stock would be taxed at capital gains or ordinary income rates.
Negotiations had thus far been conducted in New York City; but, early in November, Trammell and several NBC attorneys flew to California. A tentative contract of sale was drawn up providing for a purchase price of $ 2,260,000 and contained the so-called tax clause which provided that the selling stockholders might withdraw from the sale if the Commissioner ruled adversely on the capital gains tax rate question. The purchase price had been computed on the basis of 10 times the estimated annual *73 earnings of the corporation plus the commission to which MCA would be entitled for negotiating the sale. MCA represented that Amusement would net approximately $ 9,000 per week, before taxes, from the American contract. On November 11, 1948, Trammell requested a few days delay so that he might further discuss the contract with members of NBC's board in New York. Wright refused to continue the negotiations with NBC, and, at that point, such negotiations were broken off.
Also on November 11, Paley had telephoned to petitioner expressing his disappointment and displeasure that CBS had been closed out of the negotiations. Petitioner discussed that call with Wright and others and telephoned Paley in New York that Amusement's stock was still available. Paley and his attorneys immediately flew to Los Angeles and were shown the contract which had been drafted to cover the sale of the stock to NBC. Paley and his attorneys discussed the contract and agreed to accept it as written. Paley stayed in California*205 until the following day and "shook hands" with petitioner on the sale.
Throughout the negotiations for the sale of Amusement's stock, Vincent Riggio, the president of American, *74 and Paul Hahn, on the advice of counsel, had refused to indicate any preference for networks or indicate in any way whether American would or would not agree to switch the Benny program from NBC to CBS if Paley was successful in purchasing Amusement's stock. Paley had talked with Riggio on several occasions and called him from Los Angeles after agreeing to the purchase of the stock on November 13, 1948. Riggio still refused to indicate what American's position might be. Paley returned to New York, and, on November 15, the contract was signed by the sellers and a day or so later by Paley, on behalf of CBS, which purchased 70 per cent of the stock, and by the president of Columbia Records, Inc., a CBS subsidiary, which purchased the remaining 30 per cent. Paley immediately undertook negotiations with American and furnished their attorney, George W. Whiteside, with a copy of the sales contract. On November 24, 1948, CBS and American executed a contract for the switch of the Benny program to CBS, beginning January 2, 1949. Under such contract, CBS agreed to indemnify American should the Hooper rating of the Benny program decline as a result of the switch of networks. A formula *75 for determining the amount of such indemnity payments was set forth in the contract. In 1949 and 1950, CBS rebated a total of $ 152,623.35 to American pursuant to the indemnity provision.
Petitioner had nothing to do with the negotiations between CBS and American but agreed to the switch of the program, on which he was to appear, to the CBS network once that agreement had been reached between American and CBS. At no time during the course of negotiations with NBC or CBS, for the purchase of Amusement's stock, had petitioner or anyone acting for him or for the other stockholders indicated that petitioner would or would not exercise his so-called veto power over a change of networks as set forth in the veto clause of his 1947 contract with American. No representations or warranties were made by the selling stockholders incident to the sale of the stock which were not fully embodied in the contract of sale, and there was no reference of any kind in the contract concerning a change of broadcasting facilities.
In the course of the negotiations between Amusement and NBC, NBC had requested and was granted the right to take out life insurance on petitioner's life in the amount of $ 2,000,000. *76 During the period November 22, 1948, through February 21, 1949, CBS purchased several policies of insurance on petitioner's life in the total amount of $ 2,000,000.
The balance sheet of Amusement as of September 30, 1948, disclosed assets of $ 802,545.32, liabilities of $ 596,803.20, and a net worth *206 of $ 205,742.12. Its principal source of income was the contract with American. Its net income, after taxes, for the fiscal year ended September 30, 1948, was $ 154,640.63. The value of the American contract was not reflected on its balance sheet nor were the values of its contracts with various actors, performers, and writers, there reflected. CBS anticipated net earnings, before taxes, of $ 9,000 per week from Amusement's contract with American. It also expected that the value of other broadcast periods on its network on Sunday night would increase in the event that it was successful in securing the Benny show for the 7 to 7:30 p. m. period.
Subsequent to its purchase by CBS, Amusement continued to produce the Benny show and was, in all respects, a going corporation. For the fiscal years ended September 30, 1949, 1950, and 1951, it realized gross profits from its American*77 contract of $ 351,834.58, $ 339,492.04, and $ 335,781.35, respectively. On January 11, 1950, American exercised its option to extend its contract with petitioner for 104 consecutive weeks, commencing June 27, 1950. In 1952 and 1953, American again extended for a period of 52 weeks each its contract with petitioner with some adjustments as to the number of broadcasts and compensation for each performance.
Although the motion picture "The Lucky Stiff" was reflected on Amusement's balance sheet as of September 30, 1948, as an asset, neither NBC nor CBS was interested in entering the motion picture business. While the sellers considered the film to have great potential value, they agreed to indemnify CBS to the extent that the actual costs of making the film were not recovered within 132 weeks subsequent to its first general release. The picture was released in February 1949, at a time when there was a major depression in the motion picture business; and Amusement did not, in fact, recoup its costs within the 132-week period. Petitioner and the other three original Amusement stockholders subsequently reimbursed CBS by a $ 100,000 payment. Petitioner paid $ 60,000 and the other three*78 stockholders paid $ 40,000.
Pursuant to the provision of the contract of sale with reference to a ruling by the Commissioner of Internal Revenue as to the taxability of the gain on the sale of the stock, the selling stockholders in November and December of 1948 requested such a ruling. Prior to the time that the Commissioner took action on the request, the four stockholders notified CBS that they proposed to go through with the sale irrespective of what ruling the Commissioner might make and fixed the closing time for December 30, 1948, in the office of Loyd Wright in Los Angeles. They likewise so notified the Commissioner. On December 29, 1948, the Commissioner advised the stockholders that the transaction did not fall within the capital gains provisions of the 1939 Code.
*207 The sales contract provided for a payment of $ 500,000 at the time of settlement and the payment of one-third of the balance on January 2, 1949; another one-third on January 2, 1950; and the final installment on January 2, 1951. All payments were to be made to Loyd Wright, as attorney for the four stockholders. On December 30, 1948, CBS and Columbia Records, Inc., paid the first $ 500,000 to Wright, *79 who, after deducting certain expenses incident to the sale, attorneys' fees, and a part of the commission to which MCA was entitled, remitted to petitioner his share of such payment in the amount of $ 245,290.91. Wright, Blum, and Oestreicher received their 40 per cent share of the initial and all subsequent payments and reported on the installment basis the difference in the cost of the stock and the selling price as long-term capital gains. Petitioner reported his gain in the same manner. Respondent determined that the fair market value of Amusement's stock was $ 206,000 and that the long-term gain realized by petitioner and the other stockholders was to be measured by the difference in that amount and the cost of the stock. He determined that the balance of the sales price -- $ 2,054,000 -- represented compensation to petitioner for personal services. The deficiency notice reads as follows:
| Computation of amount attributable to Jack Benny's services. | ||
| Total contract price for 5,000 shares of stock of the | ||
| Amusement Enterprises, Inc | $ 2,260,000 | (100%) |
| Fair market value of stock at date of sale | 206,000 | (9.115044%) |
| Portion of selling price attributed to Jack Benny's | ||
| services | $ 2,054,000 | (90.884956%) |
*80 The difference of $ 2,054,000.00 between the contract price of $ 2,260,000.00 and the fair market value of the stock of the Amusement Enterprises, Inc., of $ 206,000.00 is regarded as compensation for the services of Jack Benny. This compensation is allocated for the taxable years 1948 to 1951 inclusive as follows:
| Amount | |||
| representing | |||
| compensation | |||
| Year | Receipts | Allocated to stock | for services |
| 1948 | $ 500,000.00 | $ 45,575.20 | $ 454,424.80 |
| 1949 | 586,666.67 | 53,474.94 | 533,191.73 |
| 1950 | 586,666.66 | 53,474.93 | 533,191.73 |
| 1951 | 586,666.67 | 53,474.93 | 533,191.74 |
| $ 2,260,000.00 | $ 206,000.00 | $ 2,054,000.00 | |
| Amount received for services for the year 1948 | $ 454,424.80 | ||
| Less: | |||
| Commissions paid (90.884956% | |||
| of $ 120,529.10) | $ 109,542.82 | ||
| Attorney's fees (90.884956% | |||
| of $ 30,000.00) | 27,265.49 | ||
| 136,808.31 | |||
| Net receipt for services | $ 317,616.49 |
*208 At the time its stock was sold, Amusement was a bona fide going corporation. All amounts paid to the stockholders of Amusement by CBS and Columbia Records, Inc., were solely for the stock of Amusement and no part of such amounts was compensation for petitioner's services of any kind*81 or for any agreement by him not specifically embodied in the written terms of the contract of sale.
OPINION.
Whether the respondent erred in determining that over 90 per cent of the total sales price received by the stockholders of Amusement upon the sale of their stock to CBS and Columbia Records, Inc., was compensation to petitioner for services is essentially a question of fact. The respondent based his determination and so argues on brief that this factual question is to be decided within the framework of the broad general principle of tax law that the substance of a transaction rather than its form is determinative of its tax consequences. The petitioner accepts this posture of the case but argues that the respondent's determination is arbitrary and without foundation in fact, within the meaning of .
The record in this case contains the depositions of Paley, CBS's board chairman; Trammell, the president of NBC; Lew Wasserman, the president of MCA, petitioner's agent; George W. Whiteside, American's general counsel; and Paul Hahn, American's executive vice president at the time the transaction in question*82 occurred. It likewise contains all relevant documents. At the hearing, Taft Schreiber, vice president of MCA and the person responsible for handling petitioner's personal contract negotiations; Myrt Blum, petitioner's business manager; Sylvan Oestreicher, one of the stockholders of Amusement; Loyd Wright, another stockholder and petitioner's attorney; and, petitioner himself, all testified at great length and were subjected to exhaustive cross-examination. There is no conflict between the testimony of the various witnesses, the depositions, and the documentary evidence. All of the evidence before us establishes beyond doubt that the substance of the transaction here in question was accurately and completely reflected by the form in which it occurred. We, therefore, can find no justification for the respondent's determination that some 90 per cent of the total sales price received by petitioner and the other three stockholders represented compensation for petitioner's services. We agree with the petitioner that that determination is without foundation in fact and cannot stand.
The respondent, on brief, requested that we make an ultimate finding of fact that $ 2,054,000 of the*83 amount paid by CBS and Columbia Records, *209 Inc., "was compensation for [petitioner's] services in effecting a move of the Jack Benny Program to the CBS network and for rendering his services thereafter on the CBS network."
There is abundant testimony in this record that neither petitioner nor any person acting for him even intimated that he would attempt to persuade the American Tobacco Company, which, in fact, selected and contracted and paid for the network facilities on which the Benny show was broadcast, to switch the program from NBC to CBS. Petitioner had no part in the negotiations between CBS and American which led to moving the program to the CBS network in January 1949. It is equally well established that neither petitioner nor anyone acting for him promised that he would refrain from exercising his so-called veto power should American attempt to switch the broadcasting facilities of the program. It is also a fact that petitioner's future services, subsequent to the sale of Amusement's stock, were never discussed or bargained for during the negotiations. To the contrary, when that subject was mentioned in the course of the negotiations with NBC, Loyd Wright threatened*84 to end negotiations immediately if petitioner's services were to be the subject of discussions incident to the sale of the stock. For more than a year and a half prior to the sale and for some 5 1/2 years thereafter, petitioner's only contract for his personal services was with the American Tobacco Company.
Paley testified:
it was made perfectly clear to me by Mr. Wasserman in the first instance that in the purchase of Amusement Enterprises, Inc., in no way was I acquiring the services of Jack Benny.
In answer to the question:
is the Court to understand from your testimony that you * * * took a calculated risk as to whether or not you might be able to obtain a switch of the Lucky Strike program from NBC to CBS?
Paley replied:
I would say that was putting it pretty well, that in addition to the assets which we acquired by the purchase of Amusement Enterprises, I had high hopes that we might induce the American Tobacco Company to switch its Jack Benny program from NBC to CBS.
And to the further question:
But at the time the contract was concluded there was no certainty that you could obtain a switch of the program?
he replied:
None whatsoever. To that extent, using your*85 language, it was a calculated risk.
The respondent argues that the question presented here is the same as in (C. A. 2, 1936); and *210 (C. A. 9, 1954). In the Beals case, it was decided that a part of the purchaser's stock received by the selling stockholders of an ice cream company was in payment for their personal agreement not to compete with the purchaser for a period of years; and, hence, that the fair market value of the stock received for that promise was taxable to them as ordinary income. In the Particelli case, the court decided that the major part of the purchase price which the seller of a winery received was in payment for the wine and, hence, taxable as ordinary income. The holding of those two cases, that a part of the purchase price received by sellers upon the sale of capital assets was taxable as ordinary income, is the result which the respondent seeks here. The significant difference in those cases and the one before us is that in those cases there was a sound factual basis on which the conclusions*86 rested. Here there is no factual basis for the determination which the respondent made. To the contrary, there is abundant specific evidence that the entire amount paid for the stock was exclusively for stock of a bona fide corporation. In addition, it is also true that the amount paid for the stock was substantially equivalent to the fair market value thereof, which is another reason why we believe that no part of such amount represented compensation for petitioner's services or for his promise to do or to refrain from doing something. Amusement's contract with American was its most valuable income-producing asset but the value of that contract was not reflected on its balance sheet. It may be true that the value of that contract was not equivalent to the anticipated total net earnings therefrom for the remaining 5 1/2 years which it had to run because of cancellation possibilities should American's contract with petitioner end. It is, nevertheless, clear that the value of the contract in 1948, together with Amusement's other assets, far more nearly approximated the price which CBS paid for the stock than did the mere book value of Amusement's assets. In addition to the assets*87 of Amusement, there was an additional value which its stock had to CBS in that CBS's other broadcast periods on Sunday night would be more valuable with the Jack Benny Show as the "kick-off program."
Also underlying the respondent's determination of the deficiency is his belief that the whole transaction here in question was a deliberate scheme for improper tax avoidance. We think there is no question but that the selling stockholders and those acting for them, as well as NBC and CBS, were all conscious of the tax consequences of the sale of the stock. We, however, cannot agree with the respondent's suggestion that the petitioner's concern over the consequences of the sale, taxwise, raises sinister implications that the outward appearance of the transaction was merely a cloak for a deliberate scheme of tax avoidance. We appreciate the respondent's diligence in guarding the *211 revenues; but it has long been recognized that a taxpayer may decrease the amount of what otherwise would be his taxes or altogether avoid them by any means which the law permits. ; .*88
Decision will be entered under Rule 50.
Harron, J., dissenting: The chief question for decision is, in my opinion, what was the fair market value of 5,000 shares of stock of Amusement Company at the time of the sale to CBS on November 13, 1948. I am unable to agree that the fair market value was $ 2,260,000, and I respectfully dissent for the reasons set forth below at length. A dissent ought to be brief; in this instance, brevity cannot be achieved.
The Commissioner determined that the fair market value of the stock of Amusement was $ 206,000. From this determination it followed that the difference between the total sum paid by CBS, namely $ 2,260,000, was for something other than the stock of Amusement, the difference being $ 2,054,000. The petitioner's burden of overcoming the prima facie correctness of the Commissioner's determination carried the burden of proving that the fair market value of Amusement stock was more than $ 206,000, and to succeed wholly, petitioner had the burden of proving that the fair market value of the stock was $ 2,260,000 on November 13, 1948. See , affd. .*89 I would conclude that the petitioner failed to prove a value on the date of sale of $ 2,260,000. Indeed, there is no categorical ultimate finding of fact that the value was $ 2,260,000. The fatal weakness in petitioner's case is that his proof does not establish a fair market value of the stock of an amount which is even close to $ 2,260,000. On the other hand, a finding could be made that the stock had a value of $ 420,000 in November 1948.
It is necessary first to analyze the evidence on the matter of the value of the stock of Amusement because a related question, namely, for what else did CBS make payment, is not reached until a finding is made on the value of the stock. There is no margin between the amount of the fair market value of the stock and the sum of $ 2,260,000 to consider until the first question is answered.
It is necessary to advert to the evidence relating to the assets of Amusement wherein are to be found facts about the value of its stock on the date of sale. There is no evidence about any market value for the stock; its value has to be determined on the basis of the *212 value of Amusement's assets. However, to make a reasonable and fairly accurate *90 appraisal of Amusement's assets several contracts must be considered, all but one being described in the findings, namely, a contract between American Tobacco Co. and NBC which was executed on July 2, 1947. This contract is described first, before considering the assets of Amusement for reasons which will become apparent later.
After the American-Benny contract of March 6, 1947, was executed, American executed a contract with NBC on July 2, 1947, under which American purchased the Red Network time on Sundays from 7 to 7:30 p. m. The term of the contract was for 14 weeks, commencing September 28, 1947, and ending December 28, 1947. American had options to extend the agreement with NBC for 11 additional periods of 13 weeks each by giving NBC notice of its election to extend each renewal period not less than 30 days prior to the end of the original period or of a current renewal period, as the case might be. On November 13, 1948, when CBS signed the contract to purchase the stock of Amusement, the network contract between American and NBC was in the fourth renewal period which would expire on December 28, 1948, and November 28, 1948, was the date on which American could notify NBC*91 of its election to extend the NBC network contract for another period of 13 weeks, if American desired to do so. Absent exercise of the election by American on or about November 28, 1948, the network contract with NBC expired on December 28, 1948. It is observed that the last Sunday in 1948 was December 26, and the first Sunday in 1949 was January 2. Dates are of significance in considering the issue. It will be recalled that the findings show that on November 24, 1948, American entered into a radio network contract with CBS which was to go into effect on January 2, 1949.
Returning to the matter of Amusement's assets. It is stated that as of September 30, 1948, according to the balance sheet, the net worth of Amusement, without ascribing any value to the 1947 Amusement-American Tobacco contract, was $ 205,742. Passing the point of how such net worth was determined, it is observed that Amusement had been in existence only 1 year; it was apparently organized without any noticeable amount of capital; its chief asset was the 1947 contract with American Tobacco; and the net earnings after taxes in the first fiscal year of the contract with American was only $ 154,640.63 (rather*92 than $ 315,000, which is the figure for $ 9,000 per week for 35 weeks). That is to say, Amusement's net earnings after taxes under the contract with American came to only about $ 4,418 per week for 35 weeks, rather than $ 9,000 per week before taxes, the figure mentioned by the agent, MCA, in September 1948 when the agent approached Paley of CBS.
*213 It is presumably agreed that under the facts, the value of the stock of Amusement depended upon the anticipated net earnings, after all expenses and charges, from the 1947 Amusement-American contract. It is necessary, therefore, to look at that contract as it stood in November 1948.
It was the production contract under which American agreed to provide Benny as the star of the show Amusement was to produce. Unless a wholly unrealistic view is taken, it is a serious question under the issue, how much the 1947 Amusement-American production contract was worth if American could supply Benny as the star. The production contract of March 6, 1947, had a term of 7 years, i. e., to 1953, but there was a termination clause by which American could end the contract with Amusement, if American could not furnish Benny as the star performer*93 in the show; i. e., if American's contract with Benny for his personal services should terminate before 1953 for any one of 5 specified reasons, one of which was the failure of American to exercise options in its 1947 contract with Benny. This leads to the 1947 American-Benny contract executed on March 6, 1947. Although the term of the American's contract with Amusement was for 7 years, American's contract for Benny's personal services had an initial term of only 3 years (156 weeks), beginning July 1, 1947, and ending July 1, 1949, with options to extend the contract for 2 additional periods of 104 weeks each (or a total of 364 weeks, 7 years).
It was on November 13, 1948, that CBS bought the stock of Amusement, and on November 1, 1948, the American-Benny contract had only 7 months (or 30 weeks) remaining until the end of the original term of the contract on July 1, 1949. Therefore, in considering the value, based on net earnings after taxes, of the 1947 Amusement-American production contract on or about November 1, 1948, it is clear that any buyer of Amusement stock who considered contract earnings seriously, could be certain only of a contract between Amusement and American Tobacco*94 until about July 1, 1949, i. e., for an additional 30 weeks; and since Amusement's net profit after taxes from the contract amounted to only $ 4,418 per week (on the basis of 35 weeks a year), such buyer could be certain that Amusement would get net profit out of the contract of about $ 132,540 ($ 4,418 multiplied by 30), plus $ 75,000, the maximum penalty payable by American if it terminated the contract on July 1, 1949, or $ 207,540.
It could be held that petitioner has established that the fair market value of the stock of Amusement was at least $ 413,282 on November 13, 1948, or $ 420,000, to round off figures, but a value above $ 420,000 cannot be found unless some value is ascribed to contingencies such as exercise by American of its option to extend the Benny contract, and it is difficult to find in the record evidence upon which some *214 amount can be fixed as a value of contingencies. There should be no hesitation in concluding that the production contract of Amusement with American had a greatly lower value if American could not put Benny into the show, than it did if American provided the star. Petitioner has failed in his burden of proving that Amusement stock*95 had a fair market value of $ 2,260,000; he succeeds in proving $ 420,000 which leaves a wide margin between what CBS paid and the fair value of the stock, namely, $ 1,840,000. But, even if this Court could ascribe a value to the contingency of American's extending its contract with Benny beyond July 1, 1949, for the extended period of 104 weeks covering two periods of production of 35 weeks each, or 70 weeks, the value of the production contract and of Amusement's stock could go up to about $ 309,260 (net earnings after taxes for 70 weeks, at $ 4,418 per week), and even that added factor would give Amusement stock a fair value of only $ 729,260, leaving an excess of $ 1,530,740 to be taxed.
Upon the record, the excess is swept into section 22 (a) which reaches gain or profit from whatever source derived. It is in connection with the application of section 22 (a) to the excess of the payment of CBS over and above the fair market value of the stock that the following authorities are in point: ; ; ;*96 , and ;; . It seems to me that the majority view misconceives the posture of the question, starting as it does by approaching the problem as though the chief and first question is whether "90 per cent of the sales price * * * was compensation to petitioner for services * * *." Rather, the chief question is, how much of the total paid by CBS was for stock of Amusement? If the petitioner has failed to prove that the entire $ 2,260,000 was for the stock, the excess over the fair market value of the stock has to be taxed as ordinary income. The circumstances of the transaction were such that close scrutiny of the facts is permissible. ; .
I find no difficulty with the second aspect of the problem, however, about the implications to be found in the facts and circumstances, and I strongly*97 dissent from the construction given to the evidence that no part of the total sum paid by CBS represented compensation for "services" or an implied agreement of petitioner "to do something." Lacking adequate proof that Amusement stock had a fair market value of $ 2,260,000 on November 13, 1948, or any value even close to that figure, certain circumstances become highly important. Obviously, the objective of CBS was to get the Jack Benny Show switched away *215 from NBC to CBS. Amusement corporation had nothing whatever to do with broadcasting arrangements, nothing in its contract with American gave Amusement any control over the matter, and CBS could not get the show over to its network merely by purchasing the stock of Amusement. It was within the power of American to terminate its contract with NBC, and to enter into a broadcast contract with CBS. The American-NBC contract's current term fortuitously ended on December 28, 1948, and the date to exercise the extension option was November 28. American did not exercise its option, and on November 24, 1948, 11 days after CBS bought the Amusement stock, American signed a broadcast contract with CBS, which was what CBS wanted. *98 Petitioner did not object to the change in the network arrangements. Furthermore, petitioner was not disinterested. He, on November 11, 1948, telephoned to Paley of CBS in New York and told Paley "that Amusement's stock was still available." It is not plausible that petitioner in his subjective thinking would "fool" Paley about practicalities. He shook hands with Paley when the deal with CBS was completed. Little, if any, doubt exists, after considering all of the record, that petitioner had the assurance that the Jack Benny Show would switch to CBS at the time CBS purchased the stock of Amusement and that he was capable, in some way, even by a handshake, of passing that assurance on to CBS. The petitioner's proof falls short of establishing that petitioner did not lend his services to persuading American to enter into a contract with CBS. It was worth a great deal to CBS to get a broadcast contract with American which had an exclusive contract for petitioner's personal services on the show produced by Amusement which could be extended beyond July 1, 1949. I would sustain the respondent's determination that the excess of the fair market value of the stock is taxable as ordinary*99 income.
Footnotes
1. The reference in the contract to the effect that Benny held exclusive broadcasting rights to the 7 to 7:30 p. m. Sunday time on NBC was because the president of NBC had so assigned such time to Benny for as long as he should desire it pursuant to negotiations carried on in 1941 between Benny, his then sponsor, General Foods, and NBC. The letter from the President of NBC assigning such time to Benny stated that it was the first time in the history of broadcasting that NBC had ever assigned a period of time to an entertainer. The assignment of such time to Benny was voluntary on NBC's part and Benny never formally or specifically accepted the assignment of the time to him.↩