*248 Decision will be entered under Rule 50.
Capital Assets -- Personal Service Contract -- Section 117 (a) (1). -- Amounts received from alleged purchaser of contracts for personal services were not capital gains.
*1517 The Commissioner determined a deficiency of $ 20,573.80 in excess profits tax of the petitioner for its fiscal year ended October 31, 1944. The only issue for decision is whether $ 38,860.53 received from MCA Artists, Ltd., is taxable as a long term capital gain or as ordinary income.
FINDINGS OF FACT.
The petitioner, a New York corporation, *249 organized in 1933, filed its excess profits tax return for its fiscal year ended October 31, 1944, *1518 with the collector of internal revenue for the third district of New York.
It reported, on a schedule attached to its income tax return for the fiscal year ended October 31, 1944, a long term capital gain of $ 41,780.88 on a contract acquired on July 21, 1942. The same amount was shown on its excess profits tax return as a net gain from the sale or exchange of capital assets.
The Commissioner, among other adjustments made in determining the deficiency, added to the net income as disclosed by the return, ordinary income of $ 41,780.88 and eliminated that same amount as long term capital gain. He explained those adjustments as follows: "It is held that amounts received by you during the taxable year from MCA Artists, Ltd., totaling $ 41,780.88, and reported by you as net long term capital gain, represent ordinary income."
The petitioner was engaged in business at all times material hereto as a booking agency, that is, it acted as agent for orchestras, bands, entertainers, singers, actors, and actresses in obtaining employment for them in the various fields of the entertainment*250 business, including motion picture, radio, stage, and cafes. It had agency contracts with approximately 270 or 275 entertainers during its fiscal year ended October 31, 1944, to obtain employment for them. It operated under franchises from various guilds or unions of performers such as the Screen Actors Guild, hereafter called SAG, the American Federation of Radio Artists, hereafter called AFRA, and the American Guild of Variety Artists, hereafter called AGVA.
It entered into a contract dated July 21, 1942, with Frank Sinatra providing that the latter employed the petitioner as his exclusive agent in the variety field over which AGVA had jurisdiction for a term of 1 year commencing September 4, 1942. That period was extended, prior to its termination under an option, for 1 year or until September 4, 1944. Sinatra agreed to pay the petitioner a sum equal to 10 per cent of all monies received by him under contracts of employment entered into during the term of the agreement or in existence when the contract was entered into on which commissions were not payable to any other agent. The petitioner was entitled to the 10 per cent after the expiration of the contract as long as Sinatra*251 continued to receive payments under employment contracts entered into by him during the term of the contract or during extensions pursuant to options on such contracts regardless of when the options were exercised. If Sinatra terminated a contract of employment, except on account of illness or the like, during the period the petitioner was entitled to commissions, and entered into a new contract with the same employer within 60 days, the new contract was to be deemed in substitution of the terminated one. The contract further provided, "So long as the Agent receives commissions from the Artist, *1519 the Agent shall be obligated to serve the Artist and perform the obligations of this contract with respect to the services of the Artist on which such commissions are based." The petitioner was not required to devote its entire time to the business of Sinatra, but was to be available for consultation and advice in regard to the career of Sinatra in the entertainment industry. The contract was subject to AGVA regulations governing artist's representatives and the basic contract between it and the Artist's Representatives Association then in effect or as thereafter amended.
The *252 petitioner and Frank Sinatra entered into a similar contract on July 21, 1942, providing that the petitioner would act as Sinatra's exclusive agent in the broadcasting industry (over which AFRA had jurisdiction) for a 10 per cent commission. It was for a term of 1 year from September 4, 1942, and, before that date, was extended under an option for one additional year or until September 4, 1944. It contained a provision that "The Agent's relationship to the Artist shall be that of a fiduciary." It contained other provisions similar to those contained in the contract relating to the variety field.
The petitioner and Frank Sinatra entered into a contract dated April 26, 1943, providing that Sinatra employed the petitioner as his exclusive agent in the motion picture industry for a term of 1 year from April 26, 1943, for a 10 per cent commission. The contract provided that two persons named, and those only, should personally supervise Sinatra's business during the term of the contract but unnamed subagents employed by the agent might handle agency matters for Sinatra or assist the named persons. The contract was subject to SAG regulations. It contained other provisions similar to *253 those in the other two contracts.
The contracts contained no provision in regard to their sale, assignment, or transfer.
Sinatra under each contract had the right to reject any employment obtained for him by the petitioner.
The petitioner was not in the business of selling contracts such as these and never sold any such contracts prior to the latter part of December 1943.
The petitioner and MCA Artists, Ltd., hereafter called MCA, entered into an agreement dated December 10, 1943, providing that the petitioner "sells" to MCA the three agency contracts described above, with all of its rights in those agreements from December 1, 1943. MCA agreed to perform all of the duties to be performed by the petitioner under the contracts after December 1, 1943. The agreement contained a provision of mutual release of all claims which either might have against the other pertaining to Sinatra except as provided in the agreement. The release was not to affect MCA's rights against Sinatra arising out of a contract dated August 26, 1943, between *1520 Sinatra and MCA, or otherwise. MCA agreed not to permit any release or modification, so as to affect the petitioner adversely, of any of its *254 new contracts with Sinatra without the written consent of the petitioner. It further provided: "MCA is about to, and agrees to use its best efforts to enter into new AFRA, AGVA, SAG and Form A-8 Management Contracts with Frank Sinatra for the period beginning December 1, 1943 and expiring November 30, 1948," providing for a 10 per cent commission, and those contracts, if entered into, "shall be deemed to supersede, cancel and take the place of" the three contracts between the petitioner and Sinatra, "as well as the certain standard form SAG, AFRA, and AGVA agency contracts executed between MCA and Frank Sinatra, all dated August 26, 1943 and all claims, demands, actions and rights thereunder." MCA agreed to pay the petitioner 50 per cent of the compensation due from Sinatra under the new contracts up to November 30, 1948, and 25 per cent on renewals or extensions beyond that date. MCA was to retain in full any commissions it received on services rendered by Sinatra in the recording of commercial phonograph records. MCA agreed to use its best efforts to obtain an agreement with Sinatra under which the petitioner would in effect carry out its original contracts and all employment *255 contracts obtained thereunder in case Sinatra justifiably canceled the new agency contracts with MCA.
Sinatra signed the following endorsement to the above described agreement:
The undersigned is familiar with all the terms, provisions and conditions contained in the above contract and agrees to be bound by the same and acknowledges that the undersigned's agreement is an inducement to the parties to enter into the above contract.
The petitioner did not obtain any new employment contracts for Sinatra or render any service to him after the signing of the above agreement. All new contracts of employment for Sinatra and all services rendered to him after that time were obtained or rendered by MCA.
The record does not show that the petitioner or MCA Artists, Ltd., performed any services for Sinatra either in 1943 or 1944 other than to obtain contracts of employment for him.
MCA and Sinatra entered into a contract dated January 21, 1944, providing that Sinatra employed MCA as his exclusive agent in the variety field over which AGVA has jurisdiction at a commission of 10 per cent for the period December 1, 1943 to November 30, 1948. They entered into a similar contract dated the same date, *256 for the same period, and for the same commission, under which Sinatra employed MCA as his exclusive agent in the broadcasting industry within the regulations of AFRA. They entered into a similar agreement dated the same day, for the same period, and for the same commission, under which Sinatra employed MCA as his exclusive agent in the motion *1521 picture industry within the regulations of SAG. Each of those contracts contained a provision that upon approval by the appropriate guild the contract should be deemed to supersede, cancel, and take the place of prior contracts between Sinatra and the petitioner and prior contracts dated August 26, 1943, between Sinatra and MCA but all contracts of employment covered by those agreements would be deemed covered as of December 1, 1943, by the new agreement dated January 21, 1944. It specifically provided that MCA should receive full commissions after December 1, 1943, on "his current radio contract with the American Tobacco Company for their present radio program entitled 'Your Hit Parade'" and commissions in the amount set forth in the contract of January 21, 1944, on "his current contract with Lever Bros. for their radio program*257 commencing January 5, 1944."
The petitioner concedes that $ 2,920.35 of the total of $ 41,780.88 reported as capital gain on the return was "amounts paid to taxpayer by M. C. A. from performances by Sinatra under bookings prior to sale of contract, conceded by taxpayer to be ordinary income." It introduced an exhibit, No. 5, giving the following explanation of the source of the remaining $ 38,860.53:
| NATURE OF SINATRA | ||
| PERFORMANCE | ||
| A. F. R. A. | S. A. G. | |
| (Radio) | (Pictures) | |
| Your Hit Parade (performances from 12/4/43 | ||
| to 1/23/44) (amounts paid to taxpayer for | ||
| period covered by last option exercised by | ||
| the American Tobacco Co. with the taxpayer | ||
| prior to sale of contract to M. C. A.) | 1,120.00 | |
| Your Hit Parade (performances from 1/29/44 | ||
| to 9/16/44) (amount paid to taxpayer for | ||
| period covered by options exercised by the | ||
| American Tobacco Co. with M. C. A. after | ||
| sale of contract by taxpayer) | 4,620.00 | |
| Vimm's (performance from 1/5/44 to 10/4/44) | 19,200.00 | |
| Lux (performance on 2/25/44) | 250.00 | |
| Take It Or Leave It (performance on 5/28/44) | 250.00 | |
| All Time Hit Parade (performance on 9/17/44) | 250.00 | |
| L. & S. Commercial (performance on 9/27/44) | 75.00 | |
| Boston (performance on 12/8/43) | ||
| Stanley Theatre Pitts. (performance on | ||
| 12/16/43) | ||
| Earle Theatre, Phila. (performance on | ||
| 12/23/43) (amounts paid to taxpayer by | ||
| M. C. A. identified by performances by | ||
| Sinatra, under bookings after sale of contract, | ||
| arranged by M. C. A.) | ||
| RKO (performance from 1/11/44 to 9/9/44) | ||
| (amounts paid to taxpayer by M. C. A. | ||
| identified by performance by Sinatra under | ||
| bookings after sale of contract, arranged | ||
| by taxpayer prior to sale of contract) | 9,729.99 | |
| 25,765.00 | 9,729.99 |
| NATURE OF SINATRA | |
| PERFORMANCE | |
| A. G. V. A. | |
| (Night clubs- | |
| theatres & | |
| Misc.) | |
| Your Hit Parade (performances from 12/4/43 | |
| to 1/23/44) (amounts paid to taxpayer for | |
| period covered by last option exercised by | |
| the American Tobacco Co. with the taxpayer | |
| prior to sale of contract to M. C. A.) | |
| Your Hit Parade (performances from 1/29/44 | |
| to 9/16/44) (amount paid to taxpayer for | |
| period covered by options exercised by the | |
| American Tobacco Co. with M. C. A. after | |
| sale of contract by taxpayer) | |
| Vimm's (performance from 1/5/44 to 10/4/44) | |
| Lux (performance on 2/25/44) | |
| Take It Or Leave It (performance on 5/28/44) | |
| All Time Hit Parade (performance on 9/17/44) | |
| L. & S. Commercial (performance on 9/27/44) | |
| Boston (performance on 12/8/43) | 1,502.65 |
| Stanley Theatre Pitts. (performance on | |
| 12/16/43) | 920.39 |
| Earle Theatre, Phila. (performance on | |
| 12/23/43) (amounts paid to taxpayer by | |
| M. C. A. identified by performances by | |
| Sinatra, under bookings after sale of contract, | |
| arranged by M. C. A.) | 942.50 |
| RKO (performance from 1/11/44 to 9/9/44) | |
| (amounts paid to taxpayer by M. C. A. | |
| identified by performance by Sinatra under | |
| bookings after sale of contract, arranged | |
| by taxpayer prior to sale of contract) | |
| 3,365.54 |
*259 *1522 A contract of employment obtained by the petitioner prior to December 10, 1943, whereby RKO employed Sinatra, contained options which could extend the contract beyond April 25, 1944.
A contract obtained by the petitioner prior to December 10, 1943, whereby American Tobacco Company employed Sinatra for 13 weeks, with the option to employ him for additional periods of 13 weeks on its program called "Your Hit Parade" could have extended beyond September 3, 1944. The record does not show when the last services were furnished by Sinatra under that contract.
The record does not contain any evidence in addition to that shown above with respect to employment contracts obtained for Sinatra at any time material hereto.
The Commissioner, in determining the deficiency, understated the petitioner's excess profits credit by $ 520.22.
OPINION.
The petitioner contends that its three contracts were capital assets which it sold to MCA after having held those capital assets for more than six months, and $ 38,860.53 of the total amount which it received from MCA during the petitioner's fiscal year ended October 31, 1944, was taxable as a long term capital gain. The Commissioner has held *260 that the entire amount received from MCA was ordinary income and no part of it was a capital gain. His determination is presumed to be correct and the burden of proof to show that the $ 38,860.53 is taxable as a long term capital gain is upon the petitioner. A long term capital gain means gain from the sale or exchange of a capital asset held for more than 6 months. Section 117 (a) (4).
The three contracts in question were for the personal services of the petitioner and they gave to the petitioner the right to receive 10 per cent of Sinatra's earnings on contracts procured for Sinatra by the petitioner. It does not appear that they could be sold. The following from Thurlow E. McFall, 34 B. T. A. 108, is apropos:
Petitioners did not sell their contracts, for inherently this they could not do. The contracts bound them to perform services of skill. Arkansas Valley Smelting Co. v. Belden Mining Co., 127 U.S. 379">127 U.S. 379. Before they had any contractual rights which they could sell, they were obligated to perform services for the company. All past services had been fully paid for and there was no due and unpaid amount to *261 constitute a chose in action subject to assignment. On April 2, 1929, there was a right of petitioners to continue to perform service and then to be paid -- to persist in their contractual relation for its agreed term. While this right is property in the constitutional sense in that it could not be arbitrarily legislated away, it is not capital. Beals v. Commissioner, 82 F. 2d 268. It is a continuing right which goes hand in hand with performance. Before performance it is in embryo, and after payment it is exhausted. Obviously it is not the sort *1523 of property which is susceptible of ownership for a length of time as is a share of stock, a bond, or a thing.
See also George K. Gann, 41 B. T. A. 388.
The relationship, if any, between the petitioner and MCA, their motives in entering into the contract of December 10, 1943, and the purposes which they intended to accomplish thereby, and those of Sinatra in agreeing to the change, are not adequately disclosed by the record. MCA was to receive as its own a fee of only 5 per cent for performing the same services for Sinatra in the future for which the petitioner*262 had charged 10 per cent, while the petitioner gave up 5 per cent on valuable contracts on which it had already done its part. But whatever the explanations for their actions may have been, nevertheless, the petitioner did not actually sell its agency contracts with Sinatra to MCA under the agreement of December 10, 1943, despite the fact that the parties described their transaction as a sale. Those contracts were to be canceled immediately under the agreement dated December 10, 1943, and thereupon MCA was to enter into new agency contracts with Sinatra. Thus, even if the subject matter of the agreement of December 10, 1943, had been salable property, nevertheless, it was not sold by the petitioner to MCA in the sense that thereafter MCA continued to own it. The effect of the agreement was not to sell anything but to permit MCA and Sinatra to enter into new contracts under which MCA would be the exclusive agent of Sinatra instead of the petitioner. That is not a sale or exchange within the meaning of section 117.
A further effect of the agreement was that MCA henceforth would perform any new services for Sinatra which might be required and the petitioner, for permitting MCA to*263 perform those services and earn a part of the fee, was to receive from MCA one-half of the total commissions which MCA collected from Sinatra. That was compensation to the petitioner, not proceeds of a sale of a capital asset. If one person, originally employed to do work, has another do the work, with the consent of the employer, for a part of the charge, the entire amount received is still ordinary income. The amount received by the petitioner from Sinatra through MCA was of that character and likewise ordinary income. Cf. Edwin J. McEnaney, 3 T.C. 552">3 T. C. 552.
Finally, and this of itself is fatal to the petitioner's case, it appears that a large part, perhaps all, of the amount which the petitioner received in the taxable year from MCA was commissions earned on contracts obtained for Sinatra by the petitioner or on extensions of such contracts. The petitioner was entitled to that income as soon as Sinatra performed the services and could not, by assigning the income, relieve itself of tax on that income which, so far as the petitioner was concerned, was earned when the petitioner obtained the contract of *1524 employment for Sinatra. Charles J. Williams, 5 T. C. 639;*264 Herman Shumlin, 16 T. C. 407; Lucas v. Earl, 281 U.S. 111">281 U.S. 111; Helvering v. Eubank, 311 U.S. 122">311 U.S. 122; Straus v. Commissioner, 168 F. 2d 441, certiorari denied 335 U.S. 858">335 U.S. 858, rehearing denied 335 U.S. 888">335 U.S. 888. The evidence shows that the Hit Parade contract was obtained by the petitioner before entering into the contract with MCA. The same was true of the RKO contract. The petitioner merely introduced Exhibit No. 5 and did not explain or support the statements contained thereon. The evidence does not show which contracts, if any, were new contracts obtained for Sinatra by MCA and were not contracts previously obtained by the petitioner.
The petitioner has failed to show that the Commissioner erred in taxing the entire $ 41,780.88 to the petitioner as ordinary income.
Decision will be entered under Rule 50.
LeMire, J., dissenting: I disagree with the majority holding that the agency contracts under consideration were not assignable property, that they were not in fact assigned and sold by the*265 petitioner as capital assets, and that the commissions subsequently earned by the assignee and paid over to the petitioner as a part of the purchase price were ordinary income of the petitioner.
The contracts were ordinary agency contracts. They called for certain booking agency services to be performed by the petitioner and personal entertainment performances by Frank Sinatra. While the services to be performed by Sinatra were unique and of a strictly personal nature, there is nothing to indicate that this is true of the services to be performed by petitioner or that those services could not have been performed as well by any other competent booking agency. In fact, the evidence is that these services were satisfactorily performed by MCA after the assignment of the contracts. Moreover, there is no legal restraint on the assignment even of strictly personal service contracts where the parties consent to the assignment, as did the parties here. See 6 C. J. S., p. 1074.
The facts leave no doubt in my mind that the actions which the parties took were intended to effect and did effect a complete assignment and sale of the contracts rather than a farming out by the petitioner of the*266 work which it was to perform under a sort of subcontract arrangement, as suggested in the majority opinion. I do not see how the fact that the old contracts were immediately canceled after the assignment and new contracts entered into between petitioner and MCA precludes a sale. Is that to say that there can be no capital gain *1525 sale of an asset unless the assignee continues to hold and use it? A payment by an insurance company to an exclusive agency for cancelation of the agency contract was held to be a capital gain in Jones v. Corbyn, 186 F. 2d 450. It seems to me wholly immaterial whether after the assignment MCA and Sinatra continued under the old contracts or entered into new contracts replacing them.
The commissions involved here, as I understand it, are commissions paid to MCA on bookings made for Sinatra after the assignment of the contracts. Petitioner has conceded in this proceeding that $ 2,920.35 of the amount which it received from MCA in the taxable year was from performances by Sinatra under bookings made prior to the assignment of the contracts and therefore constitutes ordinary income. The respondent does not contend*267 that any more than the $ 2,920.35 was commissions on performances under bookings made before the assignment. The subsequent commissions could not have been compensation for any services performed by the petitioner for petitioner performed no services whatever for Sinatra after the assignment of the contract.
It is suggested in the majority opinion that petitioner merely agreed to let MCA perform the services which it was to perform under the contracts with Sinatra for a portion of the fee which MCA was to "collect" from Sinatra, and that "If one person, employed to do work, has another do the work for a part of the charge, the entire amount received is still ordinary income. The amount received by the petitioner from Sinatra through MCA was likewise ordinary income." I find nothing in the facts stated or in the evidence to support the proposition that MCA was in any sense an employee or subcontractor of petitioner in respect of these contracts. After the assignment MCA was the principal and only contractor with Sinatra. Petitioner had definitely terminated its agency relationship with and its services to Sinatra.
As I view our question here, it is simply whether the gain from *268 the sale by an agent of an exclusive booking agency contract is capital gain or whether it is ordinary income. I think that the interest of an agent in such a contract is a property right or "capital assets" subject to sale just as was the insurance agency in Jones v. Corbyn, supra.
It is my opinion that the amount paid to petitioner by MCA was not petitioner's earnings and was not taxable to petitioner as ordinary income except for the commissions on services performed by Sinatra under bookings arranged for him by petitioner prior to the assignment of the contracts to MCA. The petitioner admits its liability to that extent.