*217 Decision will be entered for the respondent.
Petitioner, under an exclusive contract to direct motion picture films for one producer, nevertheless contracted to produce a film for a second producer. About 5 months thereafter, petitioner and the first producer executed a contract whereby the first producer acquiesced in the arrangement with the second producer, and as consideration for such acquiescence, petitioner agreed to pay over a part of all sums received by him under his contract with the other producer. Petitioner never paid over any amount in the tax year or thereafter. Petitioner was on the cash basis. Held, the entire sum received by petitioner under his contract with the second producer constituted gross income to him upon receipt.
*1073 The Commissioner determined a deficiency in the income tax of the petitioner for the year 1948 in the amount of $ 26,773.79. Petitioner claims an overpayment in the amount of $ 11,277.22. The sole issue is whether the full amount of $ 122,333.33 received by petitioner in 1948 under a contract for the*218 performance of services for Metro-Goldwyn-Mayer Pictures constituted gross income to him in that year or whether a portion of that amount, namely $ 38,034.49, must be excluded from his gross income by reason of certain contractual arrangements between petitioner and a British corporation.
FINDINGS OF FACT.
A stipulation of facts filed by the parties is hereby adopted as part of the findings and is incorporated herein by this reference.
Petitioner is a citizen of the United Kingdom. He filed his income tax return for 1948, on the cash basis, with the collector of internal revenue for the sixth district of California.
On or about December 21, 1945, petitioner and one Sydney Box (hereinafter called Box) entered into a written contract (hereinafter called the Box Agreement) in London, England, whereby petitioner agreed to render his services as director of a film to be produced by Box. This contract also gave Box 2 options to engage petitioner's services as director for 5 additional films, the first option for 3 films and the second option for 2 films. During and between engagements under the Box Agreement petitioner agreed not to engage as a film director for anyone else without the*219 written consent of Box.
*1074 In the latter part of 1946 petitioner's obligations under the Box Agreement were suspended and he was permitted to accept a contract with Universal International Pictures Corporation in the United States. Following the termination of his engagement with Universal, petitioner's suspension under the Box Agreement was extended and he was permitted to direct a motion picture for Paramount Pictures, Inc., in 1947. Upon completion of his services for Paramount, petitioner returned to the United Kingdom in October of 1947. The foregoing suspension was based on the oral acquiescence of Box and not upon any written consent as spelled out in the Box Agreement. Petitioner retained for his own use the entire compensation received from both Universal and Paramount.
Before being able to leave the United States, petitioner was required to obtain an income tax clearance from the Bureau of Internal Revenue. He suffered considerable embarrassment in obtaining such clearance because of the large amount of tax liability asserted and an inability on his part to produce sufficient ready cash.
On or about October 24, 1947, the Box Agreement was assigned to Gainsborough*220 Pictures, Ltd. (hereinafter called Gainsborough), a United Kingdom corporation engaged in the production of motion pictures. Box was managing director of Gainsborough. Prior to the assignment and on or before September 25, 1947, negotiations had been entered into between Metro-Goldwyn-Mayer Pictures (hereinafter called M. G. M.) and Phil Berg-Bert Allenberg, Inc. (hereinafter called Berg), as petitioner's American agent, with respect to the engagement of petitioner by M. G. M. to direct a motion picture. Thereafter, and subsequent to the assignment of the Box Agreement to Gainsborough, petitioner's agent in England, Christopher Mann, Ltd. (hereinafter called Mann), began negotiations with Gainsborough with respect to obtaining permission for petitioner to accept an engagement if one should be offered by M. G. M. Gainsborough gave its permission on condition that such arrangement be made as a "loan-out." Mann and Berg received permission to represent Gainsborough in this transaction and to receive a commission on the gross income covered by the "loan out." Petitioner left London, England, en route to Hollywood, California, on or about March 1, 1948, in anticipation of an agreement*221 with M. G. M.
In the motion picture industry a "loan out" is an arrangement whereby an employee of one company is loaned to another company to perform services for the latter. The terms of employment are agreed upon between the two companies, and compensation for the services is paid to the lending company rather than to the employee. Gainsborough's reasons for desiring the arrangement as a "loan out" were: (1) A considerable profit was anticipated as a result of a deal *1075 with M. G. M.; (2) J. Arthur Rank, Chairman of Gainsborough, was anxious to demonstrate to the British Government that he could obtain dollars for the services of his technicians; and (3) Gainsborough desired to obtain greater prestige for British technicians by arranging for them to work on top American productions and to receive credit "by arrangement with J. Arthur Rank."
M. G. M. was opposed to a "loan out" arrangement; it insisted on a direct contract between itself and petitioner. Although petitioner's American agents were advised of and were aware of Gainsborough's position that any agreement with M. G. M. for petitioner's services should constitute a "loan out," they nevertheless negotiated a *222 direct contract (hereinafter called the M. G. M. Agreement) between M. G. M. and petitioner. There was reason to believe that the deal would collapse if they insisted on a "loan out." The contract was signed on March 16, 1948. Under this agreement petitioner was engaged to direct a motion picture for M. G. M. entitled "Forsythe Saga." The term of petitioner's services for M. G. M. thereunder commenced on March 20, 1948.
The M. G. M. Agreement provided in part as follows:
3. On condition that you fully perform all of your obligations and agreements hereunder, we agree to pay you as compensation therefor and for all rights herein granted and agreed to be granted to us as follows:
(a) Commencing with the commencement of the term of the agreement, compensation shall be payable to you (conditioned as aforesaid) at the rate of Four Thousand Dollars ($ 4,000.00) per week * * * Said compensation shall become due and payable on Thursday of each week for the week ending on and including the Saturday preceding. * * * Conditioned as aforesaid, we agree that compensation shall be payable to you hereunder for not less than fifteen (15) weeks; * * *
This agreement made no mention of Gainsborough, *223 or of any prior commitments by petitioner. Paragraph 16 thereof reads in part as follows:
You represent and warrant to us that you do not have, and you agree that you will not any time hereafter enter into, any contract of any kind with any person or company which will prevent, conflict or interfere with the full and complete performance by you of each and all of your obligations and agreements hereunder, * * *
Petitioner's English agent was aware no later than January 20, 1948, that the contract was being negotiated as a direct deal rather than as a "loan out," and thereupon agreed to the transaction going through in such form. There was no inadvertence or mistake on anyone's part. It was a calculated risk accepted by both agents in view of M. G. M.'s apparent determination against any "loan out" arrangement. They acted with the hope and expectation, subsequently proved to be justified, that after the contract should be thus executed, Gainsborough, *1076 presented with a fait accompli, could be persuaded to acquiesce in the arrangement as made.
Petitioner began performance of his services for M. G. M. in March 1948, and he continued to render such services until April *224 1949.
Upon receipt of a copy of the M. G. M. Agreement, Mann opened negotiations with Gainsborough in an attempt to persuade the latter to agree to the arrangement as made. These negotiations culminated in a further agreement between petitioner and Gainsborough dated August 12, 1948 (hereinafter referred to as the Agency Agreement), whereby Gainsborough permitted petitioner to enter into the M. G. M. Agreement (which he had already done on March 16, 1948, as stated above) and to render his services thereunder. Under the Agency Agreement it was the intention of Gainsborough and petitioner to salvage for Gainsborough as far as possible the benefits which Gainsborough would have received had the M. G. M. Agreement been made as a "loan out" rather than as a direct hiring of petitioner by M. G. M.
Paragraph (5) of the Agency Agreement reads in part as follows:
(5) You hereby undertake to pay us all remuneration received by you from M. G. M. for your services in directing the said film after deduction of:
(a) A sum equivalent to the remuneration which would have been payable to you under [taxpayer's arrangements with Gainsborough as modified in certain respects] * * *
(b) Agents' commission*225 which shall not exceed 10% of the remuneration received by you from M. G. M.
(c) A sum of £ 404 in respect of your transportation expenses
(d) Living expenses from the said 8th March 1948 until the termination of your said engagement with M. G. M. * * *
(e) The amount of any income tax which may be payable by you in the United States of America upon the remuneration paid to you by M. G. M. and for which relief is not obtainable by you against your United Kingdom income tax and surtax * * *
and the net amount so payable to us shall be paid to us promptly as and when it is received by you from M. G. M. * * *On August 9, 1948, petitioner had entered into a further agreement with Gainsborough (hereinafter referred to as the Supplemental Agreement) whereby Gainsborough exercised the second option contained in the Box Agreement. The compensation payable to petitioner by Gainsborough was increased and Gainsborough was given an additional option to engage petitioner's services for two more films. Box had previously exercised the first option.
On September 20, 1948, petitioner entered into another contract with M. G. M. (hereinafter referred to as the M. G. M. Amended Agreement) whereby*226 the weekly compensation for petitioner's services was reduced from $ 4,000 to $ 2,500. This contract reads in part as follows:
As an inducement to us to continue your employment under said contract beyond September 20, 1948, it is agreed that commencing September 20, 1948 and continuing *1077 during the remainder of the term of your employment under said contract, compensation shall be payable to you * * * at the rate of Twenty-five Hundred Dollars ($ 2,500.00) per week instead of at the rate of Four Thousand Dollars ($ 4,000.00) per week. * * *
This agreement made no further changes in the relationship between petitioner and M. G. M., and the fourth paragraph thereof reads as follows:
Except as hereinabove expressly provided, said contract of March 16, 1948 is not hereby modified, amended or affected in any manner or particular whatsoever.
Petitioner did not seek prior permission from Gainsborough to enter into the M. G. M. Amended Agreement, reducing his compensation. No mention was made of Gainsborough in this agreement.
Petitioner was paid weekly for the services which he performed for M. G. M. during the period March 1948 to April 1949. He received an aggregate *227 of $ 122,333.33 from M. G. M. in 1948 in accordance with the terms of the original and amended M. G. M. agreements, from which sum, however, $ 36,700 was withheld by M. G. M. and paid to the collector of internal revenue.
Out of the aforementioned $ 122,333.33, $ 12,233.32 was paid to Berg as agent's commissions, of which a portion not in excess of 50 per cent thereof was paid to Mann.
Petitioner's 1948 income tax return was prepared and filed with a statement attached thereto entitled "Statement Relative to Income." This statement related to moneys received from M. G. M. and set forth petitioner's contention that out of the aforesaid $ 122,333.33 the sum of $ 38,034.49 was not received by him under a claim of right but was received and held by him as an agent for Gainsborough. This sum of $ 38,034.49 is the difference between the amount of $ 122,333.33 paid to petitioner in 1948 under the original and amended M. G. M. agreements and the amount of $ 84,298.84 which represents the total of items (a) through (e) in paragraph (5) of the Agency Agreement, quoted above. In his 1948 return petitioner reported only the sum of $ 84,298.84 as gross salary received from M. G. M. and did not*228 report the additional amount of $ 38,034.49 other than as referred to in the statement attached to the return.
During 1948 petitioner actually received, through his American agent, all of the payments from M. G. M. totaling $ 122,333.33, with the exception of $ 36,700 withheld as aforesaid by M. G. M. and paid to the collector of internal revenue.
Petitioner was present in the United States and England as follows:
| End 1946 | England |
| End 1946 to October 1947 | United States |
| October 1947 to March 1948 | England |
| March 1948 to January 1950 | United States |
| January 1950 to date | England and abroad |
*1078 Petitioner did not at any time during 1948 or subsequent thereto pay to Gainsborough, or to any one on behalf of or for the benefit of Gainsborough, any portion of the aforesaid $ 122,333.33 received from M. G. M. in 1948. On December 31, 1949, petitioner and Gainsborough entered into a contract whereby, inter alia, Gainsborough released petitioner from any obligation to pay to it any part of the aforesaid sum of $ 122,333.33. Negotiations looking towards the release of petitioner from that obligation had been conducted and the outcome appeared favorable no later than February *229 11, 1949.
During the negotiations leading to the M. G. M. Agreement, M. G. M. had been insistent that the contract be made directly with petitioner and appeared to all concerned to be adamant against a "loan out" arrangement. At the inception of that agreement, the compensation payable to petitioner thereunder was regarded as belonging to petitioner in its entirety in his individual capacity. Berg, as petitioner's agent, collected the $ 122,333.33 from M. G. M. as it became due, withheld a 10 per cent commission, and deposited the balance to the petitioner's bank account. No part thereof was held, deposited, or segregated for the account of, on behalf of, or for the benefit of, Gainsborough. It did not become ascertainable prior to August 12, 1948, when the Agency Agreement was made, what, if anything, Gainsborough should receive as a result of petitioner's arrangement with M. G. M. That agreement did not in fact create any agency nor did it result in the establishment of any trust with respect to the salary paid by M. G. M. to petitioner; it simply created in this connection a contract right in favor of Gainsborough against petitioner.
Sydney Box was the managing director of *230 Gainsborough during 1947, 1948, and 1949. During 1947 and 1948 Mann reported each development promptly to Box.
Petitioner, in view of his previous experience, recognized the possibility that he would once more have difficulty in receiving tax clearance when leaving the United States. He stood ready at all times to use all or any part of the $ 38,034.49 in question to pay any actual or asserted tax liability in order to receive tax clearance. At no time did he report the $ 38,034.49, or any part thereof, as taxable income either to the United States or the British Government.
The entire amount of $ 122,333.33 received from M. G. M. by the taxpayer in 1948 was part of the taxpayer's 1948 income subject to tax in that year.
OPINION.
The question for decision is whether the full amount paid to petitioner as compensation for services rendered constituted gross income to him in the year of receipt, despite an obligation on *1079 his part to pay over to another a portion of such amount where he in fact did not pay over such portion.
Petitioner concedes that where a taxpayer has rendered services and receives money as compensation therefor under a claim of right and without restriction*231 as to use or disposition, such amounts constitute gross income to him, notwithstanding that he may subsequently have to return the amount received or its equivalent. Cf. ; ; ; (C. A. 6). Petitioner contends, however, that of the sum of $ 122,333.33 received by him from M. G. M. in 1948, $ 38,034.49 "was not received by him in 1948 under any claim of right, but, rather, that it was received by him with full and complete restrictions against any use by him and was received by him as agent or trustee for Gainsborough." He bases this contention on the Agency Agreement, whereby he agreed to turn over to Gainsborough his receipts from M. G. M. less the items more fully set forth in the findings. Petitioner interprets this agreement as preventing him from receiving the full sum paid by M. G. M. under a claim of right as his own salary, and causing him instead to receive such sum as*232 a mere agent or trustee for Gainsborough, the true recipient. He thus insists that the amount includible in his gross income should be limited to that amount which, under the Agency Agreement, he was entitled to retain; the excess was received and held by him in a mere representative capacity, and not under any claim of right or with any freedom to dispose of it. With this contention we cannot agree.
It has long been recognized that a taxpayer must report as his income amounts received as compensation for personal services, and even an irrevocable assignment of all or a part of such compensation cannot relieve him of that duty, regardless of whether the compensation is paid to him or to the assignee. ; . Cf. ; .
While one receiving money or property as a mere agent or trustee and not as his own compensation may not be taxable thereon (cf. ;*233 ; but cf. ), the record in the instant case establishes that petitioner and not Gainsborough was the true payee. Petitioner was employed by M. G. M. to perform highly specialized personal services. A relationship was created which petitioner clearly could not assign to Gainsborough. He alone performed the specified services, and he alone had the right to demand and receive the sum of $ 122,333.33 as compensation from M. G. M. *1080 Gainsborough was not a party to either of the M. G. M. agreements, nor did either of the parties to those agreements undertake therein to pay anything to Gainsborough or to recognize it as having any interest or rights in the contracts or in any sum payable thereunder. Cf. (C. A. 9). Indeed, in the negotiations leading to M. G. M.'s employment of petitioner, M. G. M. was unwilling to enter into a "loan out" arrangement with Gainsborough; it dealt directly with petitioner through his American agent.
The fact that petitioner entered into a direct contract*234 with M. G. M. in violation of the Box Agreement is irrelevant. The pivotal consideration is that he actually did render services to M. G. M. for which he was paid. To the extent that he may have been accountable in damages to Gainsborough for violation of the Box Agreement, he may have been entitled to deductions when and if he might pay over such amounts to Gainsborough. But meanwhile any compensation received by him from M. G. M. was his own and must be charged to him for tax purposes. The so-called Agency Agreement with Gainsborough was not executed until August 12, 1948, some 5 months after petitioner commenced his employment for M. G. M. In effect that agreement spelled out petitioner's liability to Gainsborough by reason of his contract with M. G. M. It did not make Gainsborough a party to the M. G. M. contract. It did not in fact constitute petitioner an agent, and it did not result in the establishment of a trust. It merely set forth a contractual liability from petitioner to Gainsborough. If petitioner had in fact paid over a portion of his compensation to Gainsborough, then he probably would have been entitled to a deduction therefor, and would thus be burdened *235 taxwise only with the net amount retained. The situation in this respect would be different from that in the Lucas v. Earl line of cases where the payment to the assignee was of a personal character and nondeductible by the assignor. But in the present case, petitioner did not pay the amount in question to Gainsborough during the tax year or at any other time. Being on the cash basis, he obviously could not claim such deduction, and therefore seeks to achieve the same result by contending that the compensation actually paid to him and retained by him for services rendered by him did not constitute gross income. We think the contention is unsound.
The cases relied upon by petitioner (; ; ; ; (C. A. 3), certiorari denied ) are all distinguishable. In some of them a trust was thought to exist by reason of the*236 special facts presented, and in others it was thought *1081 that the taxpayer had not received or did not have the right to receive the amounts in question during the tax year involved. The instant case is more nearly comparable to (Ct. Cl.), where the purchaser of corporate shares withheld part of the agreed price to cover possible liabilities. After paying taxes and interest it paid over the balance of the sums withheld. In a later year it received a refund of taxes previously paid, of which a portion was remitted to the retired stockholders, as representing part of the amount deducted from the original purchase price. The court held the total amount of the refund includible in the taxpayer's gross income, but deductible upon being paid over, saying at p. 900:
The transaction did not create a trust or agency fund * * * in which the retiring stockholders had a property interest. If the corporation had become bankrupt, the former stockholders could not have claimed any part of this amount in preference to other creditors. It was a debt, contingent as to amount, and nothing more. * * *237 *
* * * *
the plaintiff * * * owned the claim for refund and the interest paid on that claim. Its payment pursuant to its agreement to the former stockholders * * * did not affect the fact that it had received it as owner. Having so received it, the plaintiff was, prima facie, obligated to return it as income. * * *
In the case at bar, had petitioner, after receipt of his salary, become bankrupt, there is nothing to indicate, and petitioner does not argue, that Gainsborough could claim any part of sums received from M. G. M. in preference to other creditors. The obligation to pay over a part of his salary to Gainsborough does not affect the fact that he received it from M. G. M. as owner.
Moreover, the M. G. M. Agreement was concluded on March 16, 1948, and it was not until August 12, 1948, when the Agency Agreement was signed, that it became definite as to what, if anything, Gainsborough should receive as a result of petitioner's employment by M. G. M. Until that date petitioner was under, at most, a contingent, unliquidated liability for breach of contract. Amounts received by petitioner prior to the signing of the Agency Agreement were clearly received by him under a claim*238 of right and without any restriction on his use or enjoyment thereof. That he later chose to assume a specific liability to pay a part of such sum to satisfy his obligation under the Box Agreement can no more prevent it from constituting gross income to him than if he had spent it for any other purpose. Sums received subsequent to the signing of the Agency Agreement are similarly gross income to petitioner. However matters may have stood between him and Gainsborough, he was the only party to the contracts and he alone performed the services by which the amount *1082 in question was earned. Any restriction 1 on such amount in his hands arose only after unconditional payment to him by M. G. M., and neither affects the claim of right under which he received his salary, nor removes from him the burden of taxation thereon. Cf. , affirmed per curiam, (C. A. 3); (C. A. 5). In the latter case, the court said at p. 632:
The rule of the *239 Earl Case, while made graphic by a figure, is more than a figure of speech. It is an expression of the simple truth that earned incomes are taxed to and must be paid by those who earn them, * * * not to those to whom their earners * * * are under contract to pay them. [Italics supplied.]
We hold that the compensation which petitioner received for his services to M. G. M. is to be treated in full as his own. To the extent that he might have paid over part of it to Gainsborough in fulfillment of a contractual obligation he probably would have been entitled to a corresponding deduction. However, he never did pay any part of it to Gainsborough, *240 during the tax year or at any other time. We can find no escape from the conclusion that the compensation earned by petitioner, paid to him, and retained by him must be included in his gross income, undiminished by any contractual liability running to Gainsborough.
Decision will be entered for the respondent.
Footnotes
1. As indicated above, we think that the compensation was not subject to any restriction in petitioner's hands. There was neither a trust nor an agency. Petitioner was in substance under a simple contractual obligation to pay a sum of money, computed in a specified manner, to Gainsborough. The compensation received by him from M. G. M. was subject to his unfettered control.↩