1939 BTA LEXIS 898">*898 An English corporation organized to carry on motion picture, theatrical, and related businesses, the beneficial ownership of its stock being in the petitioner, a nonresident alien, contracted with petitioner for his exclusive services as an actor for a period of five years at a fixed weekly stipend. By virtue of loan contracts with Hollywood studios the corporation realized substantial earnings during the taxable years 1934 and 1935 on its exclusive service contract with petitioner. Held, the amounts paid the corporation as consideration for the services of the petitioner under the loan agreements do not constitute taxable income to the petitioner.
40 B.T.A. 101">*101 This proceeding involves income tax deficiencies for the years 1934 and 1935 in the amount of $23,160.03 and $81,270.84, respectively. The principal issue is whether respondent erred in determining that 40 B.T.A. 101">*102 the amounts received by Motion Picture & Theatrical Industries, Ltd., in 1934 and 1935, as consideration for the services of Charles1939 BTA LEXIS 898">*899 Laughton rendered to Metro-Goldwyn-Mayer Corporation, Twentieth Century Pictures, Inc., and Paramount Productions, Inc., constituted income taxable to the petitioner. Certain alternative issues were raised by the pleadings, which need not be set forth in view of our decision on the principal issue.
FINDINGS OF FACT.
The petitioner, Charles Laughton, is a motion picture actor well known in both Great Britain and the United States. At all times pertinent to this proceeding he was a subject of Great Britain and a resident of and domiciled in England.
On May 4, 1932, the petitioner executed a five-year contract with Frank Joyce-Myron Selznick, Ltd., which authorized them to act as his manager and personal representative. During 1932, the petitioner came to the United States and was engaged in making four pictures for the Paramount-Publix Corporation, predecessor of Paramount Productions, Inc. He also made one picture for the Universal Pictures Corporation during 1932 under a loan of his services by Paramount-Publix to Universal.
On March 29, 1933, the petitioner entered into a contract with Paramount Productions, Inc., hereinafter referred to as Paramount, under the terms1939 BTA LEXIS 898">*900 of which one picture, "White Woman", was produced in that year. Paragraph Twelfth of said contract provided in part as follows:
The Artist hereby grants to the Corporation an option upon the Artist's exclusive services in one (1) motion picture photoplay to be produced between April 15, 1934, and September 15, 1934, at the salary and at the rate of Three Thousand ($3,000.00) Dollars per week for not less than five (5) weeks for his services in such production.
Under date of September 15, 1933, Paramount notified the petitioner that it elected to exercise the foregoing option.
After completing the picture, "White Woman", the petitioner returned to England, and on April 30, 1934, a corporation bearing the name of "Motion Picture and Theatrical Industries, Limited," hereinafter referred to as Industries, Ltd., was organized under and by virtue of the laws of Great Britain, and specifically under the English Companies' Act of 1929. As set forth in its memorandum of association, the objects for which the company was established were to engage in the motion picture and theatrical businesses or any business incidental or related thereto.
The principal place of business of Industries, 1939 BTA LEXIS 898">*901 Ltd., has been at all times since its formation and now is London, England. During the 40 B.T.A. 101">*103 taxable years it was managed by a board of directors composed of business men. The petitioner was not a member of the board of directors, nor was he an officer of the company, although he was the real beneficial owner of all its outstanding stock, except qualifying shares, for which he paid into the company Pound 6,000 or approximately $30,000.
On May 4, 1934, petitioner and Industries, Ltd., executed a contract in London, whereby, in return for the payment of Pound 150 or approximately $750 per week for the next five years thereafter, together with the payment of certain other expenses, petitioner agreed to give his sole and exclusive services to Industries, Ltd., subject always to the primary obligations of a contract entered into February 26, 1934, and then existing between petitioner and London Film Productions, Ltd., whereby petitioner was to make three pictures for the latter company. The petitioner agreed to assign the profits and any moneys arising from the latter agreement and his right to 10 percent of the gross receipts from the photoplay "The Private Life of Henry VIII" 1939 BTA LEXIS 898">*902 to Industries, Ltd., as part of the consideration for the contract of May 4, 1934. Industries, Ltd., agreed to assume the obligations of the petitioner under his contract of May 4, 1932, with Frank Joyce-Myron Selznick, Ltd. Paragraph 15 of petitioner's agreement with Industries, Ltd., provided as follows:
NOTHING in this Agreement shall be contrary to the proposition that from time to time it is contemplated that the Employer itself will be engaging in motion picture or theatrical activities in the British Isles in connection with which it shall employ the Employee and in no case will it engage in any motion picture or theatrical activities in which there shall be a male principal part without employing the Employee in the enactment thereof unless the Employee expressly and in writing shall assent to the Employer in any such activities employing some other actor.
On May 5, 1934, petitioner sailed for the United States. On May 14 he reached Los Angeles and immediately commenced work as an actor in "The Barretts of Wimpole Street" for Metro-Goldwyn-Mayer under a pending loan agreement which was finally executed between Metro-Goldwyn-Mayer and Industries, Ltd., on July 6, 1934. 1939 BTA LEXIS 898">*903 The agreement became effective as of May 14, 1934, provided for petitioner's appearance in "The Barretts of Wimpole Street" and "Marie Antoinette", and permitted him to appear in one photoplay for Paramount. Metro-Goldwyn-Mayer paid Industries, Ltd., for the services performed by the petitioner under the said loan agreement $45,333.33 during 1934 and $119,230.76 during 1935.
On July 5, 1934, the contract of March 29, 1933, between petitioner and Paramount was canceled by mutual consent, and on the same day Industries, Ltd., entered into an agreement with Paramount relative to the services of the petitioner. This contract and the contract of Industries, Ltd., with Metro-Goldwyn-Mayer were both acknowledged 40 B.T.A. 101">*104 by petitioner in a separate writing, attached to each contract, wherein he obligated himself, individually, to render the services agreed upon by the studios and Industries, Ltd. Subsequent contracts and modifications of existing contracts for the loan of Laughton's services by Industries, Ltd., were likewise acknowledged by the petitioner.
Under the loan agreement with Paramount petitioner performed in "Ruggles of Red Gap", and Paramount paid Industries, Ltd.1939 BTA LEXIS 898">*904 , for such services the sums of $48,000 in 1934 and $6,000 in 1935.
On December 21, 1934, Industries, Ltd., contracted for the loan of Laughton's services to Twentieth Century Pictures, Inc. During 1935 Industries, Ltd., received $65,000 from Twentieth Century Pictures, Inc., for the services rendered the latter company by petitioner.
Each of the three studios aforementioned deducted and withheld from the amounts that were to be paid to Industries, Ltd., the sums prescribed as income tax to be withheld at the source under the provisions of section 144, Revenue Act of 1934. The sums so deducted were paid over to the collector of internal revenue by the studios in the amounts and for the years as follows:
| 1934 | 1935 | |
| Metro-Goldwyn-Mayer | $6,233.33 | $16,394.24 |
| Paramount Productions, Inc | 6,600.00 | 825.00 |
| Twentieth Century Pictures, Inc | 8,937.50 | |
| Total | 12,833.33 | 26,156.74 |
Industries, Ltd., filed its Federal corporation income and excess profits tax returns for 1934 and 1935 showing net income of $46,255.60 and $143,618.53 for 1934 and 1935, respectively. As to each year the return shows that the income tax due was less than the amount withheld by the1939 BTA LEXIS 898">*905 studios; the overpayment shown on each return amounted to $6,473.18 for 1934 and $6,409.19 for 1935.
Industries, Ltd., filed capital stock tax returns for the fiscal years ended June 30, 1934, 1935, and 1936, and claimed exemption from payment of the capital stock tax. After the claimed exemption was denied, Industries, Ltd., paid a capital stock tax for each of the years.
The petitioner reported the salary he received from Industries, Ltd., for the taxable years 1934 and 1935, amounting to $32,811.66 and $22,419.09, respectively, and paid the income tax due thereon to the Federal Government, and paid an income tax to the State of California for the year 1935.
Industries, Ltd., filed claims for refund for the amount of tax withheld by the studios over and above the amounts shown as due on its income tax returns for 1934 and 1935. Additional claims 40 B.T.A. 101">*105 for refund were filed by Industries, Ltd., for the refund of all the corporation's income tax withheld from it and paid to the collector by the studios in order to protect the corporation's interest in the event that this proceeding should result in the taxation of income to petitioner. Claims for refund were also1939 BTA LEXIS 898">*906 filed for the capital stock tax paid for the fiscal years. Subsequent to the taxable years and in 1937 the Bureau of Internal Revenue denied the claims for refund as to capital stock tax.
During the first year of its existence, May 1, 1934, to April 30, 1935, Industries, Ltd., loaned petitioner $22,520 and during the second year it made additional loans to the petitioner amounting to $78,625. The loans in the first year were made because of the extra expense to the petitioner of maintaining living quarters in Hollywood and London simultaneously. The loans made in the second year were nearly all spent in the purchase of a leasehold in London and a valuable painting. These loans were amply secured by the assignment of life insurance policies amounting to $100,000 and by the leasehold.
Industries, Ltd., was organized for a business purpose. During the taxable years the company began gathering material and preparing for future production. In December 1935 it acquired an option on a play called "The First Gentleman." It did not begin production of pictures in the taxable years, on account of lack of funds. Subsequent to the taxable years and after the company had accumulated1939 BTA LEXIS 898">*907 sufficient capital it actively engaged in production either on its own account or through a subsidiary company.
OPINION.
ARNOLD: This proceeding involves the question of whether petitioner or Industries, Ltd., shall be taxed upon sums paid to the corporation by various moving picture producers. The respondent contends that we should look through the corporate form under which petitioner's business was alleged to be conducted to the actual and substantial facts and determine that Industries, Ltd., was organized as a tax avoidance scheme. The respondent asserts that Industries, Ltd., was merely the agent and alter ego of the petitioner, that it served as a conduit or passageway for his Hollywood earnings to his London bank account, and that the agreements between Industries, Ltd., and the Hollywood film producers were anticipatory arrangements for the deflection of income. The answer to respondent's contentions turns upon whether the corporation should be recognized or disregarded as an entity separate and apart from the petitioner.
40 B.T.A. 101">*106 In 1939 BTA LEXIS 898">*908 , the Supreme Court stated:
As a general rule a corporation and its stockholders are deemed separate entities [citing cases] and this is true in respect of tax problems [citing cases]. Of course, the rule is subject to the qualification that the separate identity may be disregarded in exceptional situations where it otherwise would present an obstacle to the due protection or enforcement of public or private rights [citing cases].
See also ; ; . In our opinion, however, the facts herein fail to bring this proceeding within any recognized exception to the above stated general rule.
We have found as a fact that Industries, Ltd., was a business organization, managed by business men, and created for business reasons. Its failure to engage extensively in the production of motion pictures during the taxable years was reasonably explained as due to a lack of capital. Subsequent events support this explanation. The contract of May 4, 1934, indicates1939 BTA LEXIS 898">*909 that the directors of Industries, Ltd., and the petitioner contemplated that Industries, Ltd., would be engaging in motion picture or theatrical activities. The testimony of one of its directors and the minutes of the directors' meetings of Industries, Ltd., establish that as soon as sufficient capital was accumulated the company actively engaged in production.
The loan agreements whereby petitioner was to act for Hollywood producers were in accordance with the general practice in the industry, where one studio or producer had a long term contract for the services of an actor. Industries, Ltd., had such a contract for petitioner's services, and the amount which it could realize therefrom depended upon his continued popularity with the public and the use of his services by the producing companies. While Industries, Ltd., had the right to petitioner's exclusive services, it was obligated to pay him a salary of more than $3,000 per month for five years. By virtue of its loan agreements with studios and its rights under the assignment by petitioner of his percentage of the gross receipts from "The Private Life of Henry VIII," the directors were able to provide the company with sufficient1939 BTA LEXIS 898">*910 capital to embark upon production in their own right. This, in our opinion, was the ultimate aim and purpose for which the company was organized.
We agree with petitioner that this proceeding is in many respects comparable to the situation in . Laughton's only relationship with the contracts for the loaning of his services was to consent to the performance of the services provided for in such loan contracts. The amounts sought to be taxed as petitioner's earnings were received by Industries, Ltd., under contracts between it and 40 B.T.A. 101">*107 the studios. There was no assignment of future earnings or future income such as existed in , and there is here no occasion to apply the doctrine of that case.
The fact that petitioner is a nonresident alien and that Industries, Ltd., is a foreign corporation is immaterial so far as the present question of law is concerned. Given the same circumstances with respect to a citizen of the United States and a domestic corporation, the principle of law would apply with equal force. The principal difference between the two classifications is that nonresident1939 BTA LEXIS 898">*911 aliens and foreign corporations are subject to the withholding provisions of sections 143 and 144 of the Revenue Act of 1934 with respect to income from sources within the United States, which generally speaking have no application to citizens of this country or domestic corporations.
Considering the entire situation, we are of the opinion that Industries, Ltd., is an entity separate and apart from the petitioner, and that its income should not be taxable to him. This determination removes the necessity of considering any of the alternative issues presented by the pleadings, particularly, in view of the statements in the briefs of both parties to the effect that the sole question presented was whether the income of Industries, Ltd., was taxable to the petitioner. Since other adjustments were made by the respondent, the deficiencies should be recomputed in accordance herewith.
Decision will be entered under Rule 50.