1950 U.S. Tax Ct. LEXIS 300">*300 Decision will be entered for the petitioner.
A theatrical producer, having acquired by contract nonassignable production rights in a play, rented theaters, engaged actors, musicians, and stage hands, and bought costumes and scenery. To meet production costs he solicited and received from various acquaintances cash advances under separate contracts by which he agreed to repay the advance and to give the contributor a specified percentage of profits if any; in case of loss the contributor agreed to forgive repayment of the advance and to bear an equal percentage of the loss. Management, control, and title to property in the enterprise remained vested in the producer. The organization held, on the evidence, not to be a corporation within the meaning of section 3797, Internal Revenue Code.
14 T.C. 1">*1 The Commissioner determined against petitioner the following tax deficiencies and penalties for 1944:
| Tax | Deficiency | Penalty |
| Income tax | $ 2,600.00 | $ 650.00 |
| Declared value excess profits tax | 18,038.39 | 4,509.60 |
| Excess profits tax | 83,063.57 | 20,765.89 |
In so doing, he treated petitioner as an organization taxable as a corporation, and imposed penalties for its failure to file corporate returns. Petitioner contends that in organization and operation it bears insufficient resemblance to a corporation to warrant its classification as such for tax purposes. It also contests liability for the penalties, alleging reasonable cause for its failure to file corporate returns.
FINDINGS OF FACT.
Petitioner, an unincorporated enterprise managed by Max Gordon, with principal office in New York, New York, filed a partnership return1950 U.S. Tax Ct. LEXIS 300">*302 of income for 1944 with the collector of internal revenue for the third district of New York.
14 T.C. 1">*2 Petitioner was formed by Max Gordon, a theatrical producer, who has engaged in the presentation of stage plays for the past thirty years and has produced about fifty on Broadway, New York. In the summer of 1941 Gordon accepted for production a play entitled "Junior Miss," which had been written and submitted to him by Joseph Fields and Jerome Chodorov. This play was based on a book by Sally Benson. By contract dated September 21, 1941, Fields and Chodorov leased to Gordon exclusive production rights for the United States and Canada. Gordon agreed to produce the play within one year; to pay the authors prior to production $ 100 a month for the first six months and $ 150 a month thereafter, and to give them out of the weekly box office receipts 5 per cent of the first $ 5,000; 7 1/2 per cent of the next $ 2,000, and 10 per cent of the remainder. All the contracting parties were subscribers to the "Minimum Basic Agreement" of the Dramatists' Guild, Authors' League of America, Inc., and of the Theatrical Producing Managers. They incorporated that agreement by reference in their 1950 U.S. Tax Ct. LEXIS 300">*303 contract.
By the basic agreement the subscribing manager bound himself not to present any plays of authors not members of the Guild, and the member authors agreed that they would not grant production rights to any manager who had not signed the basic agreement. If the manager should be a partnership, all the partners had to be signatories of the agreement; if a corporation, it and those in control of it had to be signatories. The term "manager" was broadly defined to comprise individual, partnership, corporation, association, or other organization. By article X, section 1, all production rights granted by a Guild member "are personal, and neither the contract nor the rights granted thereby to the Manager shall be assigned by the Manager" without consent of the author and of the Guild, except to a corporation or company in good standing with the Guild in which the assigning manager has a controlling interest. Even in that event the manager shall remain personally liable for fulfillment of the contract. By article X, section 2, the manager's rights under the contract were to terminate in case of his bankruptcy, assignment for the benefit of creditors, or a receivership for his property:
1950 U.S. Tax Ct. LEXIS 300">*304 * * * it being the intention of the parties hereto that the rights herein conferred on the Manager are personal to him and non-transferable and nonassignable by operation of law * * *.
In the event of termination his "rights shall in all respects and for all purposes revert to the Author." Art. XIV, sec. 6.
After signing the production contract with the authors, Gordon submitted the script of Moss Hart, who read it and agreed to direct production. Gordon then proceeded to engage a costume designer, a scenery designer, a press agent. He made contractual arrangements with 14 T.C. 1">*3 theaters in Wilmington, Delaware; Washington, D. C., and Boston, Massachusetts, for preliminary showings, and with the Lyceum Theater in New York. After consultation with the director and the authors he chose and engaged actors for the cast. He contracted with the Actors' Equity Association, a trade union, to pay the actors two weeks' salary if the play should not open or should fail after opening. He contracted to indemnify each actor against any civil or criminal liability which the actor might incur by reason of his performance, and to furnish $ 1,000 bail if any actor should be arrested. He guaranteed1950 U.S. Tax Ct. LEXIS 300">*305 two weeks' salary to others employed as stage hands, musicians, electricians, press agents, and wardrobe mistresses. He purchased and was personally billed for costumes, stage properties, electrical equipment, and scenery.
By these contracts Gordon personally incurred obligations aggregating about $ 22,000 before the show had opened in New York. While engaged in making these arrangements, he approached friends and business acquaintances by personal call or letter, and induced fifteen to advance him an aggregate of $ 11,220 for production purposes. In theater parlance such supporters are known as "angels." He set forth his agreement with them in letters dated November 10, 1941, which he personally wrote to each. These letters, which were identical except as to the amount of the addressee's advance and participation, were as follows:
I have acquired the dramatic rights to a play entitled "Junior Miss" by Jerome Chodorov and Joseph Fields.
You have acquired an interest of per cent in and to all the rights acquired by me in and to said play, upon the following terms:
I estimate the approximate cost of production to be the sum of Fifteen Thousand ($ 15,000) Dollars. You have1950 U.S. Tax Ct. LEXIS 300">*306 paid me Dollars.
Should the cost of production, including losses during try-out period, exceed the budget estimated by me, you agree, upon demand, to pay over to me any such additional cost to the extent of per cent of the total thereof.
In the event that no profit shall be realized from the operation of said play, it is understood and agreed that I shall not be required to repay the aforesaid loan nor shall any obligation be imposed upon me to make any such repayment.
Out of the first profits realized there shall be set aside the sum of Ten Thousand ($ 10,000) Dollars as a Sinking Fund.
Then there shall be repaid to all investors the total investment made for production and other expenses.
Thereafter you shall receive per cent of all profits.
Statements will be forwarded to you monthly.
The entire management shall be with the undersigned, who shall receive for office and management expenses the sum of One Hundred Fifty ($ 150.) Dollars per week, commencing with the first week said play is presented in first class theaters. If more than one company is employed, a like sum of One Hundred Fifty ($ 150.) Dollars shall be chargeable to each Company presenting 1950 U.S. Tax Ct. LEXIS 300">*307 the aforesaid play under the undersigned's management.
14 T.C. 1">*4 Your signature under the word "Accepted" will signify your acceptance of the above as the full agreement between us.
Very truly yours,
[Signed] Max Gordon.
Accepted
[Addressee's signature.]
The contributors, the amounts paid in by each, and their respective percentages of participation in profits or losses were as follows:
| Contributor | Paid | Percentage |
| Joseph Cohen | $ 1,000 | 2 |
| Jules Brulatour | 1,000 | 2 |
| Joseph Fields | 1,200 | 10 |
| Mrs. Lew Fields | 300 | 2 1/2 |
| Ada Thorn | 300 | 2 |
| Paul Beisman | 500 | 1 |
| John G. Cella | 500 | 1 |
| Jerome Chodorov | 1,500 | 12 1/2 |
| Geraldine V. Hyman | 225 | 1 1/2 |
| Beatrice Kaufman | 1,800 | 14 |
| Barnet Hart | 450 | 3 |
| Bernard Hart | 600 | 4 |
| Joseph M. Hyman | 750 | 5 |
| Moss Hart | 975 | 6 1/2 |
| Leonard Bakrow | 120 | 1 |
| Total | 11,220 | 68 |
Only a few contributors happened to be members of the Dramatists' Guild or signatories of the basic agreement. The contributions were made by checks payable to Gordon, and he deposited them in a bank account which he opened with the Manufacturers Trust Co. of New York and which was designated: "Max Gordon: Junior Miss." He alone 1950 U.S. Tax Ct. LEXIS 300">*308 was authorized to draw against the account, but under a general power of attorney which he gave to Marcus Heiman on October 14, 1941, Heiman too was empowered to make withdrawals until Gordon canceled the power and right on May 7, 1947. He gave this power for use when he was absent from New York. The box office receipts from "Junior Miss" were deposited in this account and expenses of production and profits distributed were paid by withdrawals from it.
The first production of "Junior Miss" was at Wilmington, Delaware, on October 31, 1941. After showings in Washington, D. C., and Boston the opening performance in New York was held on November 16 following. The play was commercially successful in New York, and Gordon later engaged other companies for presentations elsewhere. At times there were three simultaneous showings, and he then received three weekly payments of $ 150 for management under the contract. Production continued for four years and was very profitable. Gordon was at all times in charge, hiring and dismissing personnel, fixing salaries, incurring and settling bills, and contracting with theater operators for showings. In August, 1942, when the parents of a minor1950 U.S. Tax Ct. LEXIS 300">*309 actress made claim against her for her salary, Gordon personally filed an interpleader and paid the amount of the salary to the court.
Gordon kept a working balance of about $ 10,000 in the bank account, and every four to six weeks would distribute the excess above this amount as profits. These excesses were usually between $ 20,000 and $ 30,000, and 68 per cent thereof was distributed in accordance with 14 T.C. 1">*5 the participation rights of those who had advanced funds. Of the remaining amount he paid 2 per cent to the M. G. Plays Venture, which had made no cash advance, but had agreed to pay 2 per cent of any losses, and 30 per cent to the Max Gordon Plays & Pictures Corporation. The latter had been organized in 1936 to finance plays and produce motion pictures. It made a loan of $ 700 to petitioner before production of "Junior Miss"; this loan was repaid in a short while. Gordon owned 40 per cent of the corporation's stock; Henry Goetz, 40 per cent; and Marcus Heiman, 20 per cent. The three also made loans to it, proportionate to their stock interests, which on October 31, 1941, aggregated $ 120,000, and Gordon was endorser on a note made by it for $ 112,500. By reason of 1950 U.S. Tax Ct. LEXIS 300">*310 some unsuccessful ventures the Max Gordon Plays & Pictures Corporation lost between two and three hundred thousand dollars, and it was dissolved in December, 1942, and trustees were engaged in its liquidation in 1944. Gordon paid over to the trustees his 30 per cent share of the profits from "Junior Miss" in discharge of his personal obligation for corporate debts.
Gordon engaged an accounting firm to keep petitioner's books and prepare its income tax returns. A member of this firm set up a set of books in partnership form and prepared partnership returns of income, which Gordon filed. In 1944 the profits from production of "Junior Miss" aggregated $ 136,654.47. They were distributed among the fifteen contributing participants and M. G. Plays Venture according to the agreed percentage due each, and the remaining 30 per cent was paid to Max Gordon Plays & Pictures Corporation. On the partnership return filed for 1944 the amount paid to each distributee was reported; the recipients were described as partners and the nature of the organization as a "Joint Venture." Max Gordon signed the return as "Partner or member." He did so on advice of the member of the accounting firm who kept1950 U.S. Tax Ct. LEXIS 300">*311 petitioner's books and prepared the return. This member was not a certified public accountant, but had practiced accounting and prepared tax returns for fifteen years. His two partners in the firm were certified public accountants.
The Commissioner determined that petitioner was an organization taxable as a corporation and computed deficiencies in income, declared value excess profits, and excess profits taxes on that basis. He determined delinquency penalties of 5 per cent for petitioner's failure to file corporate returns.
OPINION.
Rejecting the partnership return filed for 1944, the Commissioner determined petitioner to be taxable as a corporation under section 3797, Internal Revenue Code, and computed tax deficiencies at corporate rates. Contesting this determination, petitioner 14 T.C. 1">*6 denies resemblance to a corporation. Technically, of course, it was not one, being unincorporated, and the facts found also indicate that it lacked the essential characteristics of a partnership. But for tax purposes the meaning of each term is expanded by section 3797:
(2) Partnership and Partner. -- The term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated1950 U.S. Tax Ct. LEXIS 300">*312 organization, through or by means of which any business, financial operation, or venture is carried on, and which is not, within the meaning of this title, a trust or estate or a corporation; and the term "partner" includes a member in such a syndicate group, pool, joint venture, or organization.
(3) Corporation. -- The term "corporation" includes associations, joint-stock companies, and insurance companies.
By sections 29.3797-2 and 29.3797-4 of Regulations 111 the Commissioner has defined an association subject to tax as a corporation as any organization which continues notwithstanding changes in its participants and has a representative individual or board to conduct its affairs. In approving these characteristics as proper tests of corporate resemblance, the Supreme Court, in Morrissey v. Commissioner, 296 U.S. 344">296 U.S. 344, also stressed as significant the title to property embarked in a common undertaking, facility for the transfer of a participating interest in the enterprise, and the limitation of a participant's personal liability to the property invested by him. But the requisite resemblance is not rigidly measured by one or more specific tests. 1950 U.S. Tax Ct. LEXIS 300">*313 The various features of ownership and administration must be considered as a whole for arriving at the proper classification of the entity. Commissioner v. Brouillard (C. C. A., 10th Cir.), 70 Fed. (2d) 154.
So viewing petitioner's characteristics, we are unable to agree with respondent's contention that the enterprise was constituted and operated in the manner of a corporation. Respondent argues technically that Gordon's associates could not be partners because all members of a manager-partnership were required to be signatories of the basic agreement and the associates were not signatories; that between the associates there was no mutuality to support either a partnership or a joint venture; that Gordon himself referred to them as stockholders; and that, like stockholders, they had no managerial control. He stresses that Gordon solicited contributions which resembled stock subscriptions in that the subscriber acquired a fixed interest in the enterprise; that the associates vested in Gordon managerial powers normally inherent in a board of directors; that there was no restriction on the transfer of participating interests; that an associate's1950 U.S. Tax Ct. LEXIS 300">*314 death would not interrupt continuity; and that his personal liability was limited.
Petitioner began as Gordon's individual enterprise. He personally assumed liability for all debts contracted, performed all functions of management, and acquired the production rights in the play, petitioner's 14 T.C. 1">*7 major asset, and also other properties. He might have transferred these assets and obligations to a corporation in exchange for shares issued to him and others. But in fact he remained throughout the title holder of the assets and personally responsible for all liabilities arising out of contract or tort which the enterprise might incur. Although in his letters to the associates he stated that each had acquired a percentage of interest in the play, it seems plain that he was never divested of title to the production rights, for by his contract with the authors these rights were expressly nontransferable and nonassignable and, moreover, a reading of the entire letter indicates that the associate was entitled to receive only a specified percentage of profit in case there should be a profit, not an interest in assets.
The contract embodied in the letter must be interpreted according to1950 U.S. Tax Ct. LEXIS 300">*315 its effect rather than its language, for terms used in it are legally incompatible. Thus the cash advance for production costs is referred to as a loan in the fifth paragraph, but as an investment in the seventh. Intent, however, is clear. The associate paid in a specified amount of money, which was to be repaid out of the first profits or forgiven if there should be no profits, and he acquired a right to a specified percentage of profits thereafter, or, if there should be no profits, he agreed to reimburse Gordon for a like percentage of losses. Significantly, there is no relation between the percentage of participation and the amount of the cash advance. Cohen, who advanced $ 1,000; Ada Thorn, who advanced $ 300; and M. G. Plays Venture, which advanced nothing, each acquired a 2 per cent participation. After first receiving back the cash advance, each associate thereafter was to be paid his specified percentage of profits. But if there had been losses, he would have been required to pay his specified percentage thereof without limitation as to amount. And this obligation would have arisen from his individual contract with Gordon, not from any understanding with the other1950 U.S. Tax Ct. LEXIS 300">*316 associates or with petitioner's creditors.
Under such an arrangement the characteristic incidents of corporate organization are missing. The associates did not buy stock with their advances; they made loans, contingently payable out of petitioner's first profits if any. They acquired a right to a percentage of profits by guaranteeing to reimburse Gordon for a like percentage of losses. This was no limited liability, as respondent suggests. If the play had been unsuccessful, they would have lost not only the advance, the only property risked by them in the enterprise, but their guaranteed part of petitioner's losses, for which the contract fixed no bounds at all. Cf. Commissioner v. Rector & Davidson (C. C. A., 5th Cir.), 111 Fed. (2d) 332; Commissioner v. Horseshoe Lease Syndicate (C. C. A. 5th Cir.), 110 Fed. (2d) 748; Pierre S. du Pont, 37 B. T. A. 1198, 1282; affd. (C. C. A., 3d Cir.), 118 Fed. (2d) 544; certiorari denied, 314 U.S. 623">314 U.S. 623. Petitioner had nothing corresponding 14 T.C. 1">*8 to capital in a corporate sense such as 1950 U.S. Tax Ct. LEXIS 300">*317 the apartment houses considered in Helvering v. Coleman-Gilbert Associates, 296 U.S. 369">296 U.S. 369, or the oil leases in Helvering v. Combs, 296 U.S. 365">296 U.S. 365. As the production rights to the play were the nonassignable personal property of Gordon, they would have terminated upon his withdrawal or death, and the other properties used in the enterprise would thereupon have become of negligible value.
While there was apparently no impediment to an associate's transfer of his contract, Gordon himself could not have transferred all his interest in the venture without terminating the whole enterprise. Because of his relation to it and the production rights on which its continuity depended, furthermore, his managerial position was not like that of a corporate officer or board of directors, acting in a representative capacity for stockholders. The associates were in no position to grant or to deny him managerial control. That control was indefeasibly vested in him by his contract with the authors of the play, and he could not relinquish it without exposing production rights to forfeiture.
Respondent points out that in 1945 the "Minimum1950 U.S. Tax Ct. LEXIS 300">*318 Basic Agreement" was held invalid because in restraint of trade, Ring v. Spina, 148 Fed. (2d) 647; he also cites Dunkel v. McDonald, 57 N. Y. S. (2d) 211; affd., 298 N.Y. 586. We have read the cited opinions, but fail to perceive in them any warrant for approving respondent's determination. Under them, Gordon conceivably could have made contracts with the authors and the associates in violation of certain provisions of the basic agreement. But he did not do so expressly, and the record rebuts any inference that he intended to do so by implication. Hence, petitioner's characteristics, in so far as they stem from Gordon's several contracts, are unaffected by the decisions cited.
We are of opinion and hold that petitioner was not constituted and operated in such manner as to make it taxable as a corporation within the meaning of section 3797, and accordingly we reverse the determination of deficiencies and penalties.
Decision will be entered for the petitioner.