DECISIONS

OF THE

TAX COURT OF THE UNITED STATES

JUNIOR MISS COMPANY, PETITIONER, V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 18998. Promulgated January 11, 1950.

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.

Randolph E. Paul, Esq., Adrian W. De Wind, Esq., and Louis F. Oberdorfer, Esq., for the petitioner.

William F. Evans, Esq., for the respondent.

The Commissioner determined against petitioner the following tax deficiencies and penalties for 1944:

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 return of income for 1944 with the collector of internal revenue for the third district of New York.

1

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; 71⁄2 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 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:

* 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 produotion. Gordon then proceeded to engage a costume designer, a scenery designer, a press agent. He made contractual arrangements with

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 guaranteed 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 have 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 *heaters. If more than one company is employed, a like sum of One Hundred Fifty ($150.) Dollars shall be chargeable to each Company presenting the aforesaid play under the undersigned's management.