168 F.2d 157 | D.C. Cir. | 1948
Lead Opinion
These appeals from decisions of the Board of Tax Appeals for the District of Columbia bring before us a question as to the coverage of the District income tax law.
The controversy arose from these facts: Warner Brothers Pictures, Inc., a Delaware corporation, is a producer of photoplays. Its photographic negatives of plays are sent to its wholly owned subsidiary, Ace Film Laboratories, Inc., in Brooklyn, which manufactures therefrom as many positive prints as may be required for exhibition in motion picture theatres. Another wholly owned subsidiary, Warner Brothers Distributing Corporation,
Distributor’s thirty-one offices remit to its New York office the gross amounts collected from exhibitors for their use of positive prints and, finally, in New York City, Distributor settles periodically with Warner under an arrangement hereinafter described. Payments to Warner are made by Distributor on a nationwide basis; that is say, Warner is not furnished with a breakdown' of Distributor’s collections as to geographical sources, and so is not informed as to the amount being paid to Distributor for the use of Warner’s positive prints by exhibitors in any one geographical unit.
Quite apart from the arrangement just described, Warner itself operated a theatre in the District of Columbia during the fiscal years ended in 1941 to 1943, inclusive. It filed District income tax returns for those three years, disclosing as taxable income the revenue from the operation of its theatre, but nothing more; and having disposed of the theatre prior to the fiscal year ended in 1944, it tied no return for that year.
The Assessor of the District of Columbia, who is charged with administering the District income tax law, concluded that Warner was subject to taxation on that part of the money received by it from Distributor which was based upon Distributor’s collections from theatre operators in the District during the fiscal years ended in 1941- to 1944, inclusive. Being without exact information as to the amounts received by Warner with respect to moneys collected from District exhibitors, the Assessor applied an allocation formula' to Warner’s total receipts from Distributor, and in that manner determined the sums derived by Warner, during the years involved, on account of the moneys paid by District exhibitors for their use of Warner’s positive prints. Upon that basis he levied deficiency assessments against Warner for the first three years here involved, and an original assessment for the fourth year, as no return at all had been filed for that year.
Warner appealed to the Board of Tax Appeals in two separate positions, one for relief from the deficiency assessment, and one from the original assessment covering the fourth year. We are asked to review the Board’s decisions, which were adverse to Warner. As the proceedings involve identical questions, they were heard together in this court and will be disposed of in one opinion.
The assessments were made under a District of Columbia statute
To ascertain whether this income was taxable to Warner we must find whether it was from a source within the District of Columbia. The activities which gave rise to the income were engaged in under a contract between Warner and Distributor, some provisions of which are shown in the margin.
Under the conception of the contract as establishing a joint adventure, the two adventurers used the positive prints in the District of Columbia by hiring them to theatres therein.
But we need not decide whether under the contract there was a joint adventure, a simple lease or some other relation; the simple fact, which cannot be avoided by any technicalities of construction, is that Warner’s photoplays were hired to District exhibitors and Warner received a percentage of the money paid by them. Legal niceties cannot destroy the actuality that such money was income from sources within the District.
The petitioner cites to us the case of James v. United Artists Corporation, 305 U.S. 410, 59 S.Ct. 272, 274, 83 L.Ed. 256, in which it was held that a West Virginia statute which levied a tax upon every person engaged within that state in the business of collecting income from the use of real or personal property did not apply to United Artists Corporation. That corporation shipped photoplay prints from its film exchange outside West Virginia to renters within the state. The .consideration was a percentage of the admission fees, and was paid to United Artists outside West Virginia. The decision is not applicable to the present case because the West Virginia statute which was being construed is unlike the provisions of the District income tax law. This clearly appears from the Supreme Court’s opinion, from which we quote: “We are not here concerned with the question whether a state, by a statute appropriately framed, may lay a tax on income derived from sources within it * * *. No such taxation is attempted by § 2(i.).” In this case we are concerned with a statute which lays a tax on income derived from sources within the District of Columbia.
It seems to us that the decisions of the Board of Tax Appeals were correct. They are, therefore,
Affirmed.
For brevity, Warner Brothers Pictures, Inc., will be referred to as “Warner,” Ace Film Laboratories, Inc., as “Ace,” and Warner Brothers Distributing Corporation as “Distributor.”
The propriety of using the formula and the accuracy of its result are not challenged, but conceded, by the petitioner. The only issue is whether there was tax liability at all.
Title 47, § 1502(b), D.O.Code, 1940, 56 Stat. 42, ch. 33, § 1(a), 56 Stat. 376, ch. 433, § 1.
Title 47, § 1504(a), D.C.Code, 1940, 56 Stat. 43, ch. 33, § 1(b).
These quotations from the contract are pertinent:
“1. Producer (Warner) hereby grants to the Distributor, and the Distributor hereby accepts the right, license and privilege to distribute * * * all photoplays and trailers produced by or for Producer. * * *
“2. The gross film rentals derived and collected by the Distributor * * * shall be divided as follows:
“Twenty percent (20%) thereof shall be retained by the Distributor and the remaining eighty percent (80%) thereof shall be turned over and paid to Producer as and when received by the Distributor.
“4. Producer agrees to lease to the Distributor as many positive prints of each photoplay licensed hereunder as may be required. Legal title to all positive prints shall at all times remain in Producer, and the Distributor agrees to return all such prints to Producer upon the expiration or sooner termination of this agreement, or when the Distributor shall no longer require same for distribution purposes.
“7. This agreement in no wise constitutes a partnership between Producer and Distributor. Distributor is not the*159 representative or agent of Producer and agrees not to so hold out in any manner whatsoever.”
It is plain that the word “lease” was used in the contract as meaning “hire.”
Should it be suggested that there was no joint adventure because of the lack of certain, characteristics which are sometimes hold to be essential to the creation of that relation, it would follow that the contract was one of employment (if not a simple lease). In that view there would be no change of result as to Warner’s liability for the tax.
The District statute provides that the Assessor “shall apply as far as practicable the administrative and judicial interpretations of the Federal income tax law so that computations of income for purposes of this chapter shall be, as nearly as practicable, identical with the calculations required for Federal income tax purposes.” D.C.Code, 1940, § 47— 1529.
It is provided in the Internal Revenue Code, Title 26, § 119, U.S.C.A., that rentals from property located in the United States shall be treated as income from sources within the United States. Mertens says in his Law of Federal Income Taxation, § 45.35, vol. 8, p. 310, “* * * the physical location of the subject of the rental betrays the source of income.” In the administration of the federal law, the fact that the geographical location of property determines the source of rent received for its use is well established and no longer questioned.
Concurrence Opinion
(concurring).
Except for the fact that under the agreement between Warner Bros. Pictures, Inc., and the Distributing Corporation the legal title to the films remains in Warner Bros., I think the separate corporate entity of the Distributing Corporation would insulate Warner Bros, from the tax — there being no contention, or basis therefor (since the Distributing Corporation was formed before the tax statute was enacted), that the Distributing Corporation was formed for the purpose of tax avoidance. It is true, as urged by Warner Bros., that the Distributing Corporation under the agreement has in practical effect an owner’s power over the use of the films and that eventually they are junked and the junk value paid to the Distributing Corporation; it is true also that the Distributing Corporation treats the films as its own in personal property tax returns in the District of Columbia. Nevertheless, during the period of their use in the District of Columbia ownership of the films is in Warner Bros. Legal title is expressly retained. That is a fact which cannot be ignored. The statute taxes the “income from District of Columbia sources of every corporation, whether domestic or foreign . . . ” D. C. Code (1940) § 47-1502(b), and defines gross income to include “gains, profits, and income derived from . . . dealings in property, whether real or personal, growing out of the ownership, or use of, or interest in, such property . . D. C. Code (1940) § 47-l504(a). Thus the income in question in the case is derived from the use of Warner Bros.’ property, and this use is in the District of Columbia and the income is therefore from a District of Columbia source.