Nature of the Case
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Facts
LaMure published a novel Moulin Rouge and then wrote a play, Monsieur Toulouse. Lamure and Ferrer (P) entered into a Dramatic Production Contract for the stage production of the play. The contract was on a printed form from the Dramatists Guild. The contract was poorly drafted. The Author leased to the Manager the sole and exclusive right to produce and present the play on the speaking stage in the U.S. and Canada. Production had to occur on or before June 1, 1952, unless the Manager paid an additional advance of $1,500 not later than that date and that payment extended the deadline until December 1, 1952. A payment of $500 was paid as an initial advance against the Author’s royalties, and further advance payments of the same amount were required on December 1, 1951, and January 1, 1952. Royalties were to be paid to the Author on all box-office receipts on a sliding scale percentage. The contract also has a provision that in the event the Manager was entitled to share in the Motion Picture rights, it was agreed that the Manager was to get 40% for the first ten years and diminishing percentages thereafter. The motion picture and radio and television rights vested in the Author. An additional clause also stated that all dramatic, motion picture, radio and television rights in the novel were to merge in and with the play during the existence of the contract and if the Manager produces and presents the play for a sufficient period, throughout the copyright period of the play. Shortly after signing, Huston called P and asked if he wanted to play Toulouse in a picture based on Moulin Rouge, and P responded that he owned the rights. Both Huston and P then had discussions with LaMure. P was willing to abandon the theatrical production in favor of a film production but only if he were recompensed for abandoning the stage production (if the film were successful). LaMure signed with Huston and Huston’s attorney insisted on either an annulment or a conveyance of the Dramatic Production Contract. A letter of agreement was prepared whereby P would cancel and terminate the Contract. P signed the letter but instructed his attorney not to deliver it until the closing of a contract between himself and the movie production company. The letter was signed around February 7, 1952, but not delivered until May 14, 1952. On May 7, 1952, P entered into a contract with Huston’s production company, Moulin Productions, Inc. This was followed by an agreement and assignment dated May 12, 1952, in which LaMure sold to Huston all motion pictures rights including the right to exploit the picture by radio and television. LaMure was to get $25,000 plus 5% and 4% of the Western and Eastern Hemisphere motion picture profits and 50% of the net profits from live television. The Motion Picture Contract said that Romulus Films was to produce the picture and that Moulin Productions would be vested with the Western Hemisphere distribution rights and that Moulin on behalf of Romulus was interested in engaging P’s acting services. P was to get $50,000 to cover the 12 weeks of acting and $10,416.66 per week for each additional week over the 12 weeks but this together with other salary was to be postponed and payable only out of net receipts. P was also to be paid percentage compensation equal to 17% of the Western Hemisphere net profits until P had received $25,000 and thereafter 12.75% and 3.75% from the Eastern Hemisphere net profits. If disability struck P, there was a proration clause. Over objections of the Commissioner, P offered testimony by Huston’s attorney, who was president of Moulin, that in the negotiation, it was said that the ultimate percentage payment to be made to P would be his compensation for giving up his interest in the dramatization guild, and a letter from the same attorney for the sale of the dramatic rights and that LeMure refused to sell the motion picture rights unless P sold the aforementioned dramatic rights. P’s agent also testified over objection that the largest salary P had ever gotten for a motion picture was $75,000. The corporate books showed P’s salary as $109,027.74 and $178,751.46 as his payment for participating interests as of August 1953. P reported the salary as ordinary income and the participating interest funds as long term capital gains. The Commissioner disagreed and claimed that the $178,751.46 less expenses was ordinary income. The Tax Court disagreed with the Commissioner. The Commissioner appealed.
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