22 T.C. 13">*13 The Commissioner determined deficiencies in income tax for the year 1943, as follows:

The year 1942 is involved because of the provisions of the Current Tax Payment Act of 1943.

The chief question to be decided is whether the sum of $ 805,000, which the petitioner Jesse L. Lasky received in 1942, is taxable as ordinary income or capital gain. An alternative question is whether $ 570,698.62 was received in 1942, or was constructively received.

FINDINGS OF FACT.

The facts which have been stipulated are found as facts. The stipulation and the annexed exhibits are incorporated herein by this reference.

The petitioners are husband and wife. They resided in Los Angeles, California, during 1942 and 1943. Each filed separate income tax returns on the cash1954 U.S. Tax Ct. LEXIS 247">*248 basis with the collector for the sixth district of California. Their income in 1942 and 1943 was community income.

The petitioner Jesse L. Lasky is referred to hereinafter as the petitioner.

The petitioner's occupation has been that of a motion picture producer since 1913, and he has produced many pictures. He has been a producer for various corporations in which he was an officer such as Jesse L. Lasky Star Players Company, Famous Players-Lasky Company, 22 T.C. 13">*14 Paramount Famous-Lasky Company, R. K. O., Fox Film Corporation, and Pickford-Lasky Corporation.

Petitioner was the producer of a radio show called "Gateway to Hollywood" from 1938 to the early part of 1940. For 3 months in the early part of 1940, petitioner was not associated with or engaged in any production, and he was not associated with any corporation.

Prior to March 1940, Lasky, as an individual, had not purchased any literary property, but as vice president in charge of production of Paramount, many literary properties passed through his hands. When he was an officer of Jesse L. Lasky Star Players Company and when he was in charge of production of Famous Players-Lasky Company, he became acquainted with the procedures1954 U.S. Tax Ct. LEXIS 247">*249 followed by those companies in purchasing plays, stories, and literary properties.

In the early part of 1940, in Jamestown, Tennessee, petitioner negotiated with Alvin York, a hero of World War I, for the purchase of the motion picture and other rights in the life story of Alvin York. On March 23, 1940, York and Lasky entered into a written agreement which is incorporated herein by this reference. Under the agreement of March 23, 1940, York sold to Lasky, inter alia, the exclusive motion picture rights in the story of Sergeant York, and, in particular, in three published books, "Sergeant York and His People," "Sergeant York, Last of Long Hunters," and "The War Diary of Sergeant York." In consideration for all the rights received, Lasky agreed to pay York $ 25,000 upon the execution of the agreement, and $ 25,000 at the expiration of either 18 months from the date of the execution of the agreement, or upon the date following the release of any motion picture made pursuant to the agreement, whichever date was earlier. Failure to pay the second $ 25,000 would result in termination of the agreement. In addition, Lasky agreed to pay York a sum equal to 4 per cent of gross receipts1954 U.S. Tax Ct. LEXIS 247">*250 from the distribution of each motion picture in excess of $ 3,000,000; 5 per cent, in excess of $ 4,000,000; 6 per cent, in excess of $ 6,000,000; and 8 per cent, in excess of $ 9,000,000. It was expressly provided that if the contract should be assigned to a production or distribution corporation the assignee would assume all of Lasky's obligations. Lasky paid York $ 25,000 upon the execution of the agreement. He borrowed the funds used to make the payment.

Petitioner, thereafter, flew to Hollywood, California, where he arrived on about March 25, 1940. Lasky shopped around to sell the story for production of a motion picture. He had an outline of a story which he gave Sam Goldwyn to read. He called on Paramount, also. None of the first contacts wanted the story. He then called on Harry and Jack Warner of Warner Bros. Pictures, Inc., hereinafter referred to as Warner Bros. Warner Bros. agreed to purchase the rights to the story of Sergeant York and to employ Lasky as the supervising 22 T.C. 13">*15 producer. The understanding of Warner Bros. and Lasky was reached a few weeks before written instruments were ready for execution. The agreements executed and the dates thereof were 1954 U.S. Tax Ct. LEXIS 247">*251 as follows: (1) One agreement was dated May 8, 1940, by which Warner Bros. employed Lasky as the supervising producer of a photoplay tentatively entitled "The Amazing Story of Sergeant York." (2) Another agreement was dated May 15, 1940, by which Lasky sold to Warner Bros. all of his rights to the York story and all other rights he had acquired under the York contract of March 23, 1940. Another agreement was simultaneously executed, entitled "Supplemental Agreement," which was dated May 15, 1940, by which Warner Bros. agreed to pay Lasky part of the gross receipts, in varying percentages, from the distribution of the photoplay, "The Amazing Story of Sergeant York." These agreements are incorporated herein by this reference.

The agreement of May 8, 1940, was for an original term of 52 weeks beginning, retroactively, on April 1, 1940, with options to extend the period of the agreement for a maximum period of 7 years. The agreement provided, inter alia, as follows:

13. It is understood that the Company has purchased from the Producer, all Producer's rights to, in and under certain agreement dated March 23, 1940, between the Producer and Alvin C. York, the original of which contract1954 U.S. Tax Ct. LEXIS 247">*252 has been delivered to the Company, and which rights are of value in connection with the production of the proposed photoplay, "THE AMAZING STORY OF SERGEANT YORK," referred to in Paragraph 3 hereof. The Company shall be entitled to the services of Producer in the preparation and/or writing of the script upon which said motion picture photoplay shall be based, but it is not a condition or prerequisite to the production of said photoplay that said script shall be approved by Producer, and on the contrary Producer agrees to render his services in the complete production of said photoplay provided only said script meets with the approval of the Company. It is further understood that Producer shall work under the direct supervision of Jack L. Warner and Hal B. Wallis, or either of them, provided either of them remain in the employ of the Company during the term hereof; * * *.

14. It is further agreed that Producer shall be accorded credit on the film of the photoplay produced hereunder and in all paid advertising and publicity issued by and under the direct control of the Company in approximately the following form, to-wit: "PRODUCED BY JESSE L. LASKY AND HAL B. WALLIS."

In general, 1954 U.S. Tax Ct. LEXIS 247">*253 the aforesaid agreement provided that Lasky would render services as the supervising producer of the York photoplay, and such other photoplay as might be selected by mutual consent, for a period of 52 weeks from April 1, 1940; that Lasky, at the option of Warner Bros., would render additional services in connection with the preparation or writing of the script, and editing, supervising, and overseeing the development of the screen play; and that Lasky would receive for all of his services under the contract at least $ 60,000 payable at the rate of $ 1,500 per week.

22 T.C. 13">*16 Under the agreements of May 15, 1940, Warner Bros., in general, agreed to pay Lasky $ 40,000 for all of his right, title, and interest in the York agreement of March 23, 1940, plus a part of the gross receipts from domestic and foreign distribution during not more than 5 years after the date of release of the York photoplay. Warner Bros. assumed all of Lasky's obligations under the York contract. The so-called "Supplemental Agreement" provided, in part, as follows:

WHEREAS, the parties hereto have simultaneously herewith entered into a contract whereby Warners have purchased all the right, title and interest of1954 U.S. Tax Ct. LEXIS 247">*254 Lasky in and under a certain contract between Lasky and Alvin C. York, dated March 23, 1940, relating to a motion picture tentatively entitled, "THE AMAZING STORY OF SERGEANT YORK", as in said contract set forth,

NOW, THEREFORE, it is further agreed that as an additional compensation and consideration payable to Lasky by Warners for the rights contained in the aforesaid contract Warners will pay to Lasky a further sum based upon the gross returns from the release and/or distribution and/or exhibition of the said photoplay, as follows:

* * * *

2. Warners will pay Lasky a sum equal to twenty per cent (20%) of the gross film rentals or sales (as hereinafter defined) realized from such motion picture in excess of the sums hereinafter stated. The term "gross film rentals or sales", as used herein, shall be deemed to be the aggregate of the domestic proceeds and the foreign proceeds realized from the sale, rental or distribution of the photoplay contemplated hereunder. * * * Warners will pay Lasky the said sum of twenty per cent (20%) upon the said domestic proceeds in excess of One Million Six Hundred Thousand Dollars ($ 1,600,000.00) and a similar percentage of the foreign proceeds 1954 U.S. Tax Ct. LEXIS 247">*255 in excess of One Hundred and Fifty Thousand Dollars ($ 150,000.00); * * * It is further understood that should the aggregate proceeds, both domestic and foreign, reach the sum of Two Million Five Hundred Thousand Dollars ($ 2,500,000.00), then thereafter Warners will pay Lasky a sum equal to twenty-five per cent (25%) of the excess above such figure instead of twenty per cent (20%) as is herein provided for proceeds below such figure.

* * * *

Warner Bros. agreed, also, to keep complete books of account pertaining to receipts from the distribution of the photoplay, and to make such records available at all times to Lasky or his agents. Warner Bros. agreed to render periodical statements to Lasky after the release of the picture, not less than once each quarter, accounting for receipts, and to make simultaneous payment to Lasky of his share of the gross receipts shown by each statement.

The so-called "Supplemental Agreement" of May 15, 1940, is the type of agreement which is known as a participation agreement.

Warner Bros. paid $ 40,000 to Lasky in 1940, as provided in the agreement of May 15, 1940. Warner Bros. reported the payment of $ 40,000, on Form 1099 of the Treasury Department, 1954 U.S. Tax Ct. LEXIS 247">*256 as a payment for "Sale of Story."

Lasky went on Warner Bros.' payroll as of April 4, 1940. He was paid $ 58,500 during 1944 for his services as a producer during 39 22 T.C. 13">*17 weeks. Warner Bros. reported payment of $ 58,500 as "salary" on Form 1099.

Lasky reported the sums of $ 40,000 and $ 58,500 as ordinary income in his income tax return for 1940.

A photoplay, entitled "Sergeant York," was produced; it was released in the United States and Canada in July 1941.

Lasky's employment as a producer of the photoplay extended over 58 1/2 weeks, from April 4, 1940, to May 17, 1941. Lasky was paid $ 87,750 for his services at the rate of $ 1,500 per week.

Lasky was employed by Warner Bros. in the production of other pictures during 1941, 1942, 1943, and 1944. He went back on the payroll on May 19, 1941, in connection with a photoplay about Mark Twain. He worked on that project intermittently until January 9, 1943, for a period of 77 weeks, receiving total compensation of $ 126,175, for his services as an associate producer. From January 11, 1943, until April 24, 1944, Lasky worked for Warner Bros. during 83 weeks on "various" projects receiving $ 150,516.67 for his services as an associate1954 U.S. Tax Ct. LEXIS 247">*257 producer.

Warner Bros. followed the practice of mailing statements to Lasky which were designated "Statement to Jesse L. Lasky covering distribution of production 'Sergeant York' to (date)," together with a check for the amount of Lasky's participating share as shown by the statement. Lasky's share was 20 per cent, at first, under the agreement. The first of such statements was mailed to Lasky with a letter dated December 15, 1941. The statement was for the period ending November 29, 1941, and showed the following:

Lasky received a check for $ 21,216.80 with this statement.

An account was set up on the books of Warner Bros. entitled "Income from Distribution of Production 'Sergeant York' and Jesse L. Lasky's Share Thereof." This account showed gross receipts from domestic and foreign distribution. The account was periodically credited with Lasky's share of gross receipts pursuant to the "Supplemental Agreement" of May 15, 1940. The1954 U.S. Tax Ct. LEXIS 247">*258 account showed the total amount of credits before a new crediting of his share, the amount of his participating share as of a particular date, and the total "to date." It also showed certain charges against Lasky's account. A record was kept of the checks of Warner Bros. which were made payable to Lasky, and the amounts thereof.

22 T.C. 13">*30 At the end of 1941, Lasky made two separate requests to Warner Bros. to make advances to him of his 20 per cent share of gross receipts. His first request was for an advance payment of $ 85,000, and his second request was for an advance payment of $ 90,000, a total amount of $ 175,000. Warner Bros. made the payments requested by check.

In 1941, Lasky received $ 196,216.80 from the gross receipts from the distribution of the York picture which he reported in his return for 1941 as ordinary income ($ 21,216.80, plus $ 175,000).

As consideration for the two advance payments in 1941 of $ 175,000, Lasky agreed to modifications of the supplemental agreement of May 15, 1940. The amendments were made by letters of Warner Bros. to Lasky, which he signed as "Accepted," dated December 30, 1941, and December 31, 1941. These "letter agreements" are incorporated1954 U.S. Tax Ct. LEXIS 247">*259 herein by this reference.

The letter agreement of December 30, 1941, is set forth in part in the margin. ¹

1954 U.S. Tax Ct. LEXIS 247">*260 The letter agreement of December 31, 1941, is set forth in part in the margin. ²

1954 U.S. Tax Ct. LEXIS 247">*261 22 T.C. 13">*19 As consideration for the advance payments of $ 175,000, Lasky agreed that he would begin to share in the earnings of "Sergeant York" after the gross film rentals reached $ 2,580,000 instead of $ 1,600,000, as previously agreed. If Lasky had waited to receive the 20 per cent first agreed upon, his share would have been $ 196,000. Therefore, the receipt of the advance payments of $ 175,000 represented a discount of the first $ 196,000 of earnings for $ 21,000. Lasky gave Warner Bros. a discount in order to receive payments in 1941 in advance.

By another letter agreement dated April 30, 1942, Lasky agreed to pay (and he authorized Warner Bros. to withhold and keep from any sums due him under the supplemental agreement of May 15, 1940, as amended) the sum of $ 18,998 to be expended by Warner Bros. in an advertising campaign of the picture, "Sergeant York." This sum was withheld by Warner Bros. prior to December 4, 1942.

At some time prior to May 1942, a claim based upon alleged plagiarism was lodged against Warner Bros. and Lasky by the heirs of Skeyhill, the author of "Sergeant York, Last of Long Hunters." Warner Bros. tentatively debited petitioner's account on its books1954 U.S. Tax Ct. LEXIS 247">*262 in 22 T.C. 13">*20 the amount of $ 10,000 as a safeguard against possible costs arising out of such claim. Of this debit, all but $ 239.75 was ultimately recredited to petitioner's account.

On about May 6, 1942, Lasky instructed Warner Bros. to send future statements of account and participation checks and other matters directly to his attorney.

Lasky consulted and retained a certified public accountant who specialized in motion picture accounting and in the investigation of motion picture distribution and participation accounting. Lasky and his attorney consulted the accountant about Lasky's rights under the supplemental agreement of May 15, 1940, as amended, with the purpose of securing a proper accounting of proceeds from Warners under the contract.

Under date of May 6, 1942, Warner Bros. mailed to Lasky's attorney in Los Angeles, a statement purporting to show the domestic and foreign receipts from the distribution of "Sergeant York" to February 28, 1942, and Lasky's share thereof, together with its check, made payable to Lasky, in the amount of $ 244,529.84. The statement showed, among other things, United States gross feature rentals to February 28, 1942, in the amount of $ 3,758,978.57, 1954 U.S. Tax Ct. LEXIS 247">*263 without detailed explanation. The statement listed foreign income to February 28, 1942, as $ 85,613.15, against which was offset $ 150,000; the latter was described as "Income on which participant does not share." The statement disclosed that "The sum of $ 10,000.00 has been withheld at this time by reason of the claim of alleged Skeyhill heirs."

There was attached to the check of Warner Bros., for $ 244,529.84, a voucher which was a permanent part of the check form. The voucher bore the legend, "Void If Detached." On the voucher was typed the number of the voucher and "Your share of income from distribution of production 'Sergeant York' per statements rendered as of February 28, 1942, $ 244,529.84." A letter which accompanied the check described the check as "covering the amount shown by the statement to be due."

Lasky was advised by his attorney not to accept the check for $ 244,529.84. With the approval of Lasky, his attorney returned the check to Warner Bros. Pictures, Inc., by registered mail on June 3, 1942, with the following statement: "I am unable to accept the check for Mr. Lasky under the conditions as sent    ."

On July 10, 1942, Warner Bros. mailed petitioner's attorney1954 U.S. Tax Ct. LEXIS 247">*264 another check made payable to Lasky in the amount of $ 132,692.08. On October 13, 1942, Warner Bros. mailed petitioner's attorney another check made payable to Lasky in the amount of $ 193,476.70. Each check was accompanied by a statement showing the gross rentals of the York photoplay, domestic and foreign, to May 10, 1942, and to August 29, 1942, respectively, and Lasky's share up to each date. A voucher was attached to each check with the legend, "Void If Detached."

22 T.C. 13">*21 Petitioner's attorney returned the checks for $ 132,692.08 and $ 193,476.70 to Warner Bros. with letters stating in each instance: "We are unable to accept this check under present conditions, and for that reason I am compelled to return the same."

The three checks, which were received by Lasky's attorney in 1942 and which were returned in 1942, totaled $ 570,698.62. Upon receipt of the returned checks, Warner Bros. stamped them "Void."

No investigation was ever made, on Lasky's behalf by his accountant or agents, of Warner Bros.' records of the receipts from the distribution of the York photoplay to determine whether or not Lasky was receiving a fair accounting of his participating share of the receipts1954 U.S. Tax Ct. LEXIS 247">*265 or to determine any other matters.

After the return to Warner Bros. of the three checks totaling $ 570,698.62, Warner Bros. did not send any more statements or any more checks to Lasky or to his attorney in payment of Lasky's participation in the York picture rentals. However, on its books, Warner Bros. continued to make credits to Lasky's account as it had done previously. Exhibit Z, a copy of the accounting records of Warner Bros. of Lasky's participation in the York picture receipts, is incorporated herein by this reference. It shows that computations of the receipts, foreign and domestic, in which Lasky had a share, were computed as of February 28, 1942, April 4, 1942, May 2, 1942, May 30, 1942, July 4, 1942, October 3, 1942, October 31, 1942, and November 28, 1942. Also, the cumulative totals of Lasky's shares were computed. The cumulative balances of the gross receipts on August 29, 1942, October 3, 1942, October 31, 1942, and November 28, 1942, were as follows:

The aforesaid account on the books of Warner Bros. 1954 U.S. Tax Ct. LEXIS 247">*266 was closed out on December 22, 1942, by the notation: "Assigned to United Artists Corporation." A check of Warner Bros. for $ 820,000, dated December 22, 1942, made payable to United Artists Corporation, was entered in the account and was charged to the cumulative balance shown therein. Also, $ 2,857.56 was charged to the account as a charge to "Producer" [Lasky]. The explanation, written in the account for the check to United Artists in the amount of $ 820,000, stated, in part, as follows: "The $ 820,000 was in full payment of all claims of every nature arising out of the purchase of the stories as well as any share accruing from distribution of the production [the York photoplay]."

The check for $ 820,000, payable to United Artists, dated December 22, 1942, bore the following notation: "Payment as per agreement 22 T.C. 13">*22 dated December 22, 1942 between Warner Bros. Pictures, Inc., and United Artists Corporation."

The check was paid on December 24, 1942; United Artists received payment of the check for $ 820,000 on December 24, 1942.

In 1942, Lasky's attorney had a conference with an executive of Warner Bros. about foreign blocked funds, and the executive of Warner Bros. proposed1954 U.S. Tax Ct. LEXIS 247">*267 that Lasky's share of foreign blocked funds (presumably foreign receipts from the distribution of the York picture) should be $ 200,000; but Lasky's attorney did not agree. Lasky's attorney discussed, at some undisclosed time, with executives of Warner Bros., criticisms which he had heard about Warner Bros.' handling of the York picture.

Lasky was advised and he decided to get out of his agreement of May 15, 1940, with Warner Bros. His attorney handled all negotiations. His attorney worked out an agreement with United Artists Corporation whereby it would pay Lasky $ 805,000. The agreement was consummated on December 4, 1942. United Artists was represented by its attorney. On or about December 4, 1942, Lasky received $ 805,000 from United Artists.

United Artists, on December 22, 1942, received a check from Warner Bros. for $ 820,000. The check was paid on December 24, 1942.

Petitioner's attorney had been secretary-treasurer of United Artists Corporation off and on.

The transaction between Lasky and United Artists was covered by an agreement which was entitled "Contract of Sale." It was dated December 4, 1942. Under the agreement Lasky sold and assigned to United Artists all1954 U.S. Tax Ct. LEXIS 247">*268 of his interest in the original and supplemental agreements with Warner Bros. dated May 15, 1940, and all of his interest in the motion picture, "Sergeant York," including "the proceeds thereof, rights of accounting thereof, money due or to become due thereof from Warner Bros. Pictures, Inc., * * *." Under the agreement, Lasky, also inter alia, authorized United Artists, the purchaser, irrevocably and in his (Lasky's) name, or otherwise to do the following:

to execute any document of any kind or character * * * and to remise, release and discharge for himself and his successors all manner of action and actions, cause and causes of action, suits, duties, dues, sums of money, accounts, * * * claims and demands whatsover in law or in equity which against Warner Bros. Pictures, Inc., or any other person, firm or corporation, the said Seller [Lasky] ever had, now has * * * or may have * * * relating to or in connection with the motion picture "Sergeant York," and agrees to be bound thereby as though such instruments were executed by himself, and to release and discharge Warner Bros. Pictures, Inc. from rendering any reports and accounts to him [Lasky] from paying any money to him1954 U.S. Tax Ct. LEXIS 247">*269 or in anywise be responsible for or have any duties to him by virtue of or arising out of the agreements of May 15th, 1940, or any supplements or amendments thereto, and to acknowledge that Seller neither has nor 22 T.C. 13">*23 shall it have any rights or interest of any kind whatsoever in and to the motion picture "SERGEANT YORK" and to entitle Warner Bros. Pictures, Inc. to license, sell, dispose of, re-issue, re-make and in every other way treat the motion picture "SERGEANT YORK," the negative, positive prints, stories, scenarios and other properties thereof as its sole and exclusive property without any accounting, payment or restriction of any kind to the Seller.

In consideration of all of the assignment and transfer of Lasky, the seller, United Artists agreed to pay Lasky, upon execution and delivery of the agreement, the sum of $ 805,000, in cash.

The agreement of December 4, 1942 (Exhibit 7-B), is incorporated herein by this reference.

On December 22, 1942, United Artists and Warner Bros. Pictures, Inc., executed an agreement entitled "Contract of Sale" (Exhibit AA), which is incorporated herein by this reference. Under this agreement, United Artists sold and assigned to Warner1954 U.S. Tax Ct. LEXIS 247">*270 Bros., for $ 820,000, the contract of sale dated December 4, 1942, between Lasky and United Artists, which was attached to the contract between United Artists and Warner Bros. United Artists, by its contract, sold and assigned to Warner Bros. all rights of every kind acquired by it under the terms of the agreement of December 4, 1942 (with Lasky), including, inter alia, its rights, as follows:

in and to any contract and any right thereunder or claims thereunder it may have by virtue of contracts or claims thereunder which Jesse L. Lasky may have had with Warner Bros. Pictures, Inc. or any subsidiary corporation, in and to any * * * licenses it may have any interest in pertaining to or relating to the production, distribution or exhibition of the motion picture "SERGEANT YORK," * * * any and all right, title and interest it may have by virtue of the original contract dated May 15th, 1940 between Jesse L. Lasky and Warner Bros. Pictures, Inc., the agreement supplemental thereto of similar date, and any and all other amendments and supplements thereto including specifically the right to all moneys that are now due or which may become due to Jesse L. Lasky from Warner Bros. Pictures, 1954 U.S. Tax Ct. LEXIS 247">*271 Inc., thereunder * * * and any of the rights connected with production, distribution or exhibition thereof, and any and all claims, manner of action and actions, cause and causes of action, suits, sums of money, accounts, damages and demands of any kind and character Jesse L. Lasky may have against Warner Bros. Pictures, Inc., or which arise out of or in connection with the motion picture "SERGEANT YORK" against Warner Bros. Pictures, Inc.

(4) Pursuant to the authority granted to Seller in paragraph 4 in its said agreement with Jesse L. Lasky dated December 4th, 1942, Seller does hereby for and in the name of and on behalf of Jesse L. Lasky and his successors and assigns, remise, release and forever discharge Warner Bros. Pictures, Inc. and all of its subsidiary and affiliated corporations of and from all manner of action and actions, cause and causes of action, suits, duties, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, executions, claims, and demands whatsoever in law or in equity which against Warner Bros. Pictures, Inc. and its subsidiary and affiliated1954 U.S. Tax Ct. LEXIS 247">*272 corporations the said Jesse L. Lasky now has or * * * may have in and to the receipts from the distribution and exhibition thereof or any part thereof and does further release and 22 T.C. 13">*24 discharge the said Warner Bros. Pictures, Inc. from rendering any reports and accounts to him, from paying any money to him or in anywise be responsible for or have any duties to him by virtue of or arising out of the agreement and supplemental agreement both dated May 15, 1940 between him and Warner Bros. Pictures, Inc. and all supplements or amendments thereto, and he does hereby acknowledge that he does not have nor shall he have any rights or interest of any kind whatsoever in and to the motion picture, "SERGEANT YORK," and Warner Bros. Pictures, Inc. is entitled to license, sell, dispose of, * * * the entire receipts for the world from the distribution and exhibition thereof as its sole and exclusive property without any accounting, demand or restriction of any kind.

Petitioner reported, in his return for 1942, one-half of the payment of $ 805,000 as long-term capital gain from the sale of a capital asset, as follows: "Interest in picture Sergeant York 3-15-40 -- 12-4-42, $ 402,500; gain to1954 U.S. Tax Ct. LEXIS 247">*273 be taken into account, $ 201,250.00." Petitioner's wife reported one-half of the same long-term capital gain in her return for 1942. The Commissioner rejected this treatment of the receipt of $ 805,000, giving the following explanation in the notice of deficiency:

It has been determined that $ 805,000 representing the proceeds from a contractual interest in the earnings and profits of the motion picture "Sergeant York" received from United Artists Corporation on December 4, 1942, is taxable as ordinary income received in the year 1942.

On August 11, 1941, Lasky sold to Warner Bros. all of his interest in the motion picture rights and other rights in the works covering the life of Mark Twain, purchased by him on July 10, 1941, from the Mark Twain Company, represented by Harold M. Sherman and Jervis Langlon, for $ 107,000, and an interest in the gross film receipts of a photoplay depicting the life of Mark Twain, such share in gross receipts being called "royalties." Lasky was employed by Warner Bros. as an associate producer of a photoplay depicting the life of Mark Twain, and he received from Warner Bros. for his services as an associate producer the sum of $ 126,175, at a weekly1954 U.S. Tax Ct. LEXIS 247">*274 rate of from $ 1,500 to $ 1,750.

On August 11, 1941, Lasky sold to Warner Bros. for $ 50,000 all of his interest in motion picture and other rights in a literary property known as "A Connecticut Yankee in King Arthur's Court" which he had purchased from the Mark Twain Company on July 10, 1941. Warner Bros. did not produce a photoplay based upon this literary property.

In about 1946, Lasky purchased a literary property, "Great Caruso." He was a producer for Metro-Goldwyn-Mayer of a photoplay entitled "Great Caruso."

OPINION.

The question to be decided is whether a lump-sum payment of $ 805,000 received by petitioner on December 4, 1942, is taxable in its entirety as ordinary income.

22 T.C. 13">*25 Various agreements are involved and at first the series of transactions appear to make the facts complicated. The ultimate question deals with the taxability of what petitioner received and we need not be diverted by the elaborate design set before us.

We think it is necessary to keep in mind the nature of the original transaction because the culmination of the series of transactions in petitioner's receipt of a lump-sum payment of $ 805,000, in our opinion, reflects the nature of the first step.

1954 U.S. Tax Ct. LEXIS 247">*275 Lasky acquired from York exclusive motion picture rights in the life story of the individual, Sergeant York, for which Lasky paid $ 25,000 and agreed to pay a percentage of the gross rentals of the motion picture based on that story. There can be no doubt that Lasky acquired a license to produce a film story, a motion picture, and that what York was to receive constituted royalties. ; , certiorari denied ; , certiorari denied ; . We do not need to run this point back to analyze whether what York held was a copyright, or what York's interest in published books was. And since taxation is a practical matter, we need not be concerned about niceties in the definition of the word "royalty." .

It was provided in the agreement1954 U.S. Tax Ct. LEXIS 247">*276 with York that all rights thereunder could be assigned, and Lasky assigned the rights and obligations under the agreement to Warner Bros. There were at least two agreements of Lasky with Warner Bros., since one of the agreements of May 15, 1940, was called a "Supplemental Agreement"; or there were three agreements. But, at this point, we need not become involved. Suffice it to say that we think all of the agreements with Warner Bros. made up one transaction between Lasky and Warner Bros. Substance rather than form is controlling. . Warner Bros. received only the rights to produce a motion picture based on the York story which Lasky had acquired from York. That which Warner Bros. agreed to pay Lasky for his rights, namely, a percentage of the gross film rentals of the motion picture, were no doubt "royalties" to Lasky. ;;It is immaterial that Warner Bros. also had to pay "royalties" to York. The arrangement simply was one under which Warner Bros. was obligated to pay distinct1954 U.S. Tax Ct. LEXIS 247">*277 royalties to two successive assignors of rights which were only a license. This result followed from Lasky's assignment of the York contract.

But if the above oversimplifies the arrangement, then it can be said, in the alternative, that Lasky's power to share in the proceeds of the motion picture was due to his contribution as a producer. What we said in , is appropriate here:

22 T.C. 13">*26 And the facts that a part of the proceeds originally took the form of a share in royalties for a license to employ the material in a motion picture, see , and that eventually petitioner received a lump sum in substitution, fail to deprive the whole transaction of that basic character.

We think there can be no doubt that Lasky's share in the gross rentals of the York motion picture originally constituted ordinary income, taxable in its entirety to Lasky. He so regarded all of his payments, $ 196,216.80, which he accepted in 1941 and which he reported in his return for 1941 as ordinary income.

1954 U.S. Tax Ct. LEXIS 247">*278 This brings us to the lump-sum payment of $ 805,000 in December 1942. Warner Bros. credited to Lasky during 1942 in its account with him on its books, periodically, amounts which it recognized as his share of gross rentals under its agreement with Lasky. By the end of November 1942, the credits amounted to the total sum of $ 822,857.56. Lasky, for reasons which are rather vague in the record before us, elected not to take the shares which accrued periodically and were tendered to him until it became clear that the credits alone would suffice because Lasky preferred having the accruals of his shares accumulate in the hands of Warner Bros. It is difficult to know, or to find as a fact, that a bona fide dispute existed in 1942 between Lasky and Warner Bros. At the most, the record before us contains only the suggestion that Lasky and his advisors were suspicious about the possible existence of grounds for challenging the propriety of Warner Bros.' computations of the dollar amounts of Lasky's shares, its accounting practice and procedure, and its handling of the release of the film. For example, there is no testimony of any executive of Warner Bros. about any dispute or about the1954 U.S. Tax Ct. LEXIS 247">*279 receipt by Warner Bros. of allegations of Lasky. And the testimony of Lasky does not establish that suspicions crystallized during 1942 to issues in a real dispute.

The inference is plain, and we conclude, that by the end of 1942, Lasky reached a decision to step out of his contract with Warner Bros. and to terminate the contract. For example, in the document he executed with United Artists on December 4, 1942, Lasky authorized United Artists to execute any document to release and discharge Warner Bros. from paying any money to Lasky. United Artists in the document it executed with Warner Bros. on December 22, 1942, released and discharged Warner Bros. Warner Bros. closed its account with Lasky and paid $ 820,000 in cash to United Artists, out of which amount United Artists was repaid the $ 805,000 which it had paid a few days previously to Lasky.

The credit balance under the Lasky-Warner Bros. agreement, $ 822,857.56, was closed on about December 22, 1942, by payment of $ 820,000 by Warner Bros., and $ 2,857.56 was charged to Lasky to take 22 T.C. 13">*27 care of some undisclosed charge or adjustment. This ended and closed the Lasky-Warner Bros. contract.

The decision of the ultimate1954 U.S. Tax Ct. LEXIS 247">*280 question requires that we construe the facts relating to the termination of the Lasky-Warner Bros. agreement. The petitioner does not concede that the issue should be posed in this way, but the realities of the matter compel us to see the situation as above described. We can conclude, only, from the steps taken that United Artists was a mere intermediary. There is no showing of any business purpose to Lasky in Lasky's arrangement with United Artists. In fact, the record is meager and sparse in providing any explanation for the few days' advance of funds to Lasky, which United Artists so quickly recouped out of Lasky's account with Warner Bros. through Warner Bros.' payment of $ 820,000. United Artists gained $ 15,000 for about 20 days' use of its $ 805,000 which it advanced to Lasky, and that was the only "business" aspect of the arrangement as far as United Artists was concerned.

There is ample authority for looking through the form to the substance of the three-way arrangement in which United Artists played a brief role. ; ; ,1954 U.S. Tax Ct. LEXIS 247">*281 affd. .

When the steps taken are seen in the above light, there was no more than an ending of the Warner Bros.-Lasky agreement, and Lasky received the accumulated "royalties," or shares, due him, the receipt of which had been held up.

The petitioner cannot succeed in this case by arguing that the contract or the contracts were "property"; and that "sales" were made of contracts. Cf. ;

Petitioner was entitled to receive payment of agreed shares of the gross film rentals of the York picture, and by the end of 1942, his shares had accrued and had been credited to him. This is not even a case where indeterminate or future payments were converted into a lump sum. Rather, this is a case where total accrued and credited payments were paid in a total amount based upon an agreement which had been carried out by the obligor to the extent of crediting and tendering payments upon an account inter partes. The alleged "sale" of the right to receive the accruals did not convert accrued income into capital. ;1954 U.S. Tax Ct. LEXIS 247">*282 . There was, in fact, only payment of the total accruals to Lasky through an intermediary.

The respondent's determination is sustained.

Decisions will be entered for the respondent.