
    LOUIS F. GRILL AND JOAN MYERS GRILL, AND JOAN MYERS (FORMERLY JOAN SELZNICK) v. THE UNITED STATES FLORENCE A. SELZNICK v. THE UNITED STATES
    No. 340-58
    No. 341-58
    [Decided June 6, 1962]
    
      
      Robert H. Babel for plaintiffs.
    
      George Willi, with, whom was Assistant Attorney General Louis F. Oberdorfer for defendant. Edward B. Smith and Philip R. Miller were on the brief.
   Per Curiam: :

This case was referred pursuant to Eule 45 to Wilson Cowen, a trial commissioner of this court, with directions to make findings of fact and recommendations for conclusions of law. The commissioner has done so in a report filed August 25,1961. Exceptions to the commissioner’s findings were taken by the plaintiffs, briefs were filed by both parties and the case was submitted to the court without argument by counsel. Since the court is hi agreement with the findings and recommendations of the trial commissioner, as hereinafter set forth, it hereby adopts the same as the basis for its judgment in this case. Plaintiffs are therefore not entitled to recover and their petitions will be dismissed.

It is so ordered.

OTINION OE COMMISSIONER

These two suits, which were consolidated for trial, were brought for the refund of Federal income taxes aggregating $70,628.89 paid by the plaintiffs for the calendar years 1949-1953 inclusive. During those years plaintiffs were the current income beneficiaries of a testamentary trust established under the will of Myron Selznick, deceased. The income here involved consisted of annual sums received by the plaintiffs as a portion of the net rental proceeds of the distribution of the well-known motion picture “Gone With the Wind,” and the issue to be decided by the court is whether the Commissioner of Internal Eevenue properly determined that such annual receipts were taxable as ordinary income rather than as capital gain.

Selznick International Pictures was organized in 1935 and produced a number of motion pictures. Prior to the actual production of “Gone With the Wind” and in accordance with the custom in the industry, Selznick International entered into a financing and distribution agreement with Loew’s Inc. Under the terms of this contract, the pertinent provisions of which are summarized in finding 4, Loew’s agreed to advance approximately one-half of the production costs, plus specified amounts for advertising and promotion, and in return therefor received exclusive rights to the worldwide distribution, sale, and exploitation of the picture for a period of 7 years following the delivery of the photo-play. It was agreed that after the parties had recovered all their advances and production costs, the first 20 percent of the net proceeds of distribution would be payable to Loew’s as a distribution fee and the remaining 80 percent would be divided, equally between Loew’s and Selznick International.

“Gone With the Wind” was first released in December of 1939. Effective August 24, 1942, near the end of the first domestic run of the picture, Selznick International was completely liquidated and undivided interests in all of its assets were distributed to its stockholders in accordance with a ruling made by the Commissioner of Internal Revenue, upon application of the corporation and its stockholders, to the effect that the liquidation was a complete liquidation within the meaning of section 115(c) of the Internal Revenue Code of 1939 and that each stockholder would be taxable at capital gain rates upon the difference between his tax basis for the stock and the fair market value of the assets received in exchange therefor.

In exchange for his 239/3528 stock interest, Myron Selznick received an undivided fractional interest in the assets, including a 6.174316 percent interest in “Gone With the Wind” and in the distribution contract of August 25, 1938. In his Federal income tax return for the year of liquidation, Mr. Selznick valued that interest at $78,151.08.

Tho initial release of “Gone With the Wind” covered the period December 1939-1942. During the fiscal years ending August 31, 1940-August 31, 1942, the gross proceeds of distribution received by Loew’s totaled $21,230,000, of which more than $13,000,000 was received during the first of such fiscal years.

Upon the death of Myron Selznick on March 23, 1944, his fractional interest in “Gone With the Wind” and in the distribution contract passed under his will to his testamentary trust of which plaintiffs were the income beneficiaries.

The executors of Mr. Selznick’s estate filed an estate tax return in which they valued his fractional interest in “Gone With the Wind” at the sum of $176,133.78 as of the date of his death. This valuation was accepted by the Internal Revenue Service upon audit of the return. Prior to 1949, the payments received by the trust from Loew’s under the distribution contract exceeded $176,133.78. For Federal income tax purposes, the receipts to the extent of that amount were treated as a return of capital as to which no gain or loss was realized, but the excess was reported as ordinary income.

Between 1944 and 1957, the trustees of Mr. Selznick’s trust received from Loew’s under the distribution contract and distributed to plaintiffs a total of $902,635.94. For each of the years in suit, except 1950, plaintiffs included the amounts so received in their gross income for Federal income tax purposes and paid taxes thereon at ordinary income rates. The receipts for 1950 were reported as long-term capital gains, but this treatment was disallowed by the Commissioner of Internal Bevenue and deficiencies were assessed against and paid by the plaintiffs for that year. Plaintiffs filed timely claims for refund on the ground that the proceeds they received from distribution of “Gone With the Wind” should have been treated as long-term capital gains and, upon rejection of their claims, they instituted these actions.

Since the provisions of the Internal Bevenue Code granting preferential capital gain treatment have always been narrowly construed, plaintiffs at the outset must show that the income in issue resulted from the sale or exchange of a capital asset.

It is clear that, in entering into the contract of August 25, 1938, with Loew’s, Selznick International did not divest itself of its ownership in “Gone With the Wind.” At the end of the 7-year period following the delivery of the film, Loew’s was obligated to reconvey to Selznick International all but 25 percent of Loew’s property rights in it. Selznick International was thereupon entitled to sell the entire property but was required to pay Loew’s 25 percent of the proceeds of sale. In return for its control over distribution of the motion picture, Loew’s agreed to remit a portion of the proceeds of distribution as rent or royalty and, when Selznick International was liquidated, one of the assets which Myron Selznick received in exchange for the stock was the right to receive a pro rata share of the rents or royalties to be paid by Loew’s. Mr. Selznick never disposed of his interest and, upon his death, the ownership thereof vested in his testamentary trust. Therefore, if the interest he received in “Gone With the Wind” and in the Loew’s contract had a fair market value on the date of liquidation, the distribution to him resulted in a long-term capital gain in the difference between tbe cost basis of bis stock and the fair market value of the assets he received. Under such circumstances, the liquidation in 1942 became a closed transaction and the rentals or royalties thereafter paid by Loew’s in excess of the fair market value of Mr. Selznick’s interest at the time of liquidation would be taxable as ordinary income, whether received by him or by plaintiffs. Osenbach v. Commissioner, 198 F. 2d 235; Gertsen v. Commissioner, 267 F. 2d 195; Chamberlin v. Commissioner, 286 F. 2d 850; O'Brien v. Commissioner, 25 T.C. 376. In an effort to avoid the effect of these decisions, plaintiffs have invoked the “open transaction” theory by contending that Mr. Selznick’s interest had no ascertainable fair market value at the time the corporation was liquidated and that the rentals thereafter paid by Loew’s are to be treated as capital gain. Plaintiffs rely upon such cases as Burnet v. Logan, 283 U.S. 404; Commissioner v. Carter, 170 F. 2d 911, and Lentz v. Commissioner, 28 T.C. 1157.

Plaintiffs have cited no case which holds that an interest in a motion picture, including a right to receive a part of the proceeds of distribution, is insusceptible of valuation. There are, of course, many cases in which contracts providing for indefinite or contingent future payments have been valued for tax purposes. Among these are several cases in which the market value of producers’ interests in contracts that entitled them to receive proceeds of the future distribution of motion pictures has been established. O'Brien v. Commissioner, sufra (an interest in the motion picture “The Secret Command”); Lewin v. Westover, 45 A.F.T.R. 944 (interests in the motion pictures “The Moon and Sixpence” and “So Ends Our Night”), and Herbert v. Riddell, 103 F. Supp. 369 (an interest in “Kiss and Tell”).

The only evidence offered by plaintiffs to overcome the presumptively correct valuation made by the Commissioner of Internal Revenue as of August 1942, was that, during the premiere of “Gone With the Wind” in New York City, it was acclaimed by at least two of the critics as an outstanding motion picture and was very well received by the public; that it has been successfully reissued three times since 1948, and that it has earned an unusually large sum of money (more than any other picture distributed by Loew’s) between the date of its initial release in December 1939 and April 1960. Not only does this evidence fail to show that Mr. Selznick’s interest was insusceptible of valuation in the 1942-44 period, but a conclusion to the contrary is clearly established by facts adduced by the defendant. These facts, which are undisputed, show that the fair market value of the asset in question was, in fact, determined on several occasions in the 1942-1944 period by persons who were connected with the motion picture industry and were presumably in a better position than anyone else to make that determination.

It is a known and normal procedure in the motion picture industry to place valuations on producers’ interests in motion pictures for both tax and nontax purposes. The distributor makes the valuation during the current run of the picture by estimating future earnings from the remainder of the first run and the period of time in which such earnings will be realized. The resulting figure is then discounted to arrive at the present value of the estimated income. While this procedure is not mathematically exact, it is regularly employed and relied upon in the industry and is accepted by the Internal [Revenue Service in valuing interests in motion pictures. As shown in the findings of fact, a number of major motion pictures have been valued in this manner.

Moreover, Mr. Selznick himself valued his interest in the film and in the Loew’s contract at $78,151.08 in his income tax return for the year 1942. It is a fair assumption that when he made this valuation, he was aware of the favorable reception which the critics and the public had accorded to “Gone With the Wind” and of the total gross receipts which Loew’s had received in the distribution of the picture from the time of its release to August 31,1942. Since there is no other evidence in the record as to the value as of August 24,1942,1 have found that the value determined by him represents the fair market value of his interest on the date stated. It is well settled that the valuation of an asset by a taxpayer in his tax return is an admission against interest which, in the absence of other impugning evidence, may be resorted to for determining market value. O'Brien v. Commissioner, supra; Estate of Marsack v. Commissioner, 288 F. 2d 533; Campagna v. United States (C.A. 2d), 290 F. 2d 682 (1961).

Finally, in the latter part of 1943 and about 4 months prior to the death of Mr. Selznick, Loew’s purchased from seven of the ten former stockholders of Selznick Interna' tional their undivided interests in the film at a uniform price of $26,000 per percentage point of interest owned. In this way, Loew’s acquired ownership of approximately 86.90 percent of the property. As the distributor of the picture, Loew’s was unquestionably an informed purchaser, and it would be difficult to find more persuasive proof of market value than these arms-length transactions which were completed about midway between the first and second releases of “Gone With the Wind.” In Mr. Selznick’s estate tax return, the executors of his estate also valued his interest at the time of his death at $26,000 per percentage point of interest. Consequently, I have found that the market value of Mr. Selznick’s interest at the time of his death was $176,133.78.

Plaintiffs’ evidence regarding the successful reissues of the film in 1948 and thereafter, and the total gross rentals received by Loew’s up to the year 1960 is entitled to very little weight in resolving the issue because, as stated in Bader v. United States, 172 F. Supp. 833, the valuation for income tax purposes must be made as of the relevant date without regard to events occurring subsequently. Perhaps the most that such evidence proves is that neither Mr. Selznick nor the seven individuals who sold their interests to Loew’s in 1943 could foresee that this motion picture would be successfully reissued three more times.

In the light of the facts which have been found, plaintiffs’ position on the question of market value is not supported by Burnet v. Logan, supra, nor by the other cases of the same import which have been cited in plaintiffs’ brief.

Even if it were conceded that the income involved here would have been subject to capital gains treatment had the income been received by Myron Selznick during his lifetime, the concession would not aid plaintiffs. Neither the testamentary trustees nor plaintiffs have ever sold or exchanged any interest in “Gone With the Wind.” Since their receipt of the income derives from property acquired by bequest or devise, such income must be considered as ordinary income in the absence of some statutory provision to the contrary. Helvering v. Flaccus Oak Leather Co., 313 U.S. 247.

Faced with this formidable obstacle, plaintiffs have asserted that the income in question may well be “income in respect to a decedent” within the meaning of section 126 of the 1939 Internal Eevenue Code, 26 U.S.C. (I.E.C. 1939) § 126 (1952 ed.), which has the general effect of treating certain types of income in the hands of a decedent’s estate or his heirs in the same way as such income would have been treated in the hands of the decedent had he lived, collected, and accounted for that income. The purposes for which this statute was enacted and the general principles to be followed in its application are discussed at some length by this court in Estate of Helen Davison v. United States, 155 Ct. Cl. 290, cert. denied 368 U.S. 939, and will not be repeated here. As the court there stated, to constitute income with respect to a decedent, the income must have accrued to or have been earned by the taxpayer during his lifetime, although the actual receipt of the income or the determination of the amount thereof is postponed until after his death.

A factual situation, closely analogous to the facts presented here, is covered by Eev. Eul. 60-227, 60-1 Cum. Bull. 262. Although the ruling construes 26 U.S.C. (I.E.C. 1954) § 691 (a) (1952 ed. supp. Ill), the provisions of section 691 (a) are, in essential respects, identical to those of section 126 of the 1939 code. Advice was requested with respect to a deceased inventor who, during his lifetime, had entered into nonexclusive licensing arrangements to manufacture and sell articles under his patent in return for the payment of royalties. The Internal Eevenue Service ruled that royalty payments made after the inventor’s death and attributable to sales concluded by the licensees after his death could not be considered as income in respect of a decedent but were items of ordinary income, since the decedent had not sold the patent and therefore had not earned the payments during his lifetime. It is my opinion that the ruling is a correct exposition of the law in the circumstances and that the income received by plaintiffs during the taxable years covered by these suits was not income in respect of a decedent within the meaning of section 126. All of such income was received by plaintiffs as a result of rentals earned and received by Loew’s in 1948 or thereafter. No portion of such income had accrued to or had been earned by Mr. Selznick before his death.

Plaintiffs also rely on Arrowsmith v. Commissioner, 844 U.S. 6. In that case the former stockholders of a liquidated corporation were required to satisfy a judgment against the corporation about 4 years after the liquidation had been completed. They had previously reported and paid taxes on the profits realized from the liquidation as capital gain. In resolving the question as to the treatment of the loss sustained by the taxpayers through the subsequent monetary adjustment, the Supreme Court held that the nature of the loss must be determined by referring back to the original liquidation proceeding. The stockholders, in effect, were required to return a portion of the assets received by them and the Court held that since the original distribution of assets Was a capital transaction, the return of assets resulted in a capital loss. In the instant cases, there has been no subsequent adjustment of the terms or the effect of the liquidation proceedings as between Selznick International and Myron Selznick. Also, there is nothing in the record to indicate that there have been any changes in the terms of the distribution contract entered into with Loew’s which has continued to pay the rentals required by the provisions of that contract without dispute. In my opinion, the principle announced in Arrowsmith is inapplicable to these cases and affords no basis for relief to plaintiffs. No cases have been cited by the parties, nor have any been found in which the principle has been applied for the purpose of characterizing the nature of a subsequent gain. Moreover, there is no indication in any of the decisions that the principle may be applied to treat unforeseen increases in annual receipts from income-producing property as capital gains, where such property was distributed on the liquidation of a corporation but not thereafter sold or exchanged. Under circumstances quite similar to those affecting plaintiffs, it has recently been held that Arrowsmith is inapplicable. Campagna v. United States, supra.

For the reasons stated above, the court should deny plaintiffs refunds of the taxes in these suits.

FINDINGS OF FACT

1. These two suits were brought by plaintiffs for the refund of Federal income taxes aggregating $70,628.89, together with interest, paid by the plaintiffs for the calendar years 1949-1953 inclusive. The actions were consolidated for trial because they involved common questions of fact and law.

2. During and prior to the years in issue the plaintiffs were citizens of the United States and residents of the State of California. They timely filed their Federal income tax returns for all such years on a calendar year basis, using the cash method of accounting. Thereafter, the plaintiffs timely filed claims for the refund of portions of the taxes reported due and paid by them for the years 1949, 1951-1953, inclusive. They also paid and filed timely claims for the refund of income tax deficiencies and interest timely assessed against and collected from them with respect to the calendar year 1950. The plaintiffs thereafter timely instituted these actions. The court has jurisdiction of the parties and the subject matter of these actions.

3. Selznick International Pictures was incorporated under the laws of the State of Delaware on October 7,1935. During its corporate existence, it produced a number of well-known motion pictures including the photoplay “Gone With the Wind.” Among the stockholders of that corporation was Myron Selznick who owned 239 of the 2,043 outstanding shares of Class A stock, and none of the 1,485 shares of outstanding Class B stock. Since both classes of stock had the same rights upon liquidation, Myron Selznick’s interest in liquidation was represented by the fraction 239/3528, or 6.774376 percent.

4. On. August 25, 1988, Selznick International Pictures (hereinafter referred to as SIP) entered into a contract with Loew’s Inc., a Delaware corporation (hereinafter referred to as Loew’s) under the terms of which Loew’s received certain rights for the distribution and exhibition of “Gone With the Wind.” The contract, which is in evidence as exhibit 11, is incorporated herein by reference. The following is a summary of its pertinent provisions:

(a) Upon the contemporaneous execution of a financing agreement between the parties, SIP agreed to commence the production of the motion picture “Gone With the Wind” and upon the completion thereof to deliver to Loew’s a sample positive print.

(b) SIP assigned to Loew’s the exclusive control over the worldwide distribution, sale, and exploitation of the picture, including any reissues thereof, for a period of 7 years, commencing with the date of the delivery of the completed film; Loew’s rights extended to all contemporaneous and future forms of exhibition and performance, including radio and television.

(c) SIP sold and assigned to Loew’s a 50-percent interest in the former’s contracts with the author and publisher of the copyrighted novel “Gone With the Wind.” At the expiration of the 7-year period referred to above, Loew’s agreed to reconvey to SIP one-half of Loew’s share of the contracts so that the contract rights, including the negative and prints of the motion picture, would be owned to the extent of three-fourths by SIP and to the extent of one-fourth by Loew’s. Upon the expiration of the 7-year period, the management and control of the contract rights were to vest in SIP, except that in the event it desired to make another film based on the same novel, it agreed to purchase Loew’s remaining 25-percent interest at a mutually agreeable or arbitrated price.

(d) The motion picture was to be copyrighted jointly by Loew’s and SIP, but at the end of the 7-year period, Loew’s was to convey one-half of its interest in the copyright to SIP.

(e) After the expiration of the 7-year period, SIP had the right to sell the entire property, but in that event Loew’s bad the option to purchase SIP’s interest at a mutually agreed price, or at 75 percent of the price offered by another. If Loew’s failed to exercise the option and the property was sold to a third person, SIP was obligated to pay Loew’s 25 percent of the consideration paid by the purchaser.

(f) Loew’s agreed.to bear the cost of specified advertising to the extent of not less than $100,000 nor more than $200,-000 and to pay SIP in installments, one-half of the production costs of the motion picture up to $1,200,000; SIP agreed to pay all production cost in excess thereof.

(g) The gross proceeds received by Loew’s for the distribution of the film were to be divided as follows:

SThe first 20 percent, with minor exceptions, was retained by Loew’s as a distribution fee;
(ii) the remaining 80 percent was to be retained by Loew’s until it recouped all of its advances in connection with specified direct costs of distribution, and
_ (iii) the remainder of the 80 percent was to be divided equally between Loew’s and SIP until each had recovered its respective share of the costs of production and thereafter the balance of such 80 percent, constituting profit, was to be divided equally between SIP and Loew’s.

Although the basic contract was amended several times, the amendments are not material to the issues here.

5. The motion picture “Gone With the Wind” was released for the first time in 1939. During its premiere in New York City, it was acclaimed by two of the critics as a monumental motion picture and in terms of public interest and popular acceptance, it was an outstanding picture. Its initial release covered the period December 1939-1942. During the fiscal years ending August 31,1940-August 31,1942, the gross proceeds of distribution received by Loew’s totaled $21,230,-000, of which more than $13,000,000 was received during the first of such fiscal years.

6. In June 1940, SIP commenced dissolution proceedings and a certificate of dissolution was issued on August 27,1940. On August 24, 1942, the trustees in liquidation assigned to Myron Selznick in exchange for his 239/3528 stock interest an undivided interest in certain assets of SIP, including an undivided 239/3528 stock interest in “Gone With the Wind” and the contract of August 25, 1938, between Loew’s and SIP.

7. On July 2, 1940, and in connection with, the liquidation of SIP, it and its stockholders applied to the Internal Eeve-nue Service for a ruling to the effect that the proposed liquidation would be treated for Federal income tax purposes as a complete liquidation within the meaning of section 115(c) of the Internal Eevenue Code of 1939. On August 2, 1940, the Internal Eevenue Service approved the request. Its ruling stated that any gains or losses realized from any distributions made pursuant to the plan of liquidation by stockholders who had held their stock for more than 18 months would be treated as long-term capital gains or losses, taxable or deductible to the extent provided by section 117 of the Internal Eevenue Code of 1939.

8. On his Federal income tax return for the calendar year 1942, Myron Selznick reported as the fair market value of all of the assets of SIP received by him in exchange for his stock as $108,652.44. Upon audit of that return, the Internal Eevenue Service increased the said valuation, without subsequent objection by Myron Selznick, to $119,735.65. Of this sum Myron Selznick’s interest in “Gone With the Wind” and the Loew’s distribution contract was valued by him at $78,151.08.

9. Commencing in the fall of 1943, Loew’s instituted a program of purchasing for cash, from the former stockholders of SIP, their undivided interests in “Gone With the Wind.” Prior to December 1, 1943, Loew’s purchased such interests from all of the former SIP stockholders except Myron Selznick, C. Y. Whitney, and Merian C. Cooper. The interests purchased by Loew’s during 1943, and the prices paid therefor were as follows:

Name Percentage Interest Price
John Hay Whitney_ 88. 518347 $997,477.34
Joan W. Payson_ 34. 793084 904, 620.18
Lehman Bros_ 2. 551021 — (90/3528) 66,326.54
John Hertz_ 2.125850 — (75/3528) 55,272.10
Flora Miller_ 1. 643991 — (58/3528) 42, 743.77
Est. of Arthur Lehman_ 1. 530612— (54/3528) 39, 795.91
Barbara Henry_ 0.396825— (14/3528) 10,317.45

A small interest owned by Merian C. Cooper (22/3528 or 0.623583%) was purchased by Loew’s in September 1946.

10. The evidence shows that Loew’s paid exactly $26,000 per percentage point of producer’s interest in the motion picture “Gone With the Wind.” This is also true with respect to the small interest purchased by Loew’s in 1946, except that the otherwise indicated price was reduced by the amount of the intervening distributions of income which had been made by Loew’s with respect to that interest. At the rate of $26,000 per percentage point of producer’s interest, Myron Selznick’s 6.774376-percent interest in “Gone With the Wind” had an indicated fair market value, as of the end of 1943, of $176,133.78.

11. On March 23, 1944, Myron Selznick died testate, possessed of his 6.774376-percent producer’s interest in “Gone With the Wind” and the Loew’s distribution contract. At the time of his death, plaintiff Joan M. Grill was his sole surviving child, and plaintiff Florence Selznick (now deceased) was Ms surviving mother. Myron Selznick’s interest in “Gone With the Wind” and in the Loew’s contract was part of his residuary estate.

12. Under Article 4th of his will, Myron Selznick established a testamentary trust, the corpus of which consisted of Ms residuary estate. The life income beneficiaries of the said trust, entitled to the current distribution of 60 percent and 40 percent of the income of the trust, were plaintiffs Joan M. Grill and Florence Selznick.

13. The executors of the estate of Myron SelzMck filed an estate tax return in which they valued Ms assets as of the date of Ms death. In that return, Myron Selznick’s 6.774376-percent producer’s interest in “Gone With the Wind” was valued by the executors at $176,133.78. This valuation was accepted by the Internal Revenue Service upon audit of the estate tax return.

14. During the years prior to 1949, the testamentary trust established under Myron Selznick’s will had received payments from Loew’s under the distribution contract wMch exceeded the sum of $176,133.78. For Federal income tax purposes, such receipts to the extent of $176,133.78 were treated as a return of capital as to which no gain or loss was realized or recognized.

15. The motion picture “Gone With the Wind” was released for the second time in 1948, for the third time in 1954, and for the fourth time during 1961.

16. Between 1944 and 1957, the trustees of Myron Selznick’s testamentary trust received from Loew’s under the distribution contract and distributed to the plaintiffs in their capacity as trust income beneficiaries a total of $902,635.94, as follows:

Tears Amounts
1944 _ $4, 360.12
1945 _ 48,147.09
1946 _ 3,673.21
1947 _ 2,327.34
1948 _ 146, 805.37
1949 _ 21,044.39
1950 _ 8, 829.61
1951_ 44,378.63
1952 _ 55,229.15
1953 _ 105,936.24
1954 _ 155, 904.79
1955 _ 231,000.00
1956 _ 30, 000.00
1957 _ 45,000. 00

The payments by Loew’s to the trustees were made annually after Loew’s had prepared an audited statement of the gross rentals received during its fiscal year ending August 31 in each year. It is a fair inference from the record that all payments made to the Selznick estate and trust for the years 1949-1953 were earned and accrued in 1948 and subsequent years.

17.For the years 1949-1953, inclusive, except for the year 1950, each of the plaintiffs reported and paid tax on her share of the above trust income distributions as ordinary income. For the year 1950, they reported such receipts as long-term capital gain. Upon audit of the taxpayers’ returns for the year 1950, the Commissioner of Internal Keve-nue determined and assessed a deficiency of income taxes based upon his determination that such receipts should have been reported and taxed as ordinary income. The said deficiency was paid, together with interest, on December 1, 1955.

18. The total of the gross rentals which have been received by Loew’s with respect to the distribution of the motion picture “Gone With the Wind” from the date of its initial release to April 13, 1960, was $52,700,000, which sum is a larger amount than the gross rental received from any other film released by Loew’s. A comparison of the rentals on “Gone With the Wind” with the next most financially successful film “Quo Vadis” shows that for its first 8 years “Gone With the Wind” grossed approximately $27,260,000, whereas, since its release some 8 years prior to the time of trial, “Quo Vadis” had grossed approximately $22,000,000.

19. At the time of the distribution in liquidation by SIP to Myron Selznick, “Gone With the Wind” had almost completed its first full run. Myron Selznick’s death, midway between the dates of the first and second releases, occurred shortly after Loew’s had purchased from most of the former SIP stockholders their undivided producers’ interest in “Gone With the Wind.”

20. In the motion picture industry, valuations of the interests of actors and producers, such as the interest owned by Myron Selznick in motion pictures, are made from time to time for various business and tax purposes. The business purposes for which such valuations are made included the division of assets upon corporate liquidations, sales and exchanges between related and unrelated parties, and applications for loans in which the interest is pledged as collateral. Among the tax purposes for which such interests are valued are taxation of shareholders upon corporate liquidations, taxation of gifts and estates, the establishment of the period of time over which the costs of production may be written off, and the ascertainment of the reality of prices paid in transfers between related parties.

21. It is a known and normal procedure in the industry to place valuations on producers’ interests in motion pictures. The distributor makes the valuation during the current run of the picture and the method used consists in estimating future earnings from the balance of the first run and the period of time within which the earnings will be realized. In some instances, an addition to the estimated future income may be made for the reissue value of the picture and for its prospective value for television. The final figure is then discounted to arrive at the present value of the estimated future income. The procedure used is not mathematically exact but it is regularly employed and relied upon in the industry and is accepted by the Internal Revenue Service in valuing interests in motion pictures.

22. Among the major motion pictures which have been valued in this manner for purposes of private sale or for nontax purposes in connection with corporate liquidations have been: “Giant,” “Love in the Afternoon,” “The Great St. Louis Bank Robbery,” “Come Back Little Sheba,” “The Best Years of Our Lives,” “The Secret Life of Walter Mitty,” “Hans Christian Andersen,” and “Guys and Dolls.”

23. With exceptions that are not material here, the distribution contract of August 25, 1938, between SIP and Loew’s contains provisions that are common to most distribution contracts. In the 1942-1944 period, sales of producers’ interests in motion pictures occurred less frequently than at the present time, but the method used for valuing such interests is basically the same now as it has always been and is no more or less exact than it has ever been. Although the evidence does not show whether or not it was in fact used at the time, the method hereinabove described for valuing interests in motion pictures could have been used in arriving at the value of the producers’ interests in “Gone With the Wind” in the 1942-1944 period.

24. In a number of instances Loew’s has purchased or “cleared” the producers’ interests in other motion pictures in substantially the same way that it has acquired most of the producers’ interests in “Gone With the Wind.” United Artists Corporation has also engaged in such purchases. Such purchases and sales ordinarily involve willing buyers and sellers who are not under a compulsion to act.

25. The only evidence of the value of the interest which Myron Selznick received in “Gone With the Wind” and in the Loew’s distribution contract on August 24,1942, was the value which Myron Selznick reported in his income tax return for that year and that value was accepted by the Internal Revenue Service. Accordingly, it is found that the fair market value of his interest on the date stated was $78,151.08.

26. As stated in findings 9 and 10, the evidence shows that within a period of 3 to 6 months prior to the death of Myron Selznick, Loew’s purchased most of the outstanding producers’ interests in “Gone With the Wind” at a price of $26,000 per percentage point of interest; that the executors of the Myron Selznick estate valued his interest in “Gone With the Wind” at $26,000 per percentage point of interest, and that this valuation was accepted by the Internal Revenue Service for estate tax purposes. A preponderance of the evidence therefore establishes that on the date of his death his interest in the photoplay and in the Loew’s contract had an ascertainable fair market value and that the fair market value thereof was $176,133.78.

27. The income received by the trustees of the Myron Selznick testamentary estate from “Gone With the Wind” by virtue of the Loew’s distribution contract and thereafter distributed to plaintiffs accrued to plaintiffs by bequest or devise under the will of Myron Selznick. Neither plaintiffs nor the trustees ever sold or exchanged any interest in the motion picture or in Loew’s distribution contract.

28. Since the distribution contract was entered into between SIP and Loew’s in 1938, Loew’s has not requested any services from Myron Selznick or either of the plaintiffs in connection with the distribution of “Gone With the Wind.”

CONCLUSION OE LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that the plaintiffs are not entitled to recover and their petitions are therefore dismissed.  