Marx v. Commissioner , 29 T.C. 88 ( 1957 )

Julius H. (Groucho) Marx, Petitioner, v. Commissioner of Internal Revenue, Respondent. John B. Guedel and Beth Pingree Guedel, Petitioners, v. Commissioner of Internal Revenue, Respondent

Marx v. Commissioner

Docket Nos. 58663, 58667

United States Tax Court

29 T.C. 88; 1957 U.S. Tax Ct. LEXIS 58;

October 23, 1957, Filed

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Decisions will be entered under Rule 50.

From 1947 until the spring of 1950, petitioners Groucho Marx and John B. Guedel produced the "You Bet Your Life" radio show, through a partnership. Marx was the star and Guedel was the producer and originator of the title and idea for the format of the show. The show was sponsored by the DeSoto-Plymouth Dealers of America and was broadcast over the facilities of C. B. S. In the spring of 1950, and for sometime prior thereto, C. B. S. and N. B. C. had been engaged in vigorous competition to secure popular radio programs for their respective networks. Generally, they secured such programs by the purchase of any literary property involved, and employed the stars of the show. In the spring of 1950, petitioners decided to sell the "You Bet Your Life" show to one or the other of the major networks. Their attorneys prepared bid forms requesting offers from the networks on the partnership interests, which included the literary property, and on various types of service contracts. Both major networks submitted bids of $ 1,000,000 for the partnership interests, but N. B. C. offered the petitioners more for their personal services and they accepted its bid. The partnership had no assets other than the so-called literary property connected with the show, which consisted of the name and the general format or plan for its presentation. Irrespective of their previous partnership interests, Marx and Guedel agreed, during the negotiations, that they would divide whatever they received for the partnership interests on a 3-to-1 basis, respectively. On their returns for the years 1950, 1951, and 1952, they reported the installment payments of the sales price of the partnership interests received by them during those years as long-term capital gains. The respondent determined that the value of the partnership interests did not exceed $ 250,000 and that the balance of the purchase price represented compensation for services. Held, the fair market value of the partnership interests was $ 1,000,000 and no part thereof represented compensation for services.

Thomas N. Tarleau, Esq., and Robert B. Hodes, Esq., for the petitioners.

John J. O'Toole, Esq., for the respondent.

Rice, Judge.

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RICE

This proceeding involves the following deficiencies in income tax:

Docket No.	Petitioner	Year	Income tax
58663	Julius H. (Grouho) Marx	1950	$ 4,199.25
		1951	36,564.52
		1952	34,469.97
58667	John B. Guedel and Beth Pingree Guedel	1950	1,481.05
		1951	10,164.42
		1952	9,765.12

By amended answers, respondent asked for additional deficiencies, to be computed under Rule 50, should the Court agree with his arguments in support thereof.

The only issue is whether all or any part of the amounts which petitioners Groucho Marx and John B. Guedel received from the sale of their interests in a partnership were taxable as long-term capital gains.

Some of the facts were stipulated.

FINDINGS OF FACT.

The stipulated facts are so found and are incorporated herein by this reference.

Petitioner Julius H. (Groucho) Marx and petitioners John B. and Beth Pingree Guedel were residents of Beverly Hills, California, during the years in issue. The individual returns of Marx and the joint returns of the Guedels for the years 1950 and 1951 were filed on a cash basis with the former collector of internal revenue for the sixth district of California. The returns of the petitioners for the year 1952 were filed on such basis with the director of internal revenue at Los Angeles, California.

For many years prior to those in issue, petitioner Marx had been a theatrical performer on the stage and in motion pictures. He had been a member of a team which consisted of him and his four brothers. In the early 1940's the team disbanded after several unsuccessful motion pictures. Thereafter, petitioner Marx appeared alone in one motion picture which was not successful. Prior to the fall of 1947 he had appeared on several radio shows which were unsuccessful. In the summer of 1947 he was not employed in any entertainment activities. On July 14 of that year he auditioned unsuccessfully for the job as quizmaster of the "Take It Or Leave It" radio quiz show.

Petitioner John B. Guedel was first employed in the radio entertainment industry in the spring of 1937. His job was with a local Los Angeles advertising company as a joke writer. He later wrote dramatic shows and originated the singing commercial. He also originated the first audience stunt program which went on the air in June 1938. That program eventually became the "People Are Funny" show. Guedel subsequently became the producer of the Red Skelton and Tommy Dorsey shows and helped originate the Ozzie and Harriet program. In the summer of 1947 he conceived the idea of an audience participation program which subsequently became the "You Bet Your Life" show. The show required a quizmaster and Guedel was interested in securing the services of Garry Moore. Moore, however, was not available and petitioner Marx was suggested to him as a possible substitute. Marx and Guedel discussed the possibility of Marx's appearing on the show and made a sample recording of the show with Marx acting as quizmaster. At the time of the recording, Guedel was aware of Marx's previous failure in radio shows.

In the fall of 1947 Guedel, through the William Morris Agency, auditioned the recording for a representative of the Illinois Watch Case Company (hereinafter referred to as Illinois). The representative was impressed with the possibilities of the show, and on October 1, 1947, Guedel executed a radio package contract for the sponsorship of the show with Weiss & Geller, Inc., an advertising agency acting on behalf of Illinois.

On September 27, 1947, Guedel, as the sole owner of the literary property "You Bet Your Life," sold a one-half interest therein to Marx for $ 250. Such sum was determined by Guedel's out-of-pocket expenses in having the sample recording of the show made. Guedel had sold Art Linkletter, the master of ceremonies on the "People Are Funny" show, a half interest therein, and would have sold a half interest in "You Bet Your Life" to Garry Moore, for example, if he had become the quizmaster. Guedel felt that sharing a valuable literary right with the stars gave them an incentive, a feeling that they were building something, and resulted in a better and more successful show.

The contract which Guedel entered into with the representative of Illinois provided that the program "You Bet Your Life" would be broadcast over the facilities of the American Broadcasting Company (hereinafter referred to as A. B. C.) on Monday night each week from 8 to 8:30 p. m., current New York time, with repeat broadcasts on the Pacific coast. The term of the agreement was for a period of 26 consecutive weeks commencing on either October 27 or November 3, 1947. Marx was to be the star of the show. Guedel agreed to furnish a complete entertainment package for which he was to receive, during the first 13-week period, the amount of $ 5,400 weekly, and for the second 13-week period, the amount of $ 5,675 weekly. The agreement also provided for renewal options by Illinois for the broadcast years 1948-1949, 1949-1950, 1950-1951, and 1951-1952.

On October 3, 1947, Guedel and Marx entered into a partnership agreement which provided in part as follows:

A. The parties are co-owners of an original radio program and package known as YOU BET YOUR LIFE, hereinafter for convenience called "the program".

B. The program has been sold by Guedel as a package to Weiss and Geller, Inc. by contract dated October 1, 1947, and letter of modification of October 3, 1947, which contract, as modified, is hereinafter referred to as "the package contract".

C. Although the package contract is in the name of John Guedel Productions, (another name for John Guedel) simultaneously Groucho approved the package contract.

D. The package contract provides for the production of the show by Guedel and the acting in the show by Groucho.

Now, Therefore, it is agreed by and between the parties as follows:

1. Guedel and Groucho, in consideration of the foregoing and of the mutual promises and agreements herein contained, have agreed to and do hereby form a partnership. The purpose of said partnership is to engage in the business of producing the aforesaid radio program and supplying it to any person, firm, or corporation purchasing the right to use said program.

2. The partnership shall conduct business under the name of YOU BET YOUR LIFE PRODUCTIONS. Guedel hereby assigns the package contract to the partnership, which assumes and agrees to perform the same.

3. The term of the partnership shall commence September 27, 1947, and shall continue as long as the package agreement (including any options exercised thereunder) is in effect.

4. Each of the parties shall contribute $ 500 which shall be the capital contributions to the partnership. The parties own an equal interest in the partnership, and losses shall be shared equally, * * *

* * * *

5. With specific reference to the package contract, each of the parties agree to perform and grant the things to be performed and granted by the respective parties thereunder. Guedel's specific duties shall be to produce the show, and Groucho's specific duties shall be to act in the show. Guedel may perform some writing in connection with the show as well, and Groucho may contribute incidental ideas. All such writing and ideas, of course, belong to the partnership.

The agreement also provided that the profits from the sponsorship contract with Illinois would be divided as follows:

Price of package contract weekly	To Marx	To Guedel	Excess
$ 5,400	$ 2,250	$ 500	To be divided equally.
5,675	2,500	500
6,250	2,750	500
6,800	3,000	750
7,300	3,250	1,000
7,900	3,500	1,250

Neither Marx nor Guedel was to receive any compensation for personal services, as such, under the partnership agreement since the profit-sharing provided therein was intended to fully compensate them for their services. The equal division of profits between Marx and Guedel, after the specified division between them, was of little importance because production costs, which were readily ascertainable in the industry, plus the amount of specified drawings, usually equaled the package price paid by the sponsor.

The "You Bet Your Life" show with Marx as quizmaster was broadcast over the A. B. C. network during the 1947-1948 and 1948-1949 broadcasting seasons under the sponsorship of Illinois. The show was only moderately successful during such broadcast seasons.

Beginning in the fall of 1949 Illinois switched the show from the A. B. C. network to the Columbia Broadcasting System (hereinafter referred to as C. B. S.). Illinois continued to sponsor the program until December 28, 1949.

After the show commenced to be broadcast over the C. B. S. network it became more successful, and by the spring of 1950 it had become one of the most popular radio programs on the air. It won the Peabody award for the best comedy show of the year in 1949. Marx and Guedel became dissatisfied with the sponsorship of the show by Illinois. They desired to make a more favorable sponsorship contract with the DeSoto Division of the Chrysler Corporation (hereinafter referred to as DeSoto) to provide for the sponsorship of the show by the DeSoto-Plymouth Dealers of America. Accordingly, Marx and Guedel secured a release from their obligations under the contract with Illinois on or about October 25, 1949, effective as of December 28, 1949. In consideration for the cancellation of the sponsorship agreement, Marx and Guedel caused to be paid to Illinois the sum of $ 50,000. Of such amount Marx paid $ 38,500 and Guedel paid $ 6,500; their agents paid the remainder.

Under the contract with Illinois, Marx and Guedel divided any partnership profits, after their agreed-upon drawings, on an equal basis. At or about the time of the cancellation of the Illinois contract they agreed to adjust their partnership interests as follows: They were to receive their respective agreed-upon drawings as before; the next $ 1,500 of profits per week were to be equally divided; and all profits thereafter were to be divided 39/46ths for Marx and 7/46ths for Guedel. The adjustment of their respective partnership interests was made because of the amounts paid to cancel the Illinois contract.

On December 21, 1949, the partnership of Marx and Guedel entered into a radio package show contract with Batten, Barton, Durstine & Osborn, Inc. (hereinafter referred to as B. B. D. & O.), the advertising agency which acted on behalf of DeSoto, providing for the sponsorship of the "You Bet Your Life" show by the DeSoto-Plymouth Dealers of America. Under the contract the partnership agreed to furnish to the sponsor a radio package show known as "You Bet Your Life" and consisting of the following items:

a) personal services of Groucho Marx as master of ceremonies;

b) production and direction;

c) all cash prizes required for the program;

d) the services of all personnel required for the production of the program;

e) the services of a commercial announcer, subject to approval of Sponsor. If the commercial announcer furnished by Producer is not approved by Sponsor, then Sponsor shall furnish the same at its own expense.

f) all script material and rights required for the broadcasts of the program except commercial announcements which shall be furnished by Sponsor;

g) an orchestra consisting of ten musicians, plus leader;

h) the title and format "You Bet Your Life".

The agreement provided for the sponsorship of the show for a period of 26 weeks commencing on January 4, 1950, and for renewal options of 39 weeks each beginning on October 4, 1950, October 3, 1951, October 1, 1952, and September 30, 1953. Such options were required to be exercised by the sponsor on or before May 1 preceding any one of the said option periods. The program was to be broadcast from 9 to 9:30 p. m., New York time, on Wednesday of each week over the facilities of C.B.S. The sponsor had the right to change either the time or day of the broadcast or the network with the written approval of the partnership. Under the contract the partnership was to receive $ 8,666 per week during the first broadcast period; $ 9,166 during the first option period; and $ 9,666 during the second, third, and fourth option periods. The contract covered only the production of a radio show but provided that in the event the sponsor elected to exercise its option of broadcasting the show on television, it would pay the partnership an additional $ 3,500 per week during the broadcast period and would pay all costs of televised production. The contract provided that in the event of Marx's inability to perform, the partnership was to provide a substitute performer who met with the approval of the sponsor, but that if such a substitute was not provided within 2 weeks after the commencement of Marx's inability to perform, the sponsor might terminate its sponsorship of the program, effective 2 weeks after giving notice thereof. The contract also provided that in the event of the death of John Guedel, the sponsorship agreement would not terminate but would continue in full force and effect. In connection with the payment of a substitute for Marx, in the event of his inability to perform, the contract provided:

In determining the portion of the package price which goes to Groucho Marx net, Sponsor recognizes that a substantial portion thereof goes to Groucho Marx because of his part ownership of the property right in "You Bet Your Life" and such portion shall be computed and excluded in determining the compensation to be paid a substitute hereunder.

During the summer vacation period, repeat broadcasts of some of the performances of the show have been run under the title, "The Best Of Groucho."

The spring of 1950 was a period of intense competition between the two principal broadcasting networks, C. B. S. and the National Broadcasting Company (hereinafter referred to as N. B. C.), to secure popular programs for their networks by outright purchase of a show, with a contract for the services of its star or stars. Popular shows enhanced the prestige of a network and made the broadcast time preceding and following such a show more valuable and more salable.

In February or March 1950, an executive of the Radio Corporation of America (hereinafter referred to as R. C. A.), of which N. B. C. was a subsidiary, was in the office of petitioner Marx's attorney, Laurence Beilenson, in Los Angeles. He met a brother of Marx in the office and later mentioned to Beilenson that N. B. C. would be interested in acquiring the "You Bet Your Life" show should it become available. Beilenson subsequently discussed with Marx and Guedel the possible sale of the program to either C. B. S. or N. B. C. It was agreed that the networks would be asked to submit bids for the partners' interests in the partnership which produced the show, and also for their personal services.

Sometime in April 1950, Marx's brother and an attorney associated with Beilenson went to New York and interviewed officials of both C. B. S. and N. B. C. Both networks were given blank bid forms which Beilenson and his associates had prepared for use by the networks in making their bids. Listed on the forms were the following categories on which the networks were asked to submit bids:

1. Sale of Capital Assets of Groucho Marx and John Guedel

Includes partnership interest of each and undivided interest of each in literary property.

2. Services of Groucho Marx, Performer in Radio and TV Fields -- i. e. Any One of Following:

A. 1 Radio Show 1/2 Hr. Per Week

B. 1 Radio & TV Simulcast 1/2 Hr. Per Week

C. 1 TV Show 1/2 Hr. Per Week

D. 1 Radio Show 1/2 Hr. Per Week, Plus One

TV Show 1/2 Hour Every Other Week, which TV show must be same format as radio show

5 years commencing Fall 1950, Option in employer for additional 3 years commencing at end of 5 years.

3. Services of Groucho Marx, Consultant

5 years commencing at end of period Marx rendering services as performer above

4. Services of John Guedel, Producer, in Radio or Television Fields in

A. 1 Radio Show 1/2 Hr. Per Week

B. 1 Radio & TV Simulcast 1/2 Hr. Per Week

C. 1 TV Show 1/2 Hr. Per Week

D. 1 Radio Show 1/2 Hr. Per Week, Plus One

TV Show 1/2 Hr. Every Other Week, which TV Show must be audience participation format.

5 years commencing Fall 1950, option in employer for additional 3 years commencing at end of 5 years

5. Services of John Guedel, Consultant

5 years commencing at end of his producer services.

From the time of the New York trip in April 1950 until May 26, 1950, representatives of both networks repeatedly tried to get some indication from Marx's and Guedel's representatives as to the price which they expected to receive for the various items listed on the bid forms. Beilenson and the petitioners' other agents consistently refused to give any such indication.

On April 21, 1950, Marx and Guedel entered into a "Memorandum of Partnership Agreement" which confirmed the understanding between them "creating and/or continuing the partnership between them." Pertinent provisions of such memorandum are as follows:

The parties are co-owners of an original literary property which has heretofore been used in connection with the broadcasting of a radio program and package known as "YOU BET YOUR LIFE". The literary property referred to includes, among other things, the following:

1. An original, unique and exclusive idea for the preparation and conducting of an entertainment program for transmission purposes.

2. A format of presentation of the program.

3. The title "YOU BET YOUR LIFE".

4. All other rights allied with the foregoing and incidental to the ownership of other literary property idea, format program and/or package.

* * * *

1. The term of this partnership shall be deemed to have commenced on December 21, 1949, and shall continue at will.

* * * *

4. With specific reference to the services to be performed by each of the parties on behalf of the partnership, Marx agrees to perform the services required of him as a theatrical performer under and pursuant to any contract which the partnership may enter into with a sponsor or similarly situated person, firm or corporation for the use of the package program.

The agreement further provided, pursuant to their previous understanding, that drawings of the amounts received under the DeSoto contract were to be as follows:

Marx	$ 2,750 per week
Guedel	500 per week

Any additional profits were to be divided as follows: First $ 1,500 -- equally; all other -- 39/46ths to Marx, 7/46ths to Guedel.

On April 26, 1950, B. B. D. & O., acting on behalf of DeSoto, notified Marx and Guedel that DeSoto would sponsor the "You Bet Your Life" show on radio for the 1950-1951 broadcast season.

In May, representatives of both C. B. S. and N. B. C. came to California to continue the negotiations for the purchase of the show. The networks were interested in acquiring whatever assets, rights, and services that might be necessary to insure the production of the program "You Bet Your Life" with Groucho Marx as the star. At no time did they consider purchasing only the so-called format of the show or its title, or only the services of Marx as a performer.

Since the representatives of the networks were unable to get any indication from the agents of Marx and Guedel as to the price which they expected to receive for the various items listed on the bid form, they suggested to Beilenson that Marx and Guedel indicate what value they placed, as between themselves, on their respective interests in the partnership. Beilenson discussed this with the petitioners and they agreed that of the sale price received for the partnership interests -- 75 per cent would go to Marx and 25 per cent to Guedel. That proposed division was made known to representatives of both networks.

In order to end the negotiations, the president of N. B. C. suggested that the competing networks should make their final offers in the form of sealed bids. The suggestion was accepted, and on the evening of May 26, 1950, representatives of both networks submitted their bids to Marx and Guedel. The bid of N. B. C. was submitted on the form which Beilenson had prepared. The C. B. S. bid covered the same items listed on the bid form but was in letter form. The bids were opened when received and were discussed by Marx and Guedel with Beilenson and their other advisers. Both networks bid $ 1,000,000 for the "partnership interest" item listed on the bid form, but the amounts offered by N. B. C. for the services of both Marx and Guedel were substantially greater than the amounts offered by C. B. S. No conclusive decision was reached on the night of May 26, but at a meeting the following morning, C. B. S. indicated that it would withdraw its bid in view of the preference indicated by Marx and Guedel for the N. B. C. offer. C. B. S., on May 29, 1950, addressed a letter to the petitioners confirming the withdrawal of its bid.

The bid which was submitted by N. B. C. contained the following statement: "Bid is contingent upon agreement on all the provisions which are to be incorporated in definitive agreements and upon consummation of arrangements with the sponsor for programs to be on N. B. C."

N. B. C. secured Marx's consent to, and thereafter did, insure his life for $ 1,000,000, pursuant to its policy of insuring the lives of important performers affiliated with it.

On June 23, 1950, B. B. D. & O. notified Marx and Guedel that DeSoto would commence telecasting the show on or before November 15, 1950.

N. B. C. undertook to secure the consent of DeSoto to switch the program from C. B. S. and on or about July 24, 1950, it secured such consent. Under the agreement which N. B. C. reached, it paid DeSoto the sum of $ 249,999.75 for the agreement to switch the program and to sponsor it on television.

After Marx and Guedel had indicated their acceptance of the N. B. C. offer on May 27, 1950, they "shook hands" on the deal with the president of N. B. C., which signified agreement as to the price which they were to receive for the various items listed on the bid form. Between such time and July 26, 1950, when the final contracts of sale were signed by N. B. C. and petitioners, extensive negotiations were carried on between the attorneys representing N. B. C. and Beilenson and his associates representing petitioners. Decided differences arose as to various provisions of the agreements, which were not finally resolved until shortly before the end of July when the signing took place.

The sale contracts provided that Marx was to receive a total of $ 750,000 for his partnership interest, $ 10,000 of which was payable on the execution of the contract and the balance in installments of $ 74,000 each, commencing on the first day of June 1951, and annually thereafter until the balance was paid. Guedel was to receive $ 250,000, $ 5,000 of which was payable upon execution of the contract and the balance in annual payments of $ 24,500 each, commencing on the first day of June 1951, and continuing thereafter until the balance was paid. The contract with Marx contained the following provisions:

THIRD: Seller warrants and represents to Buyer

* * * *

(6) That the assets of the partnership include, but are not limited to, the sole ownership of the elements specified in subdivision (a) hereof, and all rights, including, but not being limited to those specified in subdivision (b) hereof in and to the elements specified in subdivisions 1 through 6 inclusive of subdivision (a).

(a)	(1)	The title and trade name "You Bet Your Life".
(a)	(2)	The original entertainment idea currently being presented by radio
		transmission in the particular form or rendition known as "You
		Bet Your Life".
(a)	(3)	All of the unique features comprising the format of the program
		known as "You Bet Your Life".
(a)	(4)	The unique method of preparation of material and selection of
		participants, all for the renditions, productions and performances
		of the entertainment program known as "You Bet Your Life".
(a)	(5)	All rights in the literary material and recorded reproductions of
		past performances based thereon, including, but not limited to, the
		right to copyright where such right to copyright is applicable.
(a)	(6)	Reversionary rights in past programs produced by the
		Partnership.
(a)	(7)	Furniture and fixtures described in Exhibit "C". [Consisting of
		one dicta-wire machine.]
(b)		Motion picture rights.
		Live television rights.
		All other television rights.
		Radio rights, including amplitude modulation, frequency
		modulation, live, taped or electrically transcribed.
		Recording rights.
		Publication rights, including book publication, newspaper
		publication, magazine publication, serialization, sequels and
		anthologies. Legitimate stage rights including dramatico musical
		production rights.
		Commercial tie-up rights.

The contract with Guedel contained similar provisions. Both sale contracts provided that N. B. C. would employ, for the 1950 fall broadcast season, the writers, director, and announcer of the show at weekly salaries set forth in such contracts. Also, on July 26, 1950, Marx and Guedel entered into employment and consultant contracts with N. B. C. Under the employment contracts they agreed to provide their services as the star and producer, respectively, of the "You Bet Your Life" show for both radio and television broadcasting. The compensation per week, which both petitioners received under such employment contracts was greater than they would have received for their personal services had no sale been made and had the show remained on C. B. S. under the sponsorship of DeSoto and been broadcast on television and radio. Under the employment contracts Marx and Guedel received the following amounts per week:

Periods	Marx	Guedel
1st and 2d	$ 4,750	$ 1,500
3d	5,000	1,550
4th	5,100	1,600
5th	5,100	1,650
Option period	5,700	1,800

Under the consultant contracts Marx would receive $ 25,000 per year and Guedel would receive $ 15,000 per year for 5 years commencing after the term of the employment contracts.

Petitioner Marx received a $ 10,000 payment for the sale of his partnership interests to N. B. C. in 1950, and payments of $ 74,000 in 1951 and 1952. Guedel received a payment of $ 5,000 in 1950, and payments of $ 24,500 in 1951 and 1952. The petitioners reported the receipt of such sums as long-term capital gains. On his return for 1950, Marx reported the sale of his partnership interest in "You Bet Your Life" for $ 750,000, against which he deducted his cost basis of $ 658.19. He determined his "gross profit percentage" to be 99.9122 per cent and applied such percentage to the $ 10,000 payment of the sales price received in that year to arrive at a long-term capital gain of $ 9,991.22. On his return for 1951, he reported the $ 74,000 payment received in that year and deducted from it, cost of $ 64.97, for a net long-term capital gain of $ 73,935.03. On his return for 1952, he reported the same net amount of long-term capital gain.

On his return for 1950, Guedel reported the sale of his partnership interest in "You Bet Your Life" for $ 250,000, against which he deducted his cost basis of $ 109.42. He computed a gross profit percentage and reported $ 4,997.81 as the net long-term capital gain realized from the $ 5,000 payment received in that year. He reported a net long-term capital gain of $ 24,489.28 on the $ 24,500 payment received in 1951, and a similar amount of net gain from the like payment made to him in 1952.

The respondent determined that $ 250,000 of the $ 1,000,000 sale price represented the value of the partners' interests in the partnership and that 75 per cent of such sum was taxable to Marx, when received, as capital gains and 25 per cent so taxable to Guedel. He determined that the remaining $ 750,000 of the purchase price represented compensation for services and that 75 per cent of such sum was taxable to Marx as ordinary income, when received, and 25 per cent so taxable to Guedel. On the basis of such determination, he determined the specific deficiencies here in issue.

The combined partnership interests of the Marx-Guedel partnership, which included the literary property of the "You Bet Your Life" show, had a fair market value of $ 1,000,000 when sold. Such interests had been held by petitioners for more than 6 months.

OPINION.

This case presents the question of whether the sales price received by partners for their interests in a partnership was, in fact, received for such interests, or whether all or some part of such sales price represented compensation for services because the sale was inextricably linked with the employment of the partners by the buyer of their interests.

In support of his determination that three-quarters of the sales price represented compensation for services, the respondent argues that the petitioners and N. B. C. simply carved up a total sum of some $ 2,500,000 as best suited their purposes from the standpoint of tax consideration; that the capital asset, in the form of the partnership interests, which was sold did not, in fact, have a value in excess of one-quarter of a million dollars; and, that anything allegedly paid for that asset in excess of such amount was actually additional compensation for services. In short, the respondent based his determination on the familiar rule that for tax purposes the form in which the parties cast a particular transaction may be ignored if the substance of their dealings was, in fact, different from the way they would have it appear. ;.

Petitioners, on the other hand, argue that the respondent was not justified in reforming bona fide contracts entered into between unrelated parties dealing at arm's length; that the transactions in question were accurately reflected by the agreements which the parties reached; that the partnership interests did, in fact, have a fair market value of $ 1,000,000; and that the respondent's determination to the contrary is arbitrary and without foundation in fact.

The issue raised is essentially one of fact, and we agree with the petitioners that no part of the $ 1,000,000 which they received from the sale of their partnership interests represented compensation for services or gains and profits otherwise taxable to them as ordinary income. The significant facts in this record are that the two major broadcasting networks, completely independent of each other, arrived at a valuation of $ 1,000,000 for the partnership interests in question, and offered such sums in sealed bids to the petitioners for such interests. Ordinarily, when an asset is sold under such circumstances, the bid price establishes its fair market value, and we find no facts here which would except this case from the general rule. Aside from irrelevant factual dissimilarities, this case presents essentially the same question as was decided by the Court in . In both cases the property in question was sold in an arm's-length transaction and the price offered there and the bids made here established the fair market value of the property to the broadcasting network which made the purchase. Under such circumstances, neither the respondent nor this Court has any authority to substitute its judgment for that of the parties. We therefore conclude, as we did in , that the price which was received for the asset represented its fair market value, and that no part of such sales price represented compensation for personal services. We note also that the compensation which the petitioners here received for their services after the sale was greater than the amounts received before.

In concluding that the sealed bids of $ 1,000,000 represented the true fair market value of the partnership interests which were sold, ^;

By amended answer the respondent asked for increased deficiencies based on allegations to the effect that no part of the $ 1,000,000 which the petitioners received was taxable as capital gains. He first argues that the partnership interests, regardless of fair market value, were not held by the petitioners for a period of 6 months. That argument is based primarily on his contention that the "Memorandum of Partnership Agreement" which the petitioners signed on April 21, 1950, evidenced the formation by them of a new partnership commencing on December 21, 1949; and secondly, that the sale of partnership interests was finally consummated on May 27, 1950, when petitioners and the president of N. B. C. shook hands on the deal. We do not agree with that argument.

The memorandum of agreement which the petitioners signed on April 21, 1950, specifically stated that such memorandum confirmed an understanding between them "creating and/or continuing the partnership between them." We think that memorandum reflects only a readjustment by the petitioners of their respective interests in an existing partnership, rather than the creation of an entirely new partnership. In addition, we think the evidence clearly establishes that the final sale of partnership interests was not consummated until the contracts were signed on July 26, 1950. The bid of N. B. C. contained the statement that it was contingent upon the parties' agreement on all provisions which were to be incorporated in definitive written agreements and was also contingent upon the agreement of DeSoto to switch the program from C. B. S. to N. B. C. We think those were real contingencies and that, until they were resolved, no final sale was consummated. See . So, even if we assume that Marx and Guedel entered into an entirely new partnership agreement as of December 21, 1949, their interests therein were held for a period of more than 6 months, since the sale was not consummated until the end of July 1950.

The respondent also argued that the partnership interests did not include the so-called literary property which he says was a separate asset owned by the partners, and that the petitioners actually sold partnership assets rather than partnership interests; and that the asset sold, namely the literary property, was not a capital asset within the meaning of the statute because it was property held for sale to customers in the ordinary course of business. It was incumbent upon respondent to prove those allegations since he raised them by amended answer. Not only did he fail in that burden, but, on the contrary, we think this record clearly demonstrates that the literary property belonged to the partnership. The intent and purport of the sales contracts were to convey the literary property as a part of the partnership interests and the contracts contained the partners' warranty that it was. We therefore reject such theory and hold that the $ 1,000,000 received by petitioners is taxable as a capital gain.

Decisions will be entered under Rule 50.

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Footnotes

• 1. The respondent introduced no evidence as to such value and called only one witness who did nothing but identify certain documents and records from the files of N. B. C.↩