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Rev. Rul. 1955-706 Document Info Printer

Revenue Rulings
Internal Revenue Service
 Revenue Ruling

Rev. Rul. 55-706

1955-2 C.B. 300 

Caution: Superseded in part by Rev. Rul. 62-141 

IRS Headnote

Where a motion picture producer which distributes motion picture films on a
rental or lease basis, but does not sell such films in the ordinary course
of its business, sells a quantity of its own fully depreciated films in one
unusual and isolated transaction, the gain realized from the sale is
taxable as a long-term capital gain under the provisions of section 1231 of
the Internal Revenue Code of 1954, provided the conditions of that section
are otherwise met. 

Full Text

Rev. Rul. 55-706 

Advice has been requested as to the proper treatment for Federal income tax
purposes of proceeds from the sale of fully depreciated motion picture
films in a transaction as described below. 

X pictures corporation, a corporation whose stock is widely held, is
engaged in the business of producing motion picture films and distributing
films owned by others as well as its own films. The corporation sold 200 of
its old films to another corporation. X corporation has never before sold
films to exhibitors, but has rented them either for a fixed daily or weekly
fee, or upon a percentage of box office receipts. Ownership of the films
has not been relinquished by X during this rental process. X has, on
occasion, leased or licensed rights for television exhibition of certain
films for a limited period. However, X has retained ownership of the leased
films, and at the end of the license or lease period, all television rights
have reverted to X . 

Neither the purchasing corporation nor any of its officers or stockholders
own any shares of stock in X corporation; nor are any of such officers or
stockholders related to the principal stockholders, officers, or members of
the board of directors of X corporation. The films sold in this transaction
were all old films, originally produced and released during the period from
1931 to 1946. The films were fully depreciated on the corporation's books
and were carried at a zero basis. Although the films have a residual value
as re-issues or re-releases for exhibition purposes in foreign countries or
for long-range television purposes, they were producing negligible rental
income to X corporation. The motive, for the sale was to convert dormant
assets into working capital, increase the net worth of the corporation,
improve its balance sheet, and provide an additional base for bank
borrowing. A substantial payment was made to X at the time of sale, the
balance payable in four installments, secured by a mortgage, pledge, and
assignment with respect to the films. The mortgage and pledge will remain
in force until the full purchase price is paid. The purchasing corporation
may possibly engage X corporation to act as a distributing agent for some
of the purchased films on the usual distribution fee basis charged for such
a service. 

No participating interests in the films sold were held by any individuals
as joint venturers in a particular production. The films sold were produced
by the efforts of individuals who were paid by X the then full market value
of their efforts and services. None of such individuals owned stock in the
corporation at the time the films were made, or owned any stock or stock
options in the corporation at the time of the sale of the films. None of
the individuals contributed efforts and services to the production of these
films with a view toward subsequently realizing additional money returns,
directly or indirectly, through the medium of the sale of the films upon a
capital gain basis. 

Section 1221 of the Internal Revenue Code of 1954 excludes from the
definition of a capital asset the following items, among others: 

(1) stock in trade of the taxpayer or other property of a kind which would
properly be included in the inventory of the taxpayer if on hand at the
close of the taxable year, or property held by the taxpayer primarily for
sale to customers in the ordinary course of his trade or business; 

(2) property, used in his trade or business, of a character which is
subject to the allowance for depreciation provided in section 167, * * *; 

(3) a copyright, a literary, musical, or artistic composition, or similar
property, held by- 

(A) a taxpayer whose personal efforts created such property, or 

(B) a taxpayer in whose hands the basis of such property is determined, for
the purpose of determining gain from a sale or exchange, in whole or in
part by reference to the basis of such property in the hands of the person
whose personal efforts created such property; 

From the facts presented, it is evident that the 200 films were not stock
in trade, or property of a kind which would properly be included in
inventory if on hand at the close of the taxable year, or property held
primarily for sale to customers in the ordinary course of trade or
business. Rather, they were the subject of leases by the taxpayer to
exhibitors on a rental basis. Although fully depreciated, they were assets
of a character subject to the allowance for depreciation, used in the trade
or business. 

There is excluded from the definition of property used in the trade or
business, as provided in section 1231(b) of the 1954 Code, a copyright, a
literary, musical, or artistic composition, or similar property held by a
taxpayer described in paragraph (3) of section 1221. Many corporations,
including some whose stock is widely held and traded on established stock
exchanges, create copyrights as well as other property described in
paragraph (3) of section 1221. The property created by these corporations
is not considered to be created by the personal efforts of a taxpayer where
all of the costs and expenses are paid for by the corporation at the
current going rate for the services rendered. The production of each of the
films in the instant case involved a multiplicity of skills and abilities,
the combined efforts of numerous individuals of various backgrounds and
trades, and the use of substantial amounts of capital. Thus, no single
individual may be said to have created by his personal efforts the films in
question or a property in the films. 

Based on the foregoing circumstances, it is held that since the sale of the
200 films was an isolated and unusual sale the films were not property held
primarily for sale to customers in the ordinary course of trade or
business. It is further held that the gain realized from the sale of the
films is taxable as long-term capital gain under the provisions of section
1231 of the 1954 Code, provided the conditions of that section are
otherwise met

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