Want more? Register today for a Pro trial.
7-day trial

CharitablePlanning.com

Close
Select a date
Please wait ...
Close

Rev. Rul. 1962-141 Document Info Printer

Revenue Rulings
Internal Revenue Service
 Revenue Ruling

Rev. Rul. 62-141

1962-2 C.B. 182

Sec. 1231

IRS Headnote

Television films and tapes produced by a taxpayer and later sold for
television exhibition will ordinarily constitute property held primarily
for sale to customers in the ordinary course of the taxpayer's trade or
business within the meaning of section 1231(b)(1)(B) of the Internal
Revenue Code of 1954, although they have been leased by the taxpayer prior
to sale. Therefore, gains or losses resulting from the sales of such films
and tapes will be treated as ordinary gains or losses. 

Similarly, gains or losses resulting from the sales of films by motion
picture producers after initial theater showings will also be treated as
ordinary gains or losses where, at the time of the sale, the films were
property held primarily for sale to customers in the ordinary course of the
trade or business. In determining whether such films were held primarily
for sale to customers in the ordinary course of the trade or business, the
Internal Service will take cognizance of the fact that by August 1, 1948,
the motion picture industry recognized the distinct possibility that its
films might be sold for exhibition on television after being leased for
theater showings. 

Revenue Ruling 55-706, C.B. 1955-2, 300, superseded, as it applies to sale
made on or after August 27, 1962. 

Full Text

Rev. Rul. 62-141 

Advice has been requested as to the proper treatment for Federal income tax
purposes of the proceeds from sales by the producer of television films
(including `live' shows taped for reproduction). A similar question has
been raised as to motion picture films that are sold by the producers after
initial theater showings. 

Producers of films for television exhibition often lease their product
rather than sell it initially. In some instances, after the films had been
rented for various periods, ranging from several months to several years,
they are then sold by the producers to television distributors or
exhibitors. 

Section 1231(a) of the Internal Revenue Code of 1954 provides, in effect,
for capital gains treatment in specified circumstances for gains from the
sale or exchange of property used in the trade or business. 

Section 1231(b)(1) of the Code provides, in part, as follows: 

(1) GENERAL RULE.-The term `property used in the trade or business' means
property used in the trade or business, of a character which is subject to
the allowance for depreciation provided in section 167, held for more than
6 months * * * which is not- 

* 

(B) property held by the taxpayer primarily for sale to customers in the
ordinary course of his trade or business * * * 

The Internal Revenue Service has previously concluded that television films
are subject to depreciation under section 167 of the Code. See Rev. Rul.
60-358, C.B. 1960-2, 68. 

Therefore, the question arises whether the films in question are excepted
from the definition of `property used in the trade or business' by section
1231(b)(1)(B) of the Code, although they have been leased prior to sale and
are subject to the allowance for depreciation provided in section 167 of
the Code. If the television films are held by producers for sale to
customers in the ordinary course of the trade or business within the
meaning of section 1231(b)(1)(B) of the Code, gains and losses from the
sales of such films by them will be treated as ordinary gains and losses. 

In Rollingwood Corp. v. Commissioner , 190 Fed.(2d) 263 (1951), the
taxpayer had arranged for the construction of houses for war workers under
the condition imposed by the United States Government that each of the
houses would be rented by the taxpayer with an option to the tenant to
purchase. The houses were rented for an average time of 22 months and all
but four of the houses were sold. The United States Court of Appeals for
the Ninth Circuit affirmed the decision of the Tax Court of the United
States that the houses were property held primarily for sale to customers
in the ordinary course of the taxpayer's trade or business and that the
proceeds from their sales should be taxed as ordinary income. The court
stated as follows: 

Although the requirements of the statute are to some extent overlapping,
the emphasis in this case is whether the houses were held primarily for
sale or primarily for rent. Petitioners contend that the word `primarily'
means `principal' or `chief,' while the Commissioner contends it means
`essential' or `substantial.' For reasons hereinafter stated we think the
latter view is more consonant with the legislative policy. 

Suppose the taxpayer in the instant case intended to rent the houses for as
long as he was required to do so under existing regulations and then to
sell them. Or suppose his intention was to pursue whichever of these
activities proved to be the most profitable, that is, if the rental market
were good he would continue to rent but if the sales market were high he
would sell. In either of these suppositions we think it is fair to say that
one of the essential purposes (in acquiring or holding the houses) is the
purpose of sale. Under such circumstances, if the taxpayer does dispose of
the houses by sale, is it within the legislative purpose to allow him to
treat the proceeds of these sales as a capital gain? We think not. 

Other cases in which courts have held that the word `primarily' in the
statute is to be interpreted as meaning `essential or substantial' rather
than `principal' or `chief' and accordingly have denied capital gains
treatment for the proceeds of sale from property that the taxpayers had
rented are S.E.C. Corp. v. United States , 140 Fed.Supp. 717 (1956),
affirmed per curiam , 241 Fed.(2d) 416 (1957), certiorari denied, 354 U.S.
909 (1957), involving electric water and food coolers, and Greene-Haldeman
v. Commissioner , 282 Fed.(2d) 884 (1960), rehearing denied December 9,
1960, which concerned the sale of rental cars by dealers. In the latter
decision the court pointed out that- 

* * * In Corn Products Refining Co. v. Commissioner, 1955, 350 U.S. 46, at
page 52 * * * the Court indicated that a narrow construction should be
given to provisions of the Code which authorize capital gain treatment. If
we were to accept the taxpayer's contention we would of necessity be
expanding the types of transactions which are entitled to capital gain
treatment. 

In view of the fact that television film producers are aware of the market
that exists for sales of television films after initial leasing periods, it
is reasonable to assume that generally, from the time of their production,
a producer's intention is either to sell, to rent, or to rent and then
sell, whichever method proves most profitable in its business. Under the
rationale of the cases referred to above, the fact that the films were
leased prior to sale would not prevent their being held `primarily' for the
purpose of sale, within the meaning of section 1231(b)(1)(B) of the Code. 

Moreover, even if the producer originally has no intention to sell, he may
develop a substantial intent to sell by the time of sale. In Joseph A.
Harrah v. Commissioner , 30 T.C. 1236 (1958), a corporation had constructed
a saw mill, which it originally used for experimental purposes, but later
leased, subject to an option in the lessee to buy. In holding that the
corporation's gain upon sale of the mill pursuant to the option constituted
ordinary income, the court commented, at page 1241, that under the
applicable decisions- 

* * * While the underlying purpose of the original acquisition of property
is to be given consideration, it is clear that such purpose may change over
a given period of time. Where this has been the case, the original purpose
necessarily must give way to purpose for which the property is held at the
time of its sale. * * * 

Therefore, regardless of the purpose for which television films were
originally held, if at the time of sale they are then being held with a
substantial purpose of selling to customers in the ordinary course of trade
or business, gain or loss realized upon the sale will be within the
exception to capital gains treatment provided by section 1231(b)(1)(B) of
the Code. 

Some television film producers have made few or no past sales of films.
These situations differ from most of the cases cited above, in which the
sellers had made numerous sales of properties previously leased. On the
other hand, unlike many such cases, the producers have in each instance
produced the property in question. In an analogous situation involving a
sale by a playwright of the movie rights to his first play, a majority of
the court in an opinion by Judge Learned Hand in Clifford Goldsmith et al.
v. Commissioner , 143 Fed.(2d) 466, 467 (1944), certiorari denied, 323 U.S.
774 (1944), in upholding ordinary-income treatment of the sales proceeds,
concluded that the taxpayer's business was both the production of that play
and exploiting it for profit and that as a consequence the movie rights
constituted property held for sale to customers in the ordinary course of
his trade or business. See also Joseph A. Fields v. Commissioner , 189
Fed.(2d) 950 (1951). Similarly, the business of television film producers
also embraces exploiting of the films through whatever methods are within
their reasonable contemplation at the time of production or at a later
time. 

In accordance with the above, it is held that television films sold by the
producers ordinarily will be considered to be property held primarily for
sale to customers in the ordinary course of the trade or business, within
the meaning of section 1231(b)(1)(B) of the Code. Therefore, gains or
losses resulting from such sales will be treated as ordinary gains or
losses. 

The considerations set forth above are also applicable to sales of motion
picture films by producers. Following World War II, the motion picture
industry became aware that substantial profits might be realized through
television exhibition of its old films and of films it would produce in the
future. Beginning August 1, 1948, collective bargaining agreements in the
industry incorporated provisions allowing unions to cancel the agreements
if feature motion picture films made on or after that date were released to
television. It is reasonable to assume that no later than that date the
industry recognized the distinct possibility that its films might be sold
for exhibition on television after being leased for theater showings and
that producers generally contemplated sales to television following such
showings as a likely means of exploiting their product. In other instances,
including some cases where the films were produced prior to August 1, 1948,
the producers may not have had a substantial purpose of sale at the time of
production but, as the value of motion picture films for television
increased, may later have developed such a purpose. 

The Service will therefore determine in each case, on the basis of the
relevant facts and circumstances, whether motion picture films sold by the
producers were at the time of sale held by them primarily for sale to
customers in the ordinary course of their trade or business, within the
meaning of section 1231(b)(1)(B) of the Code. Accordingly, it is further
held that motion picture films completed on or after August 1, 1948, and
thereafter sold by the producers ordinarily will be considered as property
held by the taxpayer primarily for sale to customers in the ordinary course
of his trade or business. 

In Revenue Ruling 55-706, C.B. 1955-2, 300, it was determined that where a
motion picture producer sold in one unusual and isolated transaction a
quantity of its own films which it had previously rented, the gain realized
from the sale was taxable as a long-term capital gain under section 1231 of
the Code. There, the films sold had all been originally produced and
released during the period from 1931 to 1946, prior to general recognition
that sales of films to television might be an important future source of
income to the motion picture industory and, at the time time of production,
the films were not held for sale to customers in the ordinary course of the
taxpayer's trade or business. 

Pursuant to the authority contained in section 7805(b) of the Code, this
ruling will not be applied to the sale of motion picture films produced for
initial theater showings either before or after August 1, 1948, and sold
prior to August 27, 1962, the date of the publication of this ruling,
provided that the sale is an isolated and unusual one. 

Revenue Ruling 55-706, C.B. 1955-2, 300, is accordingly superseded as it
applies to sales made on or after August 27, 1962.

Content provided by CharitablePlanning.com in conjunction with Kallina & Associates, LLC

Support

If you encounter problems when using this website, or when the website does not function as you would expect, please contact our support team: support@charitableplanning.com.

Legal

Questions related to our terms of use, privacy policy, copyright or other such legal matters should be directed to our legal team: legal@charitableplanning.com.

Feedback

If you have comments about the website or our commentary, or if you have suggestions on how we can better serve you, please use our Feedback Form.

© 2006-2014, CPC Holdings, LLC