Summary
In Twentieth Century-Fox Film Corp. v. Lindley (1982), 2 Ohio St.3d 54, 2 OBR 596, 442 N.E.2d 766, we considered whether income generated from licensing of film prints constituted net rents or royalties from the lease of tangible personal property or income from the use of an intangible.
Summary of this case from Consumer Direct, Inc. v. LimbachOpinion
No. 82-155
Decided December 15, 1982.
Taxation — Franchise tax — Royalties from licensing agreements with motion picture exhibitors — Income from use of an intangible — Lease of part of copyright — R.C. Chapter 5733.
APPEAL from the Board of Tax Appeals.
Appellee, Twentieth Century-Fox Film Corporation, is a Delaware corporation engaged in the production and distribution of motion picture films. While appellee is headquartered in Los Angeles, California, it has regional offices in Cleveland and Cincinnati. These offices serve to promote and distribute films to exhibitors located within Ohio. Pursuant to R.C. Chapter 5733, appellee is required to pay franchise taxes for the privilege of conducting business within this state.
When calculating its franchise tax liability for the tax year 1975, under the net income method set forth in R.C. 5733.05(B), appellee treated royalties received from licensing agreements with exhibitors as apportionable in the sales factor of the three-factor formula contained in R.C. 5733.05(B)(2).
The Tax Commissioner adjusted appellee's franchise tax report whereby income received from the licensing of films was classified as "[n]et rents and royalties from tangible personal property," and thus allocable pursuant to R.C. 5733.05(B)(1) and 5733.051(A)(2). This adjustment resulted in a franchise tax assessment totaling $9,953.11.
The Board of Tax Appeals reversed the commissioner's determination noting that the income was received in exchange for the right to display or exhibit materials protected by copyright and held that the income must be apportioned pursuant to R.C. 5733.05(B)(2). The board rejected appellant's argument that appellee's film rental income was derived from tangible personal property.
The cause is now before this court upon an appeal as of right.
Messrs. Jones, Day, Reavis Pogue, Mr. Robert J. Kosydar and Mr. James R. King, for appellee.
Mr. William J. Brown, attorney general, and Mr. Mark Engel, for appellant.
The dispositive issue in this case is whether the income generated from the licensing of film prints by appellee can be characterized as net rents or royalties from tangible personal property, or as income from use of an intangible for the purposes of the Ohio franchise tax.
The assessment levied in this cause involves income which appellee receives from exhibitors and theater owners. Appellee's motion picture productions result in a master negative from which positive prints are produced. The positive prints, upon which appellee has obtained copyright protection, are then leased to theaters for a specified length of time in exchange for a percentage of the theater's revenues.
Appellant Tax Commissioner contends that the income appellee derives from the film exhibitors should be classified as "[n]et rents and royalties from tangible personal property" in accordance with R.C. 5733.051(A)(2). We do not agree.
The crucial inquiry becomes, what are the film exhibitors paying for in these agreements with the appellee? We think the answer is clear. The exhibitors are paying for the right to exhibit the films publicly. This right is an intangible right protected by copyright. The positive print given to the exhibitors under their licensing agreements with appellee is of no value, unless that print is accompanied by a right to display the film publicly for profit.
Arguably, the transfer of the print itself is a transfer of tangible personal property, but as was brought out in the record below, the relative value of the positive print is de minimis when compared to the copyright privilege conveyed in the instant transactions. See Misbourne Pictures Ltd. v. Johnson (C.A. 2, 1951), 189 F.2d 774. The true object of the transactions in question is the lease of part of the copyright in which a film is protected.
In order to resolve the issue, the Board of Tax Appeals resorted to federal copyright statutes. Upon carefully reviewing these statutes, the board reasoned that the taxpayer "* * * is transferring the right to `display' or `perform' the motion picture to the public * * *" and that "[t]he exhibitor is not paying for the positive print, a copy of the copyrighted work, but is paying for the images seen and the sound heard by the movie-going audience."
See Sections 102(a)(6), 106, 201(d) and 202, Title 17, U.S. Code.
In the instant case, appellee's rental fees would have been allocable under R.C. 5733.051(A)(7) as having been derived from patent and copyright royalties, but for the fact that well over ninety percent of appellee's gross receipts in Ohio is derived therefrom. Thus, in accordance with R.C. 5733.051(A)(8), the three-factor formula found in R.C. 5733.05(B) was properly used by appellee when it originally calculated its 1975 franchise tax liability.
Accordingly, we find the decision of the Board of Tax Appeals to be neither unreasonable nor unlawful, and it is hereby affirmed.
Decision affirmed.
CELEBREZZE, C.J., W. BROWN, SWEENEY, LOCHER, HOLMES, C. BROWN and KRUPANSKY, JJ., concur.