Appeal from Corporation Tax Appeal Board.
Allen, P. J., and Bronson and R. M. Maher, JJ.
1. Taxation -- Corporations -- Ownership of Property.
A corporate taxpayer's books and records do not represent a talisman for ascertaining the tax owed by it; a basic tenet in tax law is that courts will look to the substance of an arrangement between a taxpayer and another party rather than its form to ascertain who is the real owner of property for taxation purposes.
2. Taxation -- Corporations -- Franchise Taxes -- Motion Picture Distributors -- Motion Picture Producers -- Ownership of Property.
A motion picture distribution company owns, for corporation franchise tax purposes, films which are produced by independent producers, even though the company reported its arrangements with its producers as accounts receivable, where the company obtains sole and exclusive control over the films when completed by the producers, the company distributes the films, pays the costs of the films, and bears any loss without recourse to the producers.
The opinion of the court was delivered by: Allen
The Corporation Franchise Fee Division of the Department of Treasury determined that United Artists Corporation owed additional franchise taxes. Deficiency assessment upheld by the Deputy State Treasurer on redetermination. The Corporation Tax Appeal Board affirmed. United Artists appeals by leave granted.
Taxpayer, United Artists Corporation, appeals by leave granted from the September 12, 1974 decision of the Corporation Tax Appeal Board upholding the determination by the Corporation Franchise Fee Division that taxpayer owed additional franchise taxes for 1965 through 1970.
Taxpayer, a Delaware corporation with principal offices in New York City and authorized to conduct business in Michigan, is in the motion picture business. Following an audit of taxpayer's books and records in August 1971, CFFD determined that taxpayer improperly included certain monetary advances made to independent film producers in the property factor of the apportionment formula used in computing its franchise taxes for the years 1965-1970, and sent taxpayer a notice of deficiency in the amount of $4,480.91. Taxpayer's request for a redetermination hearing was honored on January 18, 1973, and the Deputy State Treasurer issued an order of redetermination on September 4, 1973, upholding the deficiency assessment. On appeal, CTAB affirmed. Pertinent facts stated in the CTAB's opinion adequately sets the stage for resolution of the instant dispute:
"The appellant contends that it produces motion pictures pursuant to contracts with producers which call for the production of pictures by the producers with funds that are furnished by United, or obtained by the producers from lending institutions under guarantee of United.
"The films are distributed by United under agreements by which it is understood that if the pictures do not generate sufficient revenue to enable the producers to pay off the loans advanced either by United or by the bank (but guaranteed by United) the producers shall have no personal obligation to repay any unrecouped amount. If a picture is capable of recouping its production cost, then any profits earned by the picture are shared between the producer and United, at an agreed percentage.
"On its books and records United has reflected the amounts advanced to the producers, or to the banks in repayment of their advances to producers, as accounts receivable. As funds were available from distribution for amortization of the producer's debt, they were so applied, and if the picture turned out to be a loss picture, the remaining balance was written off as a bad debt."
In addition, the taxpayer's annual report to its shareholders carried the production loans as an asset under "advances and investments". A copy of the contract between taxpayer and an independent producer, which was certified as being typical of those production and distribution agreements involving taxpayer, provides inter alia that the advances are money loans from ...