Commissioner v. Ferrer

Jose Ferrer (plaintiff), an actor, entered into a contract with Pierre LaMure, the author of the novel Moulin Rouge, to acquire the right to produce Moulin Rouge for a live stage performance. Under the contract, Ferrer obtained (1) a renewable lease of the right to produce Moulin Rouge as a play, (2) the power to prevent others from producing the Moulin Rouge story during the term of the lease, and (3) a 40 percent share of the proceeds from any Moulin Rouge movie that was produced. Under the contract, LaMure expressly retained title to the copyright for the Moulin Rouge story. Soon after entering into the contract with LaMure, Ferrer was contacted by movie producer John Huston, who invited Ferrer to play the lead role in a planned movie production of Moulin Rouge. Ferrer accepted the movie role and agreed to sell his Moulin Rouge production rights to Huston. Huston paid Ferrer a salary in exchange for Ferrer’s personal services as an actor, plus a participation interest in the movie proceeds, in exchange for the rights that Ferrer held under his contract with LaMure. On Ferrer’s federal tax return, he reported his salary from Huston as ordinary income and his participation-interest payments from Huston as capital gain. The federal tax commissioner (commissioner) (defendant) issued a deficiency notice against Ferrer, determining that the participation-interest payments constituted ordinary income. Ferrer petitioned the United States Tax Court for a redetermination. The tax court entered judgment in favor of Ferrer, and the commissioner appealed to the United States Court of Appeals for the Second Circuit.