Originally published on Forbes.com on July 31st, 2012
Tony Martin, who worked as an entertainer for over 80 years died last Friday at the age of 98. I’m sure he must have appeared in Variety and similar entertainment publications, but what really impresses me is that he also appears in Bittker and Eustice (If you ever want to convert a corporate tax geek to Christianity, tell him that the Bible is the Bittker and Eustice of religion.) The way he made it into the hallowed halls of tax history is tied into his career comeback, so we can start there.
Tony Martin’s singing and movie career was at a high point in 1941, when he appeared in Ziegfeld Girl
Tony Martin was, of course, a member of the greatest generation, so as you would expect he entered the military and served honorably. That would get him a lot of credit nowadays, but for his age group that was just table stakes. He had initially gone into the Navy and there was a rumor that he had tried to bribe his way into a commission. Because of the rumors, Tony Martin ended up in the Army as an enlisted man. That was enough to seriously hurt his career. He had trouble getting work from the studios or the record labels. He needed to do something to reestablish himself. His agent Nat Goldstone came up with a plan. We can let the Tax Court take the story up from here:
After various unsuccessful efforts on the part of petitioner and Goldstone to obtain employment in Hollywood for petitioner, it was determined that it was necessary for petitioner to make a good motion picture if he were once again to achieve public acceptance and reestablish himself in the motion picture industry. Goldstone knew of an available property entitled “Pepe le Moko,” based originally on a French novel, which he believed could be utilized for a dramatic motion picture with music. Previously, two dramatic motion pictures had been made from “Pepe le Moko,” and each had been successful, resulting in Hedy Lamarr becoming a star and benefiting Charles Boyer substantially in his career. Petitioner, Goldstone, and others considered “Pepe le Moko” as good subject matter for a dramatic picture with music and, therefore, a good vehicle through which petitioner might rehabilitate his career and reestablish himself in the motion picture industry.
For this purpose petitioner, Goldstone, and several others caused to be organized a corporation under the name of Marston Pictures, Inc., (hereinafter called Marston) with a total capital stock of $25,000, subscribed to in the following amounts: Petitioner, $6,250; Goldstone $13,750; others, $5,000. It was customary at that time in undertaking an independent production to enter into a partnership arrangement with a major studio which would provide the physical facilities for production and defer its overhead, thereby making it possible for the independent producer to secure primary financing, in the form of a bank loan for a percentage of negative costs (the cost of making the picture), so-called first money. In such cases the independent producer, in the instant case Marston, is obliged to arrange for secondary financing, or so-called second money, which is the last money to go into the financing of the picture and also the last money to be finally repaid. With the aid of Rufus LeMaire of U-I, Goldstone was able to overcome the objections to engaging in any production with which petitioner would be associated, largely because of the personal financial undertakings of petitioner and Goldstone. Marston was thus able to enter into an arrangement with U-I for the production of a motion picture based on the “Pepe le Moko” property to be entitled “Casbah.”
The picture was first budgeted at about $1,200,000, of which the Bank of America was putting up some 70-odd per cent. Goldstone meanwhile had been assured that the second money would be forthcoming as soon as needed, and that the preproduction moneys put up personally by him would be returned immediately after all of the elements were put together (a practice customary in the industry). Goldstone, therefore, was permitted to engage people and to make other commitments, and production of the picture was commenced.
There is a long story as to why the “second money” did not arrive as anticipated. This created a scramble, which caused Tony Martin to have to put in more money.
To provide the so-called second money, petitioner loaned Marston $12,000, Goldstone loaned $41,500, and others loaned varying small amounts. These loans were evidenced by promissory notes executed by Marston to the several lenders, each dated August 1, 1947, and due and payable November 15, 1948, bearing interest at 6 per cent per year until due.
Casbah was not a hit and did not produce anything for the “second money” investors.
It did, however, revive Mr. Martin’s career. So he must have taken some comfort in that when he wrote the $12,000 off as a bad debt – a business bad debt. The IRS, however, thought of it more as an investment and wanted Mr. Martin to have a capital loss rather than an ordinary loss. The Tax Court sided with Mr. Martin/
Petitioner sustained a loss from a bad debt proximately related to the conduct of his trade or business.The character of the debt for this purpose is not controlled by the circumstances attending its creation or its subsequent acquisition by the taxpayer or by the use to which the borrowed funds are put by the recipient, but is to be determined rather by the relation which the loss resulting from the debt’s becoming worthless bears to the trade or business of the taxpayer. If that relation is a proximate one in the conduct of the trade or business in which the taxpayer is engaged at the time the debt becomes worthless, the debt is not a non-business debt for the purpose of this section.
The loan which here gave rise to the bad debt in issue was not contemplated at the time of organization of the enterprise. It appeared to everyone at that time that all the necessary financing was available to Marston to complete and distribute the movie “Casbah.” But after commencing production, the so-called second money which had been promised was withdrawn and additional financing which was necessary to complete production could only be obtained from petitioner, Goldstone, and a few others interested in the production, individually. This was done primarily with a view to the necessity of so completing the picture if petitioner was once again to be able to achieve a measure of public acceptance and thus rehabilitate his career. At least such motivation must be considered as petitioner’s primary purpose even if Goldstone or the others were more interested in personally protecting the investment they had already made in the production.
I have to admit that even though I always scan the New York Times obituaries, Tony Martin’s passed me by. Even if I had read it though, I would not have known to look for the Tax Court decision, if I had not gotten a tip from my friend Julian Block.
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