Cory v. Commissioner of Internal Revenue

• Decision Date: 09 March 1956
• Docket Number: Docket 23790.,No. 195,195
• Citation: 230 F.2d 941
• Parties: Daniel M. CORY and Margot Cory, his wife, Petitioners-on-Review, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-on-Review.
• Court: U.S. Court of Appeals — Second Circuit

230 F.2d 941 (1956)

Daniel M. CORY and Margot Cory, his wife, Petitioners-on-Review, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-on-Review.

No. 195, Docket 23790.

United States Court of Appeals Second Circuit.

Argued February 14, 1956.

Decided March 9, 1956.

Washburn, Gray & Jones, New York City, Watson Washburn, New York City, of counsel, for petitioners-on-review.

H. Brian Holland, Asst. Atty. Gen., Lee A. Jackson, Morton K. Rothschild, Washington, D. C., for respondent-on-review.

Before CLARK, Chief Judge, and FRANK and HINCKS, Circuit Judges.

FRANK, Circuit Judge.

1. The sole issue is whether the amount of income reported in 1944, as derived from Santayana's "Persons and Places," constituted ordinary income or a long term capital gain. In answering, we must decide whether the transaction between Cory and Scribner's constituted a "sale" or merely the granting of a license.

The Tax Court held that Cory gave Scribner's a license. That Court based its decision, in part, on the fact that a part only of the "bundle of rights" inhering in the copyright was transferred to Scribner's, since Cory assigned neither foreign publishing rights (other than Canadian) nor movie or dramatic rights. Furthermore, the Tax Court found that Cory had not transferred the first serial rights even for the United States and Canada. In addition, the Tax Court held there was no "sale" because no definite price was fixed for the transfer: Payments to Cory were to be measured by future sales of the book. The evidence supports the Tax Court's findings which are, therefore, not "clearly erroneous."

The Tax Court thought the previous pertinent decisions not too clear. This difficulty, and its bearing on Cory, would have interested Santayana, with his sense of irony, his detachment, his mockery of "the runner's heat with gentle wonder and laughter sweet," his emphasis on human limitations and on individual human perspectives,¹ his view that human knowledge "is a torch of smoky pine that lights the pathway but one step ahead," his jibes at the common belief that opaque language must denote "profound knowledge," his smile at efforts to "grope for a deep truth in * * * obscurity."²

To grope our way through obscurity, in this area, we must put to one side, as irrelevant here, cases dealing with the taxation of transfers of interests in copyrights (or patents) by nonresident aliens:³ The decisions in those cases interpreted Sections 211 and 212 of the 1939 Internal Revenue Code, 26 U.S.C.A., and similar provisions in the prior acts, which embodied the Congressional purpose to tax "those kinds of income" of such aliens "which had been found to be readily withholdable at their * * * sources", as the Supreme Court remarked in Commissioner of Internal Revenue v. Wodehouse, 337 U.S. 369, 388-392, 69 S.Ct. 1120, 1130, 93 L.Ed. 1419. Quite different is the Congressional purpose embodied in Section 117 covering capital gains, since that section does not ordinarily apply to non-resident aliens. Accordingly, as we have previously several times observed,⁴ other considerations must guide our determination whether the profit resulting from a transfer by a citizen of interests in copyrights is a capital gain or ordinary income.

In Commissioner of Internal Revenue v. Wodehouse, supra, the Supreme Court apparently accepted the contention that it did "not properly reach the fine questions of title, or of sales or copyright law, * * * as to the divisibility of a copyright, or as to the sale of some interest in a copyright." But here we must consider such "fine questions."

In Goldsmith v. Commissioner, 2 Cir., 143 F.2d 466, 467, a case involving a citizen taxpayer, Judge Learned Hand, speaking for the majority held that the transfer of part of the bundle of rights (making up the copyright) for a definite sum, yielded a sale. However, he concluded that the vendor, a professional author, held the interests in the copyright "`for sale to customers in the ordinary course'" of his business, and were hence excluded from the definition of a capital asset in Section 117(a) (1) (A).

Mr. Justice Frankfurter, dissenting in Wodehouse, and speaking for two other Justices, approved Judge Hand's ruling in Goldsmith. He maintained that the crucial test of sale was not whether the transfer included the entire bundle of rights but whether there had been a transfer "absolutely" of a "distinct right conferred by the Copyright Law" under "terms of payment which do not depend on future use by the transferee." See 337 U.S. at pages 423-424, 69 S.Ct. at page 1146. The majority of the court in Wodehouse rested its decision on the interpretation of the peculiar provisions of the Code relating to non-resident alien individuals. Accordingly, the majority did not express any lack of agreement with Mr. Justice Frankfurter's rejection of the theory of the "indivisibility of the copyright." See also Herwig v. United States, 105 F.Supp. 384, 122 Ct.Cl. 493; Fulda, Copyright Assignments and the Capital Gains Tax, 58 Yale L.J. 245 (1949); cf. Fields v. Commissioner, 2 Cir., 189 F.2d 950.

If we adopt the reasoning of Judge Hand and Mr. Justice Frankfurter, it follows that the mere fact that Cory transferred less than his entire bundle of rights does not automatically brand this transaction as but a license.

However, it does not necessarily follow that, therefore, the transaction was a sale. For here the transaction lacked an element implicitly considered in Judge Hand's opinion in Goldsmith, supra, and explicitly stressed by Mr. Justice Frankfurter in Wodehouse: At the time of the transfer, the amount of payments to the transferor remained indeterminate, dependent wholly on the sales of the book by the transferee.

We do not now decide that a transfer by a citizen of but a part of the bundle for a definite sum, or a transfer of...