Herwig v. United States

• Decision Date: 03 June 1952
• Docket Number: No. 49561.,49561.
• Citation: 105 F. Supp. 384
• Parties: HERWIG et al. v. UNITED STATES.
• Court: U.S. Claims Court

105 F. Supp. 384

HERWIG et al. v. UNITED STATES.

No. 49561.

United States Court of Claims.

June 3, 1952.

John P. Allison, New York City, for the plaintiff. Silverson & Allison, New York City, were on the briefs.

J. H. Sheppard, Washington, D. C., with whom was Acting Asst. Atty. Gen. Ellis N. Slack, for the defendant. Andrew D. Sharpe, Washington, D. C., was on the brief.

Before JONES, Chief Judge, and LITTLETON, WHITAKER, MADDEN and HOWELL, Judges.

HOWELL, Judge.

Plaintiffs seek to recover a portion of federal income taxes paid by them in the year 1945 on the proceeds received by plaintiff Krakower from the Twentieth Century-Fox Film Corporation for the sale of the exclusive motion picture rights to her book "Forever Amber." As residents of California, plaintiffs each reported one-half of the amount received as income under the community property laws of that State.

The maiden name of plaintiff, Kathleen Winsor Krakower, was Kathleen Winsor. During the period herein involved she was the wife of Robert J. Herwig whom she married in 1936 while both were students at the University of California. Throughout the calendar year of 1945 both plaintiffs were citizens of the United States and residents of California, though plaintiff Herwig was then serving overseas in the Marine Corps. Subsequent to the filing of the petition in this cause, Kathleen Winsor Herwig married Arnold Krakower, prior to which time she had separated from plaintiff Herwig, and an appropriate motion was filed showing the change of name. Throughout the proceedings before the commissioner of this court plaintiff Krakower designated herself by her maiden name Kathleen Winsor and hereinafter she will be referred to by said maiden name of Winsor or as plaintiff.

In 1943 Kathleen Winsor completed the novel originally entitled "Wings of the Morning" which was later changed to "Forever Amber." On March 2, 1944, Miss Winsor entered into a contract with The Macmillan Company for the publication of her book. The terms of that contract reserved to her the motion picture and certain other specified rights to the literary work.

On January 8, 1945, Miss Winsor entered into a contract with Twentieth Century-Fox Film Corporation, designated as "Purchaser" under the contract, in which she as owner did "grant, convey and assign" the exclusive motion picture rights in and to her literary property for $125,000 in cash plus additional payments not to exceed $75,000. After the deduction of certain commissions she received the net amount of $165,000 for these rights.

The principal issue before us is whether her profit from this transaction was taxable as long-term capital gain. That in turn depends upon whether the transaction constituted a sale of capital assets held for over six months.

From the chronology of dates above set forth, it is obvious that the motion picture rights, having been reserved under the publishing contract entered into March 1944, had been held considerably in excess of six months at the time of their disposition in January 1945.

However, in order to ascertain whether the movie rights were a capital asset we must first determine whether the transaction between Miss Winsor and the Twentieth Century-Fox Film Corporation, disposing of her motion picture rights in "Forever Amber" constituted a "license" or a "sale." In the event the transaction be regarded as a sale, then we must decide whether the property transferred was held primarily by Miss Winsor for sale to customers in the ordinary course of her trade or business. Section 117 (a)(1) of the Internal Revenue Code; 26 U.S.C. § 117 (a)(1) (1946 Edition), provides in part as follows:

"(1) Capital assets. The term `capital assets' means property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, * * *."

The contract with Twentieth Century-Fox Film Corporation provided in part:

"First: The owner does hereby grant, convey and assign unto the Purchaser, its successors and assigns forever:

"(a) The sole and exclusive motion picture rights and motion picture copyright throughout the world in and to said literary property.

"(b) The sole and exclusive right, throughout the world, to mechanically produce, reproduce and license the reproduction of * * * all or a part of the theme, text and/or dialogue contained in said literary property.

"(c) The sole and exclusive right to make, produce, adapt, sell, lease, rent, exhibit, perform and generally deal in and with and copyright motion picture versions of said literary property, * * * to add to and subtract from the literary property, * * and to register and obtain copyright therein, throughout the world * *."

A separate assignment simultaneously executed also contained these provisions.

The contention of the plaintiff that the above language clearly expresses an intent to sell the motion picture rights is met by the defendant's contention based upon the indivisibility of a copyright as an individual thing which cannot be split up and partially assigned either as to time, place, or particular rights or privileges, in less than the sum of all the rights comprehended in the copyright; and that while exclusive rights may, however, be granted, limited as to time, place, or extent of privileges which the grantee may enjoy, such limited rights operate merely as licenses.

This concept of the indivisibility of a copyright has been embodied in a ruling of the Commissioner of Internal Revenue in I. T. 2735, XII-2 Cum.Bull. 131 (1933) in which he ruled in substance that a copyright constituted a single unit of property and that any rights granted thereunder by the author were merely licenses and that amounts paid for the rights granted constituted royalties which were taxable as ordinary income.

The copyright act provides that a person entitled to a copyright by complying with the provisions for registration, including the deposit of copies, 17 U.S.C. §§ 5, 10, 11, 12, shall have several "exclusive rights" which are specifically enumerated in the five subsections of Section 1 of the statute, 17 U.S.C. § 1. They include the right to print, publish, and sell copies (subsection (a)), the right to translate, dramatize, convert into a novel (subsection (b)), to perform publicly (subsection (c)), to make transcriptions or records, to exhibit (subsection (d)), and to reproduce mechanically (subsection (e)). The "one package rule" of the tax law is said to have been used to rationalize the conviction that a transfer of less than all the rights conferred under Section 1 of the copyright act makes the transferee "a mere licensee" entitled to less judicial aid than an "assignee" — proprietor. Amdur, Copyright Law and Practice 788-803, 913-924 (1936); 13 C.J. 1094-1096; 18 C.J.S., Copyright and Literary Property, § 82 et seq., p. 205, et seq.

While this court has not been called upon to pass upon this question of the indivisibility of copyrights, other courts have had occasion to squarely consider the matter. In Goldsmith v. Commissioner of Internal Revenue, 143 F.2d 466, 467, the Second Circuit Court of Appeals unanimously held in result but not in theory that an author's assignment of motion picture rights constituted a sale, and in a second concurring opinion, concurred in by Judge Swan, Judge Learned Hand rejected the "one package rule" or theory of indivisibility and stated:

"Copyright and literary property are monopolies; they entitle the owner to prohibit various kinds of reproduction, and to relieve individuals of these prohibitions by licenses. The licenses may do no more than excuse what would otherwise be infringements; or they may be exclusive, as in the case at bar. An exclusive license requires the author to protect the licensee against other infringement, and is for most purposes treated as `property'. I think that it is `property' within § 117 (a)(1); that its grant is a `sale'; * * *."

In Wodehouse v. Commissioner of Internal Revenue, 4 Cir., 166 F.2d 986, the taxpayer was a nonresident alien author who had transferred to the Curtis Publishing Company his American, Canadian, and South American serial rights in three stories and to the Hearst's International Cosmopolitan Magazine his American and Canadian serial rights in a fourth story for a lump-sum consideration in each case. The Commissioner of Internal Revenue contended that the proceeds of these transactions were taxable as "fixed or determinable annual or periodical gains, profits, and income * * *" from United States sources under Section 211 (a) of the Internal Revenue Code (1939), 26 U.S.C. § 211 (a). The taxpayer argued that the amounts received were the proceeds of sales and hence not within Section 211 (a).

In writing for a majority of the courts, Judge Soper rejected the theory that a copyright or literary property is an indivisible unit so that any attempt to split it up results merely in grants of licenses. At pages 989 and 990 of 166 F.2d he said:

"The language of some of the decisions gives seeming support to this idea, but when the exact point in controversy in these cases is ascertained, it will be seen that the courts were concerned with procedural matters and did not undertake to controvert the undeniable fact that serial rights, book rights, dramatic production rights and motion picture rights of a literary production are property rights which may be and are separately and effectively bought and sold in the literary market. * * *

"The authorities cited in Rohmer v. Commissioner 2 Cir., 153 F.2d 61, supra, on the indivisibility of the copyright do not show that there is anything inherent in the nature of a copyright which renders impossible the

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