Rohmer v. Comm'r of Internal Revenue

• Decision Date: 06 June 1945
• Docket Number: Docket No. 4329.
• Citation: 5 T.C. 183
• Parties: SAX AND ROSE ELIZABETH ROHMER, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

5 T.C. 183

SAX AND ROSE ELIZABETH ROHMER, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 4329.

Tax Court of the United States.

Promulgated June 6, 1945.

business in the United States and not having an office or place of business therein, received from an American publishing company a lump sum payment for the first and second American and Canadian serial rights in a book written by him. Petitioner's United States agent received the payment and retained 10 percent for his commission. Held: First, the payment was in the nature of a royalty paid for a license to use the serial rights and represents taxable income within the meaning of section 211(a) of the Internal Revenue Code; second, the total payment was received from sources within the United States, since the petitioner has failed to show by convincing proof that a specific part thereof was paid for the Canadian rights and was derived from sources without the United States; and, third, the respondent correctly disallowed certain exemptions and credits claimed by petitioner. Watson Washburn, Esq., and Royal E. Mygatt, Esq., for the petitioners.

Bernard J. Long, Esq., for the respondent.

Petitioner, a nonresident alien, not engaged in a trade or

This case involves income tax for the taxable year 1940. The petitioners are nonresident aliens, not engaged in trade or business within the United States and not having an office or place of business therein. The Commissioner determined a deficiency of $77.61. The petitioners claim they are entitled to a refund of $1,797.50.

Four questions are raised by the parties: (1) Whether the petitioners are taxable on the sum of $10,000 received from McFadden Publications, Inc., in full payment for the first and second American and Canadian serial rights to a manuscript entitled ‘The Island of Fu Manchu‘; (2) whether a part of the compensation received by the petitioners from McFadden Publications, Inc., represented income received by them from sources without the United States; (3) whether commissions paid to petitioner's literary agent are deductible in computing petitioner's tax under section 211 of the Internal Revenue Code; and (4) whether the petitioners are entitled to a personal exemption of $800.

FINDINGS OF FACT.

The petitioners, husband and wife, are British subjects and reside in Little Gatton, Reigate Hill, Surrey, England. During the taxable year the petitioners were nonresident aliens, not engaged in a trade or business in the United States and having no office or place of business in the United States. A joint nonresident alien income and defense tax return for the calendar year 1940 was filed on June 14, 1941, with the collector of internal revenue at Baltimore, Maryland. Sax Rohmer will hereinafter be referred to as petitioner.

Paul R. Reynolds & Son is a literary agent, engaged in business in the United States, and during the year 1940 was exclusive literary agent of the petitioner in this country. The agent received from Rohmer in 1940 a story entitled ‘The Island of Fu Manchu‘ and secured an offer from McFadden Publications, Inc., for the first and second American and Canadian serial rights. The total consideration paid for the above serial rights was $10,000 and was represented by two checks, one in the amount of $1,000 and the other in the amount of $9,000. These amounts, respectively, were paid to Paul R. Reynolds & Son, as agent, on July 10 and August 21, 1940. The only written contract between McFadden Publications, Inc., and Sax Rohmer, or his literary agent, covering the manuscript in question is that contained above the endorsement to the two checks received in payment for the manuscript. The rights to the manuscript granted to McFadden Publications, Inc., which are contained above the endorsement to the checks, consist of the following:

The payee represents he is agent of the Author named below, and, as agent, acknowledges full payment for manuscript(s) entitled

THE ISLAND OF FU MANCHU

By Sax Rohmer

With authority to copyright and with privilege of change of title; and warrants and represents that such composition is original and if not fiction, also factually true, and that the author above is the sole owner thereof. Any alteration hereof makes this check void.

a) With 1st and 2nd American & Canadian serial rights and right to export copies and republish in foreign editions of publication. No prior publication anywhere in the world except by special written agreement. No book publication before magazine publication is completed.

INCLUDING THE RIGHT TO ADVERTISE, DESCRIBE OR DRAMATIZE THE SAID STORY AND/OR TO PRESENT THE SAME IN DRAMATIC OR OTHER FORM AS PART OF LIBERTY RADIO BROADCAST.

By first and second serial rights is meant the right to magazine and newspaper publication of the story in serial form. The rights to the story subsequently published in book form, or produced as a motion picture or as a stage production, were retained by the petitioner. The book-publishing rights were subsequently licensed to Doubleday Doran & Co. under a royalty agreement.

The arrangement of Paul E. Reynolds & Son with the petitioner was that it should act as petitioner's exclusive agent for the sale in the United States and Canada of his literary works. It was understood that the agent would be entitled to 10 percent of the gross amount received from McFadden Publications, Inc., as a commission for services. This commission was the customary amount paid to literary agents. It was the practice of the agent to deposit the entire proceeds in its own bank account and thereafter from time to time to remit to Rohmer 90 percent of the proceeds. The story was licensed to McFadden Publications, Inc., for publication in Liberty Magazine in the United States and Canada. The record does not show whether the story was ever, in fact, published in serial form by Liberty Magazine in the United States or in Canada. The average Canadian circulation of Liberty Magazine for a period of one year succeeding July 1, 1940, was approximately 7 percent of the combined circulation in the United States and Canada.

In computing their income and defense tax return the petitioners deducted from gross income the commissions paid the literary agent during the year 1940 and also deducted 7 per cent of the amount received from McFadden Publications, Inc., as income allegedly received from sources without the United States.

The Commissioner has determined that petitioners are not entitled to the deductions and are liable for tax on additional income in the amount of $1,766.53, resulting in a total net income of $11,364.29. The net income as disclosed by the return was $9,597.76. The total tax as computed by the Commissioner was $1,875.11, of which the sum of $1,797.50 represented income tax paid at source, leaving a deficiency of $77.61 in income tax.

OPINION.

ARUNDELL, Judge:

The income in question was received by the petitioner, Sax Rohmer, through his United States agent, in payment for the first and second serial rights to a story written by him entitled ‘The Island of Fu Manchu.‘ Petitioner takes the position that the income was derived from the sale of personal property, which is not taxable to him, and that if it was not derived from a sale the income does not fall within the category of ‘other fixed or determinable annual or periodical gains, profits, or income‘ because it was a lump sum payment. The applicable statute, section 211(a) of the Internal Revenue Code, is set out in the margin.¹ Petitioner retained the rights to book publication, motion picture production, and all other rights that were not specifically licensed to McFadden Publications, Inc. The respondent has determined that the money received by petitioner was a royalty and represents taxable income under the statute.

There are several cases dealing with the same problem which require us to view this transaction not as an outright sale of the property, but as the grant of a license for the use of the property in serial story form. There was no transfer of title necessary to a completed sale. The income is thus in the nature of a royalty. Sabatini v. Commissioner, 98 Fed.(2d) 753; Ehrlich v. Higgins, 52 Fed.Supp. 805; Estate of Alexander Marton, 47 B.T.A. 184; Irving Berlin, 42 B.T.A. 668. However, the petitioner argues that the decision in the Sabatini case, supra (the leading case), is limited by the decision in Goldsmith v. Commissioner, 143 Fed.(2d) 466; certiorari denied, 323 U.S. 711. In that case the taxpayer, a citizen and resident of the United States, assigned the motion picture rights in a play which he had written and he claimed that the payment received by him should be taxed as a gain from the sale of a capital asset. The Commissioner treated the payments as ordinary income and determined the deficiency for each year accordingly. We sustained the Commissioner and held that income was from royalties and not from the sale of the asset itself. We also sustained the Commissioner's alternative contention that, even if the payments were receipts from a sale of property, they were not from the sale of a capital asset as that term is defined in section 117(a)(1) of the appropriate revenue act, since if any property was sold it was a character subject to an allowance for depreciation provided for under the act. On review by the Circuit Court of Appeals for the Second Circuit our decision was affirmed. On of the judges was of the opinion that the payments were royalties, taxable as ordinary income, and two of the judges, in a concurring opinion, expressed the view that the payments were ordinary income because they were derived from ‘property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business ‘ within the meaning of section 117(a)(1), rather than a capital asset. On the basis of that concurring opinion and upon General Aniline & Film Corporation v. Commissioner, 139 Fed.(2d)...