Wodehouse v. Commissioner of Internal Revenue

• Court: U.S. Court of Appeals — Fourth Circuit
• Writing for the Court: PARKER, , and SOPER and DOBIE, Circuit
• Citation: Wodehouse v. Commissioner of Internal Revenue, 178 F.2d 987 (4th Cir. 1949)
• Decision Date: 21 December 1949
• Docket Number: No. 5694.,5694.
• Parties: WODEHOUSE v. COMMISSIONER OF INTERNAL REVENUE.

178 F.2d 987 (1949)

WODEHOUSE v. COMMISSIONER OF INTERNAL REVENUE.

No. 5694.

United States Court of Appeals Fourth Circuit.

Argued on Rehearing November 15, 1949.

Decided December 21, 1949.

Watson Washburn, New York City, for petitioner.

Melva M. Graney, Special Assistant to the Attorney General (Theron Lamar Caudle, Assistant Attorney General, Sewall Key, George A. Stinson and Helen Goodner, Special Assistants to the Attorney General, on brief), for respondent.

Before PARKER, Chief Judge, and SOPER and DOBIE, Circuit Judges.

DOBIE, Circuit Judge.

This case has been before us once before, 4 Cir., 166 F.2d 986. There, with one judge dissenting, we held that lump-sum payments, received in 1938 and 1941 by nonresident alien author from domestic publisher under agreement requiring publisher to obtain copyright on contents of its periodical and reassign to author on demand after serial publication had been completed all rights in story except American serial rights, were not within revenue statute imposing tax on dividends, etc., or other fixed or determinable "annual or periodical gains," but were exempt as proceeds from sales of "personal property." 17 U.S.C.A. §§ 28, 101, 112; 26 U.S.C.A. §§ 119(a), 143(b), 211(a) (1) (A).

The stories in question, written by Wodehouse (hereinafter called taxpayer), were "The Cow Creamer" and "Uncle Fred in the Springtime." Certiorari was granted by the United States Supreme Court, 335 U.S. 807, 69 S.Ct. 34. Then the Supreme Court (three justices dissenting), 337 U.S. 369, 69 S.Ct. 1120, reversed us and the majority opinion, 337 U.S. at page 395, 69 S.Ct. at page 1132 ended with these words: "For the foregoing reasons, we hold that the receipts in question were required to be included in the gross income of the respondent for federal income tax purposes. The judgment of the Court of Appeals accordingly is reversed and remanded for further proceedings consistent with this opinion."

Circuit Judge Soper's opinion in our Court, 166 F.2d at page 992, concluded thus: "Since we have reached the conclusion that the payments received by the taxpayer were not taxable at all, we have no occasion to consider the question whether the Commissioner should have taxed less than the total amount received from the Curtis Publishing Company which covered publication rights not only in the United States but also in Canada. Nor have we occasion to consider the question whether the taxpayer could reduce his taxable income by transferring to his wife a share of the proceeds from the sale of his literary productions before publication."

Accordingly, we are now called on to decide the two questions left undecided in our previous opinion: (1) Was taxpayer entitled to a deduction because the total amount paid to him by the Curtis Publishing Company included serial rights to the two stories not only in the United States but also in Canada; and (2) Was taxpayer entitled to deduction by virtue of the fact that after the stories were completed (but before either publication or copyright) he assigned a one-half interest in the stories to his wife, Ethel Wodehouse. Both these questions were decided adversely to the taxpayer by the Tax Court of the United States.

The Tax Court's holding here on the first question was based almost entirely upon the following extract, from the opinion of that same Court in Sax Rohmer, 5 T.C. 183, which was affirmed 2 Cir., 153 F. 2d 61, certiorari denied 328 U.S. 682, 66 S.Ct. 1367, 90 L.Ed. 1632: "At the time the licensing agreement was settled upon the parties apparently made no effort to segregate the value paid for the United States rights from that paid for the Canadian rights. The circulation figures do not furnish a sufficient basis upon which we could determine that any of the income was derived from sources outside the United States. Since there is no basis upon which we could properly make any allocation, it follows that the full amount must be deemed to be from sources within the United States."

Besides the Sax Rohmer case, the Tax Court cited only Estate of Alexander Marton, 47 B.T.A. 184. The Circuit Court of Appeals in the Sax Rohmer case, speaking through Circuit Judge Frank, 153 F.2d at page 65, said: "The publishing company acquired for $10,000 both the American and Canadian serial rights. If the taxpayers had shown that more was paid than would have been if the Canadian rights had not been acquired, then, to that extent, there would have been no tax since the additional amount paid would not have been a royalty for the use of the copyright in this country. But taxpayers, who had the burden, offered no direct proof on that subject. An obvious and easy source of such proof, had the facts been as taxpayers contended, would have been the testimony of one of the editors of Liberty Magazine, but none of those editors was called as a witness. Instead, the taxpayers offered proof that the United States circulation of the magazine was 2,302,296 and the Canadian, 190,622, and testimony to the effect that from $1,000 to $1,500 each had been paid by some magazines for Canadian serial rights to the works of other lesser authors. The Tax Court decided that this evidence did not `furnish a sufficient basis upon which' it could `determine that any of the income was derived from sources outside the United States.' Although, if we were called upon to decide that question of fact, we might regard the evidence as sufficient, we cannot say that the Tax Court unreasonably refused to do so. For, at best such evidence would lead to conjectural inferences."

And, at the end of the opinion, 153 F.2d at page 65, is appended this note: "Thus advertisers might pay little more, and perhaps nothing more, for the small Canadian circulation; they might believe that publicity directed to 190,622 Canadians had nothing remotely like the value of similar publicity directed to the same number of dwellers in this country. Amounts paid to authors for Canadian serial rights to certain stories might throw a very dim light on the value to a magazine of the Canadian serial rights to Rohmer's story."

We are more deeply impressed by the reasoning of Circuit Judge Learned Hand in his concurring opinion in Molnar v. Commissioner, 2 Cir., 156 F.2d 924, 926-927: "It seems to me that in Rohmer v. Commissioner, 2 Cir., 153 F.2d 61, we overruled sub silentio, Cohan v. Commissioner, 2 Cir., 39 F.2d 540, a decision which had stood for sixteen years, had been often cited, never with disapproval I think. Moreover, Rohmer v. Commissioner, supra, so far as I can see, is directly contrary to Helvering v. Taylor, 293 U.S. 507, 513, 515, 55 S.Ct. 287, 79 L.Ed. 623, which I had supposed decided that, when it appeared that a taxpayer was entitled to something, it was an error for even the Tax Court to deny him any allowance whatever, although of course we should be bound to accept whatever that allowance might be. Here it is clear beyond doubt that the payments were made in some part for the foreign copyrights; yet the Tax Court has refused any allowance at all because Molnar has not shown how much; and I am unable to understand my brothers' reasoning by which they reconcile that result with the law, as I understand it was before Rohmer v. Commissioner, supra. However, I think that only in the rarest instances should we overrule so recent a decision of our own court, however much in a court differently constituted the judges may disagree with it; for it is as much the function of the Supreme Court to decide differences within a circuit as between circuits. Therefore I yield to the authority of Rohmer v. Commissioner, supra, and what I am now saying is only to record my personal disagreement." See, also, Hochschild v. Commissioner, 2 Cir., 161 F.2d 817, 820.

In its opinion below, the Tax Court stated: "So here, there is no evidence of record disclosing that when the publishing company accepted the stories of the petitioner under the agreement indicated in the memoranda of acceptance, it and the petitioner (or the petitioner's agent), made any effort to segregate the value of the Canadian rights from the United States rights. In the cases at bar, the petitioner offered testimony showing the relative circulation of the magazines in the United States and Canada, the dates of publication of the literary productions and the opinion of the literary agent as to the value of the Canadian rights. These collateral evidential facts do not afford us a reliable basis for assigning and fixing a value, if any, to the Canadian rights. The parties to the contract were best able to make a proper allocation and segregation of the respective values. They neglected or chose not to do so. The omission, or failure, of such proof can not be corrected by a guess as to the value of a right which may have no value at all. We sustain the respondent's contention on this issue."

We quote from the testimony given in the Tax Court by Paul Reynolds, the literary agent of taxpayer, who represented taxpayer in dealing with the Curtis Publishing Company.

"Q. How long has your firm been literary agents? A. Since 1893.

"Q. Are you familiar with the sales of stories in Canada and the United States over the period of years in which you have been in business? A. Yes, I am.

"Q. Have you made sales yourself in behalf of authors both in Canada and the United States? A. Yes, we made sales individually in Canada and occasionally individually in the United States, much more rarely.

"Q. And frequently have you made sales together? A. Often together but there are very few magazines in this country who will buy American rights without Canadian.

"The Court: I cannot understand you.

"The Witness: We often made sales of American and Canadian rights, and we have made sales of Canadian rights, and we have occasionally, but very rarely, made sales of American serial rights solely. Nearly all the American books in the country circulate in Canada and they...