*903 1. Petitioner, a nonresident alien, executed contracts abroad under which he granted rights to publish some of his literary productions in the United States on a royalty basis, and also the right dramatize one of his books and present the play in the United States and Canada on a royalty basis. Held that the payments received for the United States rights so granted are rentals or royalties for the privilege of using in the United States copyrights or similar property and are gross income from sources within the United States.
2. Petitioner also executed abroad contracts granting world-wide motion picture rights to some of his productions inconsideration of lump-sum payments. Held, the sums received under such contracts are not income from sources within the United States and are not to be included in gross income.
3. Twenty-five percent penalties asserted by respondent sustained in the absence of a showing of reasonable cause for delinquency.
*706 The respondent has determined deficiencies in income tax for the years 1921 to 1928, *904 inclusive, and has asserted penalties for delinquency in filing returns for the years 1921 to 1925, inclusive, as follows:
| Year | Deficiency | Penalty |
| 1921 | $19.08 | $4.77 |
| 1922 | 2,190.71 | 547.68 |
| 1923 | 1,394.81 | 348.70 |
| 1924 | 8,720.71 | 2,180.17 |
| 1925 | $16,702.74 | $1,175.68 |
| 1926 | 11,084.14 | |
| 1927 | 1,415.93 | |
| 1928 | 522.99 |
Petitioner alleges but one error, namely, that respondent erred in including in taxable income the income received from the sale of publication rights, motion picture rights, and dramatic rights in petitioner's literary works. At the hearing counsel for the parties placed in evidence certain contracts under which petitioner granted reproduction rights to some of his literary productions, petitioner's income tax returns, and revenue agents' reports. By stipulation the parties also placed in evidence a memorandum previously filed with the Bureau of Internal Revenue, excluding, however, the conclusions and computations set forth therein.
FINDINGS OF FACT.
Petitioner is a nonresident alien individual, a subject of Great Britain, with residence in London, England. He is an author by profession. Neither during the years under review nor prior*905 thereto was the petitioner ever in the United States.
During the taxable years petitioner was represented in the United States by the firm of Brandt & Brandt (formerly Brandt & Kirkpatrick), whose business was that of authors' representatives. This representation began about 1920, when petitioner authorized the firm to enter into negotiations with publishers in this country with a view to determining whether petitioner's literary works could be published in the United States with a satisfactory profit to petitioner. Neither Brandt & Brandt nor the predecessor firm had general authority to negotiate a sale of any of the rights to petitioner's literary works. Such sales as those firms consummated in this country in behalf of petitioner were consummated under authority of letter or cablegram from petitioner relating to the specific contract then pending. Income from such contracts is not in controversy.
The income in controversy arose from the granting of the following rights to petitioner's literary productions: (a) volume and second serial rights; (b) motion picture rights; (c) dramatic rights.
*707 Volume and Second Serial Rights.
During the taxable years*906 petitioner entered into a number of contracts (17 are in evidence) with the Houghton Mifflin Co., publishers, of Boston, Massachusetts. By the terms of the contracts, petitioner "grants and assigns to Houghton Mifflin Co. the volume and second serial rights of" certain named productions of petitioner. Some of the contracts granted to the Houghton Mifflin Co. the exclusive right and power to take out copyrights either in the name of that company or in the name of the petitioner, and in others the company was granted the right to take out a copyright only in the name of petitioner. Under both of these two kinds of contracts the publisher was granted the exclusive right to publish the named productions in the United States during the term of the copyright and any renewals thereof. A few of the contracts contained the statement that "copyright cannot be secured on" the named books and as to these petitioner agreed not to authorize any other publisher to reprint any of his older books as long as the Houghton Mifflin Co. kept in print their editions of the books named in the contracts. Under all of the contracts the publisher agreeed to publish the production at its expense and to pay*907 petitioner either a named percentage, "on their trade list (retail) price for each copy of them sold" or so many cents for each volume sold.
The contract between petitioner and the Houghton Mifflin Co. with reference to the book "Scaramouche" is fairly typical of those contracts wherein a copyright was to be obtained, and the contract between the same parties with reference to the book "Historical Nights' Entertainment" is fairly typical of those contracts where no copyright could be obtained. The material parts of the contract with reference to "Scaramouche", dated September 7, 1920, together with all erasures and insertions are as follows:
Said Sabatini hereby grants and assigns to Houghton Mifflin Company the volume and second serial rights of a work, the subject or title of which is SCARAMOUCHE with exclusive right and power, in their own name, or in the name of said Sabatini to take out copyright thereof, and publish said work during the term of said copyright, in the United States said Sabatini agreeing for himself, his heirs, executors or next kin, to secure the renewal of said copyright on the expiration of the first term thereof, and to grant and assign to*908 said Houghton Mifflin Company sole right to publish said work during the full term of said renewal on the same terms and conditions as for the original term as hereinafter stated. Said Sabatini guarantees that he is sole owner of said work, and has full power to make this grant; that said work is not a violation of any other copyright nor scandalous nor libelous, and that he and his legal representatives will hold *708 harmless and defend said Houghton Mifflin Company against any claim by reason of any such violation of another copyright, or any scandalous or libelous matter in said work.
Houghton Mifflin Company agree to publish said work at their own expense in such style as they deem best suited to its sale; and to pay said Sabatini, his representatives or assigns, fifteen cents for each copy by them sold up to two thousand, twenty cents per copy from two thousand to five thousand, and twenty-five cents per copy on all copies sold over and above that number, not including copies sold at reduced rates for export or reading circle or other special use; and to make an advance payment on publication based upon the advance sales of the book.
The following*909 are extracts from the contract relative to "Historical Nights' Entertainment":
Said Sabatini hereby grants and assigns to said Houghton Mifflin Company the volume and second serial rights of the following-named works written by him
Historical Nights' Entertainment
First and Second Series
for the United States of America.
In consideration of the fact that copyright cannot be secured on these books in the United States, said Sabatini hereby agrees that he will not authorize any other publisher to reprint any of his older books in the United States, nor, so far as he controls the matter, so long as said Houghton Mifflin Company shall keep in print their editions of the above-named books.
Said Houghton Mifflin Company agrees to publish said books at their own expense and risk in such form as they shall deem best suited to their sale, and to pay said Sabatini, his representatives or assigns, a royalty of ten per cent on the list price of all copies sold by them in regular trade channels, and ten per cent on the net price for all copies sold at reduced rates for special use. On copies sold in a special edition at a reduce price, the royalty shall be ten per cent of the net*910 price received. If said Houghton Mifflin Company shall lease said works for issue under another imprint than their own, the net profit thereon shall be divided equally between said Sabatini and said Houghton Mifflin Company.
If said Houghton Mifflin Company shall sell the second serial rights of said works, the net proceeds of such sale shall be divided equally between said Sabatini and said Houghton Mifflin Company.
Each of the contracts authorized the publishers to pay all sums due the petitioner to Brandt & Kirkpatrick or Brandt & Brandt.
Before entering into contracts for the publication of petitioner's books the publisher negotiated with Brandt & Brandt or the predecessor firm. The contract in each case, as finally executed, was prepared by the publisher and submited to the petitioner for acceptance or rejection, and was accepted by the petitioner and his signature affixed thereto in London, England.
Motion Picture Rights.
In the taxable years petitioner entered into contracts whereby he granted motion picture rights to five of his books, to wit, "Gates of Doom", "Strolling Saint", "Bardelys the Magnificent", "Tavern *709 Knight" and "Captain Blood", *911 to certain companies doing business in the United States. Of these works, all except "Tavern Knight" had previously been made the subject of contracts between the petitioner and the Houghton Mifflin Co. The contract relative to "Tavern Knight" with the Houghton Mifflin Co. was made June 7, 1926, while the motion picture rights were granted November 20, 1925. Under each of the contracts the motion picture company acquired world-wide motion picture rights to the named production for a stated period of time for the sum of $20,000. In each case payment was to be made through Brandt & Brandt or the predecessor firm.
In the case of each of the contracts for motion picture rights the picture company carried on preliminary negotiations through the office of Brandt & Brandt or its predecessor. The picture company then drafted the agreement embodying the terms on which it was willing to purchase the production that it was interested in, and that agreement was forwarded to petitioner in London as an offer to purchase, for his acceptance or rejection. All such contracts were accepted by petitioner and his signature affixed thereto in London, the petitioner retaining one copy and returning*912 one to the picture company. 1
Dramatic Rights.
By contract dated August 23, 1921, petitioner granted to Charles I. Wagner exclusive rights in the United States and Canada to produce a dramatization of "Scaramouche." Wagner agreed to pay petitioner $500 as an advance against first royalties; to present the dramatization in a first-class theatre in New York City, and to pay the petitioner, through Brandt & Kirkpatrick, royalties of certain percentages of gross receipts realized from the presentation of the play.
This contract was drawn in London and was executed by both Wagner and the petitioner in London.
Petitioner received income in the taxable years from the contracts above described. For the years 1921 to 1925, inclusive, he filed no income tax returns at the*913 times prescribed for filing. For each of those years certain amounts were paid as taxes payable at the source by Brandt & Brandt as withholding agents, but the income on which taxes were so paid did not include petitioner's income under the contracts here involved. For the years 1926, 1927, and 1928 returns *710 were filed for petitioner by a New York bank, which returns did not include income from the above contracts.
In October 1929 petitioner's duly appointed agent, Frederic Francis, executed income tax returns for petitioner for the years 1921 to 1925, inclusive. This was done at the request of a revenue agent and under protest. The returns so filed included income from the above contracts under the designation of "royalties."
The respondent, in determining the deficiencies, included in income the amounts received by petitioner under the above contracts, and for the years 1921 to 1925, inclusive, added 25 percent penalties for delinquency in filing returns.
OPINION.
ARUNDELL: The issue presented is whether the petitioner, a nonresident alien, is taxable on the rentals or royalties which he received in the manner set forth in our findings of fact. Some of*914 the incom originally contested is now conceded to be income from sources within in the United States, and as such subject to income tax. In view of these concessions, we have confined our findings to those contracts which we understand are those from which the presently disputed income was derived, namely, the contracts with the Houghton Mifflin Co., the contracts relating to five motion pictures, and the contract with Wagner concerning the dramatization of "Scaramouche." The amount of income from these contracts is not in evidence, but the parties are agreed that they can and will determine it upon our decision as to whether such income is taxable.
The questions presented involve the construction of sections 212(a) and 119(a)(4) and (c)(4) of the Revenue Act of 1928 and corresponding provisions of earlier statutes. The pertinent parts of these sections of the 1928 Act are:
SEC. 212. (a) General rule. - In the case of a nonresident alien individual gross income includes only the gross income from sources within the United States. 1
* * *
SEC. 119. 2 (a) Gross income from sources in United States. - The following items of gross income shall be treated as income*915 from sources within the United States:
* * *
(4) RENTALS AND ROYALTIES. - Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States, *711 patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property; and
* * *
(c) Gross income from sources without the United States. - The following items of gross income shall be treated as income from sources without the United States:
* * *
(4) Rentals or royalties from property located without the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using without the United States, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like properties; and
* * *
*916 Petitioner's view is that the contracts involved the sales of personal property in the form of rights to his literary productions, and that such sale took place in England, inasmuch as he executed the contracts in that country. On this premise he argues that the income received under the contracts was not "gross income from sources within the United States" within the meaning of section 212(a), above quoted.
The rights granted under the contracts executed by petitioner did not amount to sales of his property. "A sale of personal property when completed, transfers to the purchaser the title to the property sold." . He did not part with title to his manuscripts nor did he sell or assign his copyrights. In fact, it is stated in some of the contracts that copyrights could not be obtained, and in some of the others it is at least doubtful whether petitioner had copyrights, in view of the provisions authorizing the Houghton Mifflin Co. to take out copyrights. It may be conceded that whatever rights petitioner had in his compositions were personal property, but we fail to see wherein granting the privilege of publication*917 or other exploitation amounted to a sale. "A man can not sell his chattel by a perfected sale, and still remain its owner." . It is quite obvious from the contracts themselves that the Houghton Mifflin Co. did not contract to buy petitioner's writings outright with all rights therein, but contracted to pay him royalties on sales in the United States. Petitioner reserved to himself all rights of translation and all rights to market his books in countries other than the United States, and it seems he also reserved all motion picture and dramatic rights.
The payments made to petitioner for the right to reproduce his compositions seem to us to be clearly rentals or royalties for the use of property. Whether they were technically "rentals" or "royalties" is immaterial, for if they were either one they constituted income. "Royalties, like rent, are inherently income and have been commonly so considered." . *712 Moreover, the statute here specifically includes "rentals and royalties" in income. *918 Nor is it necessary to determine whether the payments were made for the use of copyrights which we assume were obtained by Houghton Mifflin Co. under some of its contracts. Petitioner undoubtedly had a property right of some kind in his writings, and as such comes within the statutory phrase "other like property." Payments based on earnings made for the use of a secret process are income. ; likewise payments for the right to manufacture and market an invention with application for patent pending, , and payment in stock for a license under patents, ; affd., . The application of the statute does not turn upon the place of execution of the contract for the use of property; that is not mentioned. The vital element is that the payments be made "for the use of or for the privilege of using [property] in the United States." That, as we understand the arrangement between petitioner and the publishers, is the situation here. The substance of the contracts is that under them petitioner granted to the publisher*919 the right to publish his books in the United States upon payment to him of the specified royalty upon each book sold in the United States. In other words, if no books had been sold in the United States there would have been no income. When the petitioner conveyed a restricted interest in his books to the Houghton Mifflin Co., reserving to himself a royalty on all sales in the United States, that interest became property located in the United States, and the income therefrom is of the kind described in section 119(a)(4). We see no occasion for attempting a strained construction of section 119 for the purpose of placing the income from sales in the United States in a nontaxable classification. Cf. .
What we have said above applies alike to those publications which were subject to copyright and those which were not. It also applies to the income under the contract granting to Wagner the right to dramatize "Scaramouche." Under the Wagner contract, as in the case of the Houghton Mifflin Co. agreements, there would have been no income to petitioner, save perhaps the down payment of $500 in the nature of an advance*920 royalty, unless the American public had patronized the theatres where the play was produced. All income derived by petitioner as royalties from this dramatization constituted taxable income to him.
The situation respecting the granting of motion picture rights is quite different from the other rights above discussed. In none of the motion picture contracts did petitioner obtain any income from the reproduction *713 and sale or other use of his writings in the United States as in the case of the Houghton Mifflin Co. and Wagner contracts. Here the granting of rights was made in consideration of a lump sum. The sale of these rights took place in England (cf. ), and there was no subsequent income in the nature of rents or royalties from sources within the United States. We are accordingly of the opinion that the lump sums received by petitioner for the motion pictures rights do not come within the statutory definition of income from sources within the United States and are not taxable income.
We not in passing that the contract with Wagner was not confined to the dramatization in the United States, *921 but also granted Canadian rights. The statute which we have above held applicable relates only to income for the use of property in the United States, and further, section 119(c)(4) of the act treats as income from sources without the United States rentals or royalties for the use of property without the United States. As the parties have agreed that they can make a computation if the question presented is decided, they may exclude from income on recomputation the Canadian receipts, if any, under the Wagner contracts.
The respondent has asserted 25-percent penalties for the years 1921 to 1925, inclusive, on account of petitioner's delinquency in filing returns. There is no evidence in this case of any "reasonable cause" for the delinquency which would warrant setting aside the penalty. Petitioner was represented in this country and undoubtedly could have obtained a ruling as to the taxable status of the payments he was receiving from within the United States. In the absence of a showing of reasonable cause we have no course but to sustain the imposition. See *922 ; .
Reviewed by the Board.
Decision will be entered under Rule 50.
Footnotes
1. One of the contracts contains the statement that it is "* * * being entered into in the State of New York * * *." Whatever the meaning of this statement, it apparently was not so executed. The evidence is that all of the contracts were consummated by petitioner's signature thereof in London. Moreover, according to the evidence, petitioner was not in the United States when he signed this contract. ↩
1. The same provisions appear in the earlier acts. Sec. 213(c), Revenue Acts of 1921, 1924, and 1926. ↩
2. The same provisions, with immaterial differences, appear in section 217 of the Revenue Acts of 1921, 1924, and 1926. ↩