*251 Decision will be entered under Rule 50.
George Santayana, author of the literary work "Persons and Places," caused the manuscript of that work to be delivered to petitioner, and petitioner, on November 10, 1942, as "Proprietor" of the said work, entered into an agreement for its publication with Charles Scribner's Sons. The respondent determined that Santayana made a gift of his entire interest in "Persons and Places" to petitioner and that the proceeds payable by Scribner's to petitioner by reason of its publication of the work were taxable to petitioner as ordinary income. *252 On the facts, held, that (1) Santayana had made a gift of his entire interest in "Persons and Places" to petitioner prior to November 10, 1942; (2) the agreement by petitioner and Scribner's was not a sale by petitioner of a property interest in "Persons and Places" to Scribner's, or of his rights with respect thereto; and (3) the amount of income realized and received by petitioner in 1944, the taxable year herein, was $ 12,000.
*209 *775 The respondent determined a deficiency in income tax against the petitioners for the taxable year 1944 in the amount of $ 13,770.50. The petitioners claim an overpayment of income taxes for that year in the amount of $ 7,699.06. The only issues presented for our decision are whether the amount of $ 42,057.66 derived from the publication of the book*253 "Persons and Places," or a part thereof, is taxable income of the petitioners for the year 1944 and, if so, whether as capital gain, as reported by the petitioners, or as ordinary income, as contended by the respondent.
FINDINGS OF FACT.
The petitioners are husband and wife, and are citizens of the United States presently residing in England. They filed their joint income tax return for the calendar year 1944 with the collector of internal revenue for the third district of New York.*210
Daniel M. Cory, hereinafter referred to as the petitioner, has been occupied since the age of 19 as a scholar in philosophy. He was a close friend and disciple of the well-known philosopher and writer, George Santayana, who died in Rome on September 26, 1952. Santayana was a Spanish National, who, throughout the period here in question, resided in Italy.
Santayana, who expressed an interest in the petitioner's future, thought that the petitioner showed a great deal of talent in philosophy and made efforts to encourage him in the pursuit of it. From 1927 to 1940 the petitioner spent from 4 to 5 months of each year with Santayana. *776 During these years Santayana made a practice of giving the *254 petitioner various amounts as an allowance and for the payment of his living and traveling expenses.
The petitioner has written a great many essays on philosophy and epistemology which have been published in magazines devoted to those subjects, but, in accordance with the usual practice of scholars in those fields, the petitioner has received no remuneration for such articles. In the course of his life, the petitioner has published several poems and book reviews and has published two articles in the Atlantic Monthly. Petitioner's earnings from these and all other of his writings have been relatively insignificant in amount.
In 1940, on the advice of Santayana, the petitioner and his wife came to the United States from Switzerland, and remained in the United States until the end of 1944. Santayana attempted to defray a part of the petitioners' traveling expenses with a draft of # 100, which could not be cashed because the funds on which it was drawn were frozen as a result of the war.
During his stay in this country, the petitioner attended and gave various lectures. He also conducted discussion groups in the department of philosophy at Columbia University. He earned no money from*255 1940 to 1944 except a few dollars from a poem and $ 300 for an article on Santayana published in the Atlantic Monthly. Throughout this period the petitioner was experiencing financial difficulties and was in need of money to support his wife and himself.
On June 26, 1940, Santayana, who continued to reside in Italy, wrote to the petitioner stating that the only thing that he could do financially for the petitioner was to send him checks drawn on a British bank. Because of war restrictions it was impossible for the petitioner to cash such checks. On October 21, 1940, Santayana wrote to Charles Scribner's Sons requesting them to pay to the petitioner the amount due to Santayana for royalties on December 1, 1940, and such further royalties as might later become due to Santayana until normal communications with Italy were restored. Pursuant to these instructions Scribner's paid the following amounts to the petitioner: 1940, $ 1,894.67; 1941, $ 1,245.67; 1942, $ 906.98; 1943, $ 694.13.
As early as 1936 or 1937, petitioner had been told by Santayana that he would be given Santayana's autobiography and all other of his writings unpublished as of the date of his death. In his will executed*256 April 25, 1938, Santayana provided that all of his books, manuscripts, and personal effects should go to the petitioner. By August 2, 1938, Santayana was at work on his autobiography, which he had tentatively entitled "Persons and Places: Fragments of Autobiography." This autobiography was ultimately published in three volumes: "Persons and Places," "The Middle Span," and "My Host *777 the World." The first volume, "Persons and Places," which was completed by October 12, 1941, is the only one with which this proceeding is concerned.
On April 30, 1941, Santayana wrote to John Hall Wheelock, the Scribner's representative with whom he usually dealt, as follows:
Now that I am almost entirely well again, I am returning to the Autobiography with new zest.
I will send you the Introduction at once, and it does not matter how long you decide to put off the publication.
Again, on August 22, 1941, Santayana wrote Wheelock:
In your kind letter of July 30 you say your firm is disposed to advance the payment of my royalties to Cory, if he should ever need such assistance. I am very glad to know this; because I feel partly responsible for having kept him out of steady employment*257 during the best years of his life. My late friend Strong was also responsible and acted accordingly, as you know. It happens to be difficult for me for family reasons to leave Cory any legacy or to help him out of the money in charge of my nephew George Sturgis, which is largely Sturgis money in origin. But I feel free to dispose of my earnings, including my royalties; and for this reason (as I don't need them) I have asked you to let him have them during this war, when my private bank account in London is congealed. In case of my death, however, he might be in at least momentary difficulties; and I am not sure that my royalties could then legally go to him. For this reason I*211 mean to give him my MSS including that of my autobiography, and am expressly leaving them to him in my Will. He will then make the contract for publication with you, and have a right to the royalties.
On September 18, 1941, Santayana wrote to the petitioner, stating that 16 chapters of his autobiography were finished and promising to send the petitioner a carbon copy of the 16 chapters then completed, if possible, from Italy or from Spain. Again, on October 12, 1941, Santayana wrote to the petitioner, *258 saying:
Now as to your troubles and disappointments, I am extremely sorry. I am sending you today the carbon copy of Persons & Places, 280 odd pages, and you can have it published serially in some magazine, as Wheelock suggests, so as to get some return almost at once. I am writing to him about this, and won't repeat what I tell him, as you compare notes. Get my royalties, due on Dec. 1, earlier, as soon as you need them, and I will ask George Sturgis to send you a Christmas present, since I am as superflously [sic] rich in America as I am inconveniently poor in Italy. * * *
On the same date, October 12, 1941, Santayana also wrote to Wheelock as follows:
Before moving I mean to send Cory the MS of my Persons & Places, the carbon copy. I approve of your suggestion that it should first appear serially: it had occurred to me many years ago that such a thing might be possible. Arrange everything between you, without consulting me, as if I were already dead. I don't think there is much, or indeed anything more, to cut out, as I have already removed what seem to be dangerous: but cut out anything that you think tedious or unnecessary. I keep the original in reserve, *259 for the future.
*778 On October 17, 1941, Santayana wrote petitioner to the effect that the manuscript had been returned to him by the postal authorities and that because of postal regulations imposed by the Italian authorities as the result of the war it was impossible to mail the manuscript of "Persons and Places," and further saying that he was distressed at having this means of helping the petitioner cut off, and promising to do what was possible to tide the petitioner over. In addition to promising the petitioner a Christmas present, Santayana stated that perhaps it would be possible to shift to the petitioner a small legacy and some other small sums to which Santayana was entitled.
However, Charles Scribner's Sons arranged for the delivery of the manuscript of "Persons and Places." When it was delivered to Scribner's, the manuscript bore on its cover the following notation, dated July 21, 1942:
As Messrs. Charles Scribner's Sons are aware, I have authorized my former secretary, Mr. Daniel M. Cory, to sign the contract for the publication of this book, to revise the text, and to receive all royalties that may become due in respect to it.
G. Santayana.Upon receipt of the*260 manuscript by Scribner's, the petitioner read over the manuscript but made no changes in it. Thereafter, on November 10, 1942, the petitioner and Charles Scribner's Sons entered into an agreement for the publication of "Persons and Places," which provided in part as follows:
Memorandum of Agreement made this tenth day of November 1942 between DANIEL M. CORY of New York City, N. Y., hereinafter called "the Proprietor" and CHARLES SCRIBNER'S SONS, of New York City, N. Y., hereinafter called "the Publishers." Said -- Daniel M. Cory -- being the Proprietor of a work tentatively entitled:
PERSONS AND PLACES; Fragments of Autobiography (to be in either two or three volumes)
in consideration of the covenants and stipulations hereinafter contained, and agreed to be performed by the Publishers, grants and guarantees to said Publishers and their successor the exclusive right to publish the said work in all forms in the United States and Canada during the terms of copyright and renewals thereof, hereby covenanting with said Publishers that he is the sole Proprietor of said work.Said Proprietor hereby authorizes said Publishers to take out the copyright on said work, * * *
Said Publishers, *261 in consideration of the right herein granted and of the guarantees aforesaid, agree to publish said work at their own expense, in such style and manner as they shall deem most expedient, and to pay said Proprietor or his legal representatives, Ten (10) per cent on their Trade-List, retail, price for the first five thousand (5000) copies of said work sold by them, and FIFTEEN (15) per cent of all copies sold thereafter, except as hereinafter provided. Provided, nevertheless, that one-half the above named*212 royalty shall be paid on all copies sold outside of the United States; and provided that no percentage whatever shall be paid on any copies destroyed by fire or water, or sold at or below cost, or given away for the purpose of aiding the sale of said work.
*779 It is further agreed that the profits arising from any publication of said work, during the period covered by this agreement, in other than book form shall be divided equally between said Publishers and said Proprietor.
The agreement further provided that in the event of certain contingencies the contract should be terminable.
Although the above contract purports to grant to Scribner's the exclusive right to publish "Persons*262 and Places" in all forms in the United States and Canada during the terms of the copyright and renewals thereof, it was not intended by the parties that under the contract Scribner's should have the exclusive serial rights, even for the United States and Canada, and during 1943 the petitioner granted serial rights to three chapters to the Atlantic Monthly for $ 1,000, none of which was divided with Scribner's.
Other rights retained by petitioner and not granted to Scribner's included the publishing rights in England and English-speaking countries other than the United States and Canada, the right to translate and publish in the language of other countries, and motion picture and dramatic rights. Motion picture and dramatic rights are not normally acquired by a publisher.
On some undisclosed date, but prior to March 18, 1943, Scribner's was warned by George Sturgis, a half-nephew of Santayana, against the paying over of any large sums from the profits from "Persons and Places" to petitioner. Sturgis held a power of attorney from Santayana to act for him in the United States. Further, Sturgis and his sister were named as residuary legatees in the will Santayana had executed.
As a*263 result of this warning from Sturgis, Scribner's consulted counsel, who advised them that it was doubtful whether Santayana had made an effective gift of the manuscript and its copyright to petitioner. They were further advised not to pay over any of the proceeds of "Persons and Places" without the joint consent of Sturgis and the petitioner. As the result of negotiations between the petitioner, Scribner's, and Sturgis, the three parties entered into an agreement dated June 21, 1943, providing that Charles Scribner's Sons should pay the royalty proceeds of "Persons and Places" into escrow.
On January 28, 1944, an escrow fund was established with the Chase National Bank of New York City. Charles Scribner's Sons paid $ 42,363.57 into this fund during 1944. Of this amount $ 31,300 represented Book-of-the-Month Club proceeds. Under the above contract with Scribner's, the exploitation of "Persons and Places" through the Book-of-the-Month Club was treated as "publication * * * in other than book form" and the profits therefrom were divided equally between Scribner's and petitioner.
*780 The agreement of June 21, 1943, provided that the petitioner should be entitled to payment of*264 a maximum of $ 12,000 from the escrow fund. From this sum the following amounts were distributed to the petitioner or paid on his behalf during 1944:
| $ 7,500 | representing previous advances by Charles Scribner's Sons to the |
| petitioner was paid to Charles Scribner's Sons; | |
| $ 2,100 | was paid to the petitioner; and |
| $ 2,400 | was paid to the collector of internal revenue for petitioner's account. |
The agreement of June 21, 1943, provided that no payment was to be made to the petitioner without a previous license from the United States Treasury Department, if required, and that Scribner's was authorized by the terms of the agreement to withdraw funds from escrow to pay Federal taxes.
Communication with Santayana was resumed in 1944, though with some difficulty, and on November 4, 1944, Santayana wrote to the petitioner:
Did you ever get my reply to your letter of June 15? I have been expecting to hear from you again, now that letters can come through the post, and to know whether the affair of the royalties for Persons & Places, vol. I, has been settled satisfactorily. George Sturgis now seems to understand what my wishes were, and to withdraw all objections. He had previously*265 sent me a long memorandum drawn up by his legal advisers in which there was a suggestion that rather alarmed me; namely, that in leaving my manuscripts to you by will, just as in giving them to you by hand, the law does not allow me [to] convey to you the royalties that may eventually be due on such writings, which come legally still to me or to my residuary legatees. If this is the case, I was leaving or giving you only a keepsake, and no possibility of cash. Is this the law? And how long, if at all, is a publisher expected to pay royalties on a dead man's books? Perhaps the only use you could make of my MSS. would then be to sell them for a lump sum. This matter is important*213 for me, apart from the question of my Posthumous Poems and other trifles and unfinished books; because the third volume of Persons & Places will certainly remain over, to be published by you eventually. Or must the profits for it then go to George Sturgis and his sister, Mrs. Bidwell, who are my residuary legatees? In that case, I should be compelled to publish it during my lifetime, in spite of moral scruples. Vol. II is ready to be sent, but I have no means of conveyance. If Scribner's*266 can work Mr. Myron Taylor again, let them do so.
Sturgis did not, however, agree to any further withdrawals from the escrow fund for the petitioner's account during 1944. Sturgis died suddenly on December 20, 1944. Thereafter, upon counsel's advice, Scribner's declined to pay any further sums from the escrow fund to the petitioner during 1944. Subsequent to Sturgis' death, the attorney for his estate continued to raise objections to the petitioner's receipt of the escrow funds and wrote to Santayana urging him not to turn over the escrow fund to the petitioner.
On May 21, 1945, Santayana executed a deed of gift, which provided as follows:
*781 Know All Men by These Presents
Whereas, I, the undersigned GEORGE SANTAYANA, have heretofore given to DANIEL M. CORY the manuscripts later published as "Persons and*214 Places" and "The Middle Span", with all rights and benefits of ownership and all copyrights therein, and
Whereas, it has been my intention for many years to give to the said Cory all additional autobiographical manuscripts which I might write,
Now, Therefore, in order to carry out said intention to the fullest extent possible at this time, I have given and I do hereby give, *267 confirm, release and quitclaim to the said Daniel M. Cory, his executors, administrators, and assigns, all my right, title, interest and ownership in and of the said works, "Persons and Places" and "The Middle Span," including all copyright therein throughout the world, with the intention to vest all such rights irrevocably in the said Daniel M. Cory, his executors, administrators and assigns, and I do hereby give, transfer, set over, assign and convey irrevocably to the said Daniel M. Cory, his executors, administrators, and assigns, all my right, title, interest, and ownership in and of the manuscript of the third volume of my autobiography, which is now completed, including all copyright therein throughout the world, with intent to make the same the sole property of said Cory.
No assignment is included in this instrument of the fourth volume of said autobiography for the reason that said fourth volume remains unwritten, and there is no subject matter of a gift in existence at this time.
On January 1, 1945, the escrow account contained a balance of $ 30,363.57, which was paid out during 1945 in the following amounts:
| Payment to Collector of Internal Revenue for the | |
| account of Cory or Santayana as their interests might | |
| appear | $ 12,709.08 |
| Fee for escrow services | 105.91 |
| Payment to Daniel M. Cory | 6,500.00 |
| Payment to Charles Scribner's Sons | 1,500.00 |
| Payment to Daniel M. Cory | 9,548.58 |
*268 In his 1944 income tax return, the petitioner reported $ 42,057.66 as gain from the sale of "Copyright 'Persons & Places' by George Santayana." He listed 1941 as the date the property was acquired by him, and November 10, 1942, as the date of its "sale." The gain was reported as long-term capital gain and $ 21,028.83 thereof as being the amount subject to tax. The amount of income tax shown by the return was $ 7,699.06. He reported $ 16,429.34 as having been paid on account of such tax, thereby indicating an overpayment of $ 8,730.28. The $ 16,429.34 so reported as paid was made up of $ 2,400 withheld by Scribner's and paid to the collector of internal revenue on petitioner's account, $ 12,709.08, which had been paid by Scribner's to the collector of internal revenue for "the account of Cory or Santayana as their interests might appear," and $ 1,320.27, listed as having been paid on petitioner's 1944 declaration of estimated tax. On the basis of the return as filed, a refund of $ 8,730.28 was made to petitioner in or after 1945.
The respondent, in his determination of the deficiency herein, concluded and determined that the $ 42,057.66 reported by petitioner as *782 long-term*269 capital gain from the sale of "Persons and Places" was taxable to petitioner as ordinary income.
Prior to November 10, 1942, the date of the contract between petitioner and Scribner's for the publication of "Persons and Places," Santayana had made a gift to petitioner of his entire interest in the work.
OPINION.
By an amendment to his petition, the petitioner has taken sharp departure from the representations on his return and the allegations in his original petition, to the effect that "Persons and Places" was given to him by Santayana in 1941 and that the $ 42,057.66 represented the proceeds of the sale by him of a capital asset, and now alleges that Santayana did not "complete the gift" of "Persons and Places" until May 21, 1945, 1 that the income therefrom in 1944 was that of Santayana, and such part of the "sales" proceeds as was received by him, the petitioner, in that year was received by gift from Santayana, and to him was not income. In the alternative, it is contended that if there had been a gift of the work to petitioner prior to its publication, the transaction with Scribner's was a sale and the gain was capital gain, and for the year 1944 petitioner, at the most, is*270 chargeable with $ 12,000, the amount he was entitled to draw down under the tripartite agreement.
It is the position of the respondent that there was a completed gift of "Persons and Places" to petitioner prior to the November 10, 1942, contract for its publication, and that the income received by petitioner was ordinary income, his argument being that the transaction with Scribner's was a license, not a sale, of the property, and further, if it be held that the transaction was a sale, it falls within the ambit of Joseph A. Fields, 14 T. C. 1202, affd. 189 F. 2d 950, and the concurring opinion in Goldsmith v. Commissioner, 143 F.2d 466">143 F. 2d 466, affirming 1 T. C. 711,*271 in that it was the sale of property held primarily for sale to customers in the course of petitioner's trade or business of exploiting the said "Persons and Places." In the alternative, the respondent argues that the full $ 42,057.66 realized from the publication of "Persons and Places" by Scribner's represented compensation to petitioner for services rendered by him to George Santayana and, for that reason, is taxable to petitioner as ordinary income in 1944.
While there are some references in the writings or communications of Santayana, and in the testimony of petitioner at the time of the hearing herein which might supply a basis for the conclusion that there was a period of time in which an employer-employee relationship *783 might have existed between Santayana and petitioner, we are convinced that such relationship, if it did exist, was not the basis and did not supply the consideration for the transfer of "Persons and Places" by Santayana to petitioner. The evidence, in our opinion, shows that Santayana intended to make a gift, and thought he had made a gift, of the work to petitioner, and further, that petitioner likewise so regarded the transaction. It is also clear, *272 we think, that until Sturgis entered the scene and Scribner's received the communication from its attorney, Scribner's also thought an effective transfer of ownership had been made. There was a donor competent to make the gift and a donee capable of taking the gift. And in spite of obstacles which were quite difficult to surmount, there was an effective delivery. Certainly no one would question the acceptance by petitioner. We conclude and hold that prior to November 10, 1942, petitioner, by gift from Santayana, had become the owner of "Persons and Places." Adolph Weil, 31 B. T. A. 899, affd. 82 F. 2d 561; Apt v. Commissioner, 89 F. Supp. 361">89 F. Supp. 361. It accordingly follows that the income received or realized from or on that work in the taxable year was that of petitioner.
Our next question is whether the income herein was capital gain, or ordinary income. For Federal income tax purposes, capital gain is as prescribed by Congress and results from the sale or exchange of a capital asset, and as defined by section 117 (a) of the Code, the term "capital assets" means "property held by the taxpayer*273 * * * but does not include * * * property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."
Petitioner, by gift from Santayana, had become the owner of the literary work "Persons and Places," and it was his purpose to exploit that property for profit. He was not in the publishing business and did not have the means for having the work published for his own account. The work was subject to copyright, however, and he could sell it, along with his rights under the copyright, for the best price obtainable, or grant a license thereon for such royalties as might accrue.
The law pertaining to copyrights appears as Title 17 of the United States Code, and secures to the owner of a copyright certain exclusive rights with respect to work copyrighted. These rights, which are set out in detail in section 1 of the statute, are of five classifications or groupings, and for the purposes here, may be stated as (a) the right to print, reprint, publish, copy, and sell the copyrighted work; (b) in case of a literary work, the right to translate into other languages or dialects, or to make any other version thereof; and in the case of a nondramatic*274 work, to dramatize; and (c) the right to utilize the work for lecture purposes, to make or procure the making of transcriptions or*215 records by which and from which, in whole or *784 in part, it may be produced or reproduced, and to plan or perform it in public for profit, and to exhibit, represent, produce, or reproduce it in any manner or by any method whatsoever. 2 The rights under (d) are pertinent, if the work is a drama; and those under (e), if it be a musical composition.
It is, of course, commonplace that the owner of a copyrighted property may grant a license to use or exercise some or all of the rights in and to such property, or he may make a full and complete disposition or sale of the property and his rights with respect thereto. Over the years, *275 numerous cases have been before the various courts wherein the applicability of certain sections of the internal revenue law have turned, in whole or in part, on the question whether the grant of a right or rights in and to a copyrighted work was or was not a sale of the property covered in the transaction. Rafael Sabatini, 32 B. T. A. 705, affirmed in part and reversed in part, 98 F. 2d 753; Irving Berlin, 42 B. T. A. 668; Estate of Alexander Marton, 47 B. T. A. 184; Clifford H. Goldsmith, 1 T. C. 711, affd. 143 F. 2d 466; Sax Rohmer, 5 T. C. 183, affd. 153 F. 2d 61; Pelham G. Wodehouse, 8 T. C. 637, revd. 166 F.2d 986">166 F. 2d 986, which was in turn reversed at 337 U.S. 369">337 U.S. 369; Joseph A. Fields, 14 T.C. 1202">14 T. C. 1202, affd. 189 F. 2d 950; Herman W. Shumlin, 16 T. C. 407; Misbourne Pictures Limited v. Johnson, 189 F. 2d 774,*276 affirming 90 F. Supp. 978">90 F. Supp. 978; Paul Reece Rider, 16 T. C. 1456, affd. 200 F. 2d 524; Richard W. TeLinde, 18 T. C. 91; and Herwig v. United States, (Ct. Cl.) 105 F. Supp. 384">105 F. Supp. 384. Compare E. Phillips Oppenheim, 31 B. T. A. 563. In none of the cases prior to Goldsmith v. Commissioner, supra, and more particularly Judge Hand's concurring opinion therein (except as to that part of the decision of this Court in Rafael Sabatini, which covered the grant of motion picture rights for a lump sum), have we been able to find any pronouncement or holding that the grant of rights in and to a copyrighted work, even though exclusive, was a sale, where the grant made covered less than all of the owner's rights in and to the said work. Subsequent to the Goldsmith case, however, the Court of Appeals for the Fourth Circuit, the Court of Claims, and this Court have in certain cases adopted the views expressed in Judge Hand's opinion. The present position of the Court of Appeals for the *277 Second Circuit, as will appear hereafter, is not to us so clear.
In Joseph A. Fields, supra, and Herwig v. United States, supra, there were grants for lump-sum considerations of exclusive motion picture rights, in the one case to two plays and in the other to a novel. In neither case did the grantor have any further claim against the grantee, or any retained interest in or against the rights so granted, or in the proceeds or profits from the exploitation of the copyrighted *785 work under the said rights, and it was held in both cases that the transaction was a sale. In the opinions, it was noted that, even though legal title remained in the grantor, it was a naked title and could be exercised for the benefit of the transferee only. The Fields case was affirmed by the Court of Appeals for the Second Circuit, as above indicated, but, at the outset, the court observed that "both parties are now agreed that the transaction giving rise to this income was a sale" and devoted its opinion to the consideration of the question whether the property or property rights conveyed had been held by the grantor primarily *278 for sale to customers in the course of his trade or business. Previously, in Sabatini v. Commissioner, supra, the same court had reversed the holding of this Court, to the effect that a grant by Sabatini of exclusive worldwide motion picture rights to certain of his literary works for a lump-sum consideration was a sale, and held that the grant was a license, not a sale. On another issue, it had affirmed the holding that a grant of exclusive publishing rights for the United States to certain of Sabatini's works, with a retained right, such as we have in the instant case, to share in the proceeds from the sale of the published works, was a license, and not a sale. It is to be noted that in the opinion in the Goldsmith case, written by Judge Chase, the prior opinion of the court in Sabatini was cited as an authority, whereas in the concurring opinion of Judge Hand the Sabatini case was overlooked or ignored, and in the subsequent opinion of the court in the Fields case there was no indication of any thought or intention of modifying or overruling its pronouncements or holdings.
In Pelham G. Wodehouse, supra,*279 this Court citing Sax Rohmer, supra, which had followed the holding of the Court of Appeals in the Sabatini case, was of the view that a grant by the author of the exclusive right to publish certain of his stories serially in America for a lump-sum consideration was a license, not a sale. The Court of Appeals for the*216 Fourth Circuit, at 166 F. 2d 986, reversed that decision and held that the transaction was a sale. The decision of the Court of Appeals was in turn reversed by the Supreme Court, at 337 U.S. 369">337 U.S. 369, as previously noted. The question as decided in the Supreme Court was whether or not the lump-sum payment constituted "fixed or determinable annual or periodical gains, profits and income" from sources within the United States, within the meaning of section 211 of the Internal Revenue Code of 1939. The Court pointed out that under the 1934 Act and the regulations promulgated pursuant thereto royalties had been construed as being such income. It was of the opinion that Congress intended, in section 211, which was enacted in the Revenue Act of 1936, to continue royalties as such income, *280 and held that the lump-sum payments were taxable under that section. In deciding that question, however, it pointed out that if the transaction giving rise to the "royalties" had been a sale, the decision would, under *786 the statute, have been to the contrary, and in the course of its opinion, it cited the opinion of the Court of Appeals for the Second Circuit in the Sabatini case with apparent approval.
More recently, the Court of Appeals for the Second Circuit had before it the case of Misbourne Pictures Limited v. Johnson, supra, on appeal from the United States District Court for the Southern District of New York (90 F. Supp. 978">90 F. Supp. 978). In that case, an English corporation had granted to an American corporation the exclusive distribution rights, in all the world except British territory and Australasia, of certain motion pictures produced by the English corporation. The moneys received by the grantee in connection with its distribution of the film were to be divided between the grantor and the grantee on a specified percentage basis. A lump-sum advance payment was made, subject, however, to its recoupment by*281 the grantee from the percentages which should later become payable to the grantor. The question was as to the nature of the lump-sum advance payment, and in its opinion affirming the District Court, the Court of Appeals stated the question as follows:
If the transaction was a sale, the tax was illegally exacted; if it was a contract for royalties, as Judge Kaufman held, the judgment was correct.
The court did observe, however, that:
Perhaps not all of the decisions respecting a transfer of less than all the rights in property of a limited life, such as patents, copyrights or literary property can be consistently reconciled. 1 But it seems unnecessary to discuss them in view of Commissioner of Internal Revenue v. Wodehouse, 337 U.S. 369">337 U.S. 369, * * * which we regard as decisive of the case at bar.
*282 In the instant case, petitioner in the contract of November 10, 1942, did purportedly grant to Scribner's and their successors "the exclusive right to publish the said work in all forms in the United States and Canada during the terms of copyright and renewals thereof," but both petitioner and Wheelock, Scribner's representative in the transaction, testified that the contract did not, and was not intended to, cover all of petitioner's publishing rights even for the United States and Canada, in that it was intended and understood that the serial publishing rights were not exclusively granted. And it appears further that petitioner, with full knowledge on the part of Scribner's, entered into a transaction in 1943, the year after the contract with Scribner's, for the serial publication by the Atlantic Monthly of three of the chapters of "Persons and Places," from which he realized $ 1,000, and no part thereof was shared with Scribner's under its contract.
*787 Exclusive of serial rights, however, we still do not think there was a complete or outright disposition by petitioner to Scribner's of his entire remaining interest or interests in the United States and Canadian publishing*283 rights, but rather that the grant was of the right to use or exercise those rights in the United States and Canada for the purpose of exploiting the literary work "Persons and Places" for profit on behalf of both Scribner's and petitioner. It is true that aside from the serial rights as indicated Scribner's was granted the sole and exclusive right to do the publishing and selling of the work in the United States and Canada and to determine the style and manner in which it should be published, but in consideration therefor, it obligated itself to do those things at its own expense and to share with the petitioner the proceeds from the sale of the published copies and the profits from publication in other than book form according to the percentages agreed upon and specified in the contract. No amount was payable in any event and any and all*217 realization by petitioner was dependent entirely upon sales of the printed copies or the existence of profits from publication other than in book form. Stated otherwise, there was no personal obligation or liability ever on the part of Scribner's to pay any sum to petitioner if, after its publishing of the work, it could make no sales and there*284 was an absence of profits from its publication in other than book form. Scribner's could assign its rights under the contract, but such an assignment would necessarily carry with it the obligations to petitioner as well, and there was no provision whereby, as the result of the payments prescribed or otherwise, petitioner's retained interest or right to participate in the sales proceeds and profits would ever become the property of Scribner's or its assignee. And even though the publishing rights which were granted were exclusive, the interest of petitioner therein continued to be one of substance and not merely a naked title, as in the Fields and Herwig cases, exercisable only for the benefit of Scribner's. On the facts here, an infringement would adversely affect not the profits of Scribner's alone, but those of petitioner as well, and the fact that an infringement proceeding might be in the name of petitioner or Scribner's would not actually be of any moment.
In our opinion, essential elements of a sale were lacking, and we conclude and hold that the transaction between petitioner and Scribner's for the publication of "Persons and Places" was a license, not a sale.
From*285 the above, it is apparent, we think, that the cases of Joseph A. Fields, supra, and Herwig v. United States, supra, are not this case, and whether or not the views expressed in the opinions therein as to Commissioner v. Wodehouse, supra, correctly reflects the views of the Supreme Court in that case, Fields and Herwig are not, in our opinion, controlling here.
*788 Similarly, Paul Reece Rider, supra, and Richard W. TeLinde, supra, do not indicate or require a conclusion in the instant case contrary to that expressed above, although the consideration for the contract in each of those cases, as in this case, was based upon the sales of the book or books to be published. In the Rider case, we found from the evidence that the books in question and the rights under the copyright were held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, and expressly refrained from deciding whether the contract for publication of the books was a sale or a license. In affirming, *286 the Court of Appeals, at 200 F. 2d 524, stated that it did not retry issues presented to the Tax Court, but limited its decision to the issue decided below. In Richard W. TeLinde, we concluded and held that where the fair intendment of the contract as a whole was the disposition or sale by the taxpayer of all of his rights in the property, the "mere payment of a consideration on the basis of sales" was not alone sufficient "to transmute what would otherwise be a sale into a mere license." In the instant case, and for the reasons above, we have concluded from a consideration of the transaction as a whole that a license, and not a sale, was effected. We accordingly do not reach the attendant question in TeLinde, where the gearing of the amount of the consideration to sales remained as the sole basis for concluding that the transaction was a license and not a sale.
Having concluded that the transaction between petitioner and Scribner's for the publication of the literary work "Persons and Places" was a license, not a sale, it follows that the amounts received and realized by petitioner during the taxable year from such publication constituted ordinary*287 income, and not capital gains, and we so hold.
In passing, it may be noted that in the current tax year and hereafter, questions comparable to that herein will not arise either with respect to cases involving copyrights or cases involving patents, since Congress, by amendment to the Internal Revenue Code, in the Revenue Act of 1950, has specifically dealt with the nature of copyrights as capital assets, and has also legislated specifically with respect to patents in the Internal Revenue Code of 1954. Section 117 (a) (1) (C) of the Internal Revenue Code of 1939, as amended, and sections 1221 (3) and 1235 of the Internal Revenue Code of 1954.
The remaining issue is as to the amount of income received by petitioner under the contract with Scribner's in 1944. Petitioner's right to the royalties payable by Scribner's in connection with the publication of "Persons and Places" was at all times during 1944 in dispute and undetermined. Pursuant to the tripartite agreement, however, he did have the right to receive, and did receive, the sum of $ 12,000 therefrom. His rights to the remainder were not resolved until *789 1945. Such being the case, we conclude and hold that of the royalties*288 paid by Scribner's under the contract of November 10, 1942, only $ 12,000 was income to petitioner in 1944. Foster Wheeler Corporation, 20 T. C. 15. Bonham v. Commissioner, 89 F. 2d 725, affirming 33 B. T. A. 1100, and Heiner v. Gwinner, 114 F. 2d 723, on which respondent relies, are not in point.
Decision will be entered under Rule 50.
Footnotes
1. Although the amended petition alleging that there was no completed gift of "Persons and Places" had been verified by petitioner, it was his testimony at the trial herein that it had been, and still was, his view that a gift of the said work to him had been completed in 1941.↩
2. While it is common knowledge that in recent years a considerable number of motion pictures have been based on the lives of individuals of note, we do not know, from the record, whether the story of Santayana's life would, or would not, attract such interest.↩
1. See Sabatini v. Commissioner, 2 Cir., 98 F. 2d 753; Goldsmith v. Commissioner, 2 Cir., 143 F. 2d 466, certiorari denied 323 U.S. 774">323 U.S. 774, 65 S. Ct. 135">65 S. Ct. 135, 89 L. Ed. 619">89 L. Ed. 619; Rohmer v. Commissioner, 2 Cir., 153 F.2d 61">153 F. 2d 61, certiorari denied 328 U.S. 862">328 U.S. 862, 66 S. Ct. 1367">66 S. Ct. 1367, 90 L. Ed. 1632">90 L. Ed. 1632; General Aniline & Film Corp. v. Commissioner, 2 Cir., 139 F. 2d 759; Commissioner of Internal Revenue v. Celanese Corp., 78 U. S. App. D. C. 292, 140 F. 2d 339↩.