*149 Decision will be entered for the respondent.
Petitioner, a nonresident alien, not engaged in a trade or 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.
*183 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.
*184 FINDINGS OF FACT.
The petitioners, *152 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*153 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*154 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 *185 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, *155 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 percent 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.
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*156 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 *186 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.
*157 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">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*158 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 of 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. One 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 *187 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) 759,*159 and Commissioner v. Celanese Corporation of America, 104 Fed. (2d) 339, petitioner rests his argument that he is not taxable on the income in question here.
The Goldsmith case was decided by the same court which earlier decided the Sabatini case, and, while the latter case is relied upon as authority for the conclusion that the payments were royalties, it is not mentioned in the concurring opinion. The only question before the court was whether the income should be taxed at 100 percent as ordinary income, or whether it should be taxed at the capital gains rate. Certainly, the court did not overrule the Sabatini case. Even so, see Irving Berlin, supra, where we had a similar question and where we held that there was no sale, but, at most, a mere license to use the literary material in motion picture production. The General Aniline & Film Corporation case and the Celanese Corporation of America case, supra, are clearly different from the case at bar. In each of those cases the courts found that the vendors had parted with all of their right, title, and interest in certain patents, so that *160 the transactions amounted to completed sales. Hence, the payments received were part of the purchase price. Here, petitioner parted only with the right to use his story in serial form in a limited territory and retained all rights to its use in other forms. Since our problem here turns upon the question of whether the income was derived from royalties paid for a limited use of the property or whether it was derived from the sale of the asset itself, we are constrained by the decisions in Sabatini, supra, and Marton, supra, where the question has been directly decided.
Petitioner further contends that the income in question does not come within the statute as "other fixed or determinable annual or periodical gains or profits," since payment was made in a lump sum. We are unable to approve that argument. The fact that the sum agreed upon for the use of the serial rights was paid in that form does not change its character as a royalty. Sabatini, supra.In the Ehrlich case, supra, the total sum agreed upon was paid in three installments. In the Marton case, supra, a single*161 payment was made. It is the nature of the income that is the controlling factor. See Commissioner v. Raphael, 133 Fed. (2d) 442; certiorari denied, 320 U.S. 735">320 U.S. 735, dealing with a lump sum interest payment; and DeNobili Cigar Co. v. Commissioner, 143 Fed. (2d) 436, where the court said that distributions which are the equivalent of dividends under section 115 (g) are dividends within sections 143 and 211. The opinion in the General Aniline case, supra, is not contrary to the foregoing. As we have pointed out above, in that case the court found that title to the patents in question had passed from the vendor. They recognized, however, that the passing of title did not preclude the existence of royalties and went on *188 to say that the lump sum payment there considered was paid for the assignment and that such a payment is not covered by the statute. The payment in the instant case was made for a limited use of the serial rights only and did not constitute a completed sale, as was the situation in the General Aniline case.
We conclude that the payment in question was*162 a royalty paid for the use only of the serial rights to petitioner's story and that the income, to the extent that it was derived from sources within the United States, is taxable to petitioner under section 211 (a).
Petitioner claims that 7 percent of the aforementioned payment represented the percentage of the total price which was allocable to the Canadian serial rights and that such portion of the income was not derived from sources within the United States and is not taxable to him. The applicable statute, section 119, subsections (a) (4) and (c) (4), 2 is set out in the margin.
*163 The record does not show whether the petitioner's story was ever serialized by Liberty Magazine in either this country or Canada. On brief, however, petitioner states that it was so published by that magazine in the United States and in Canada in twelve installments, running from November 16, 1940, to February 1, 1941.
In support of his contention, petitioner introduced a publication entitled "Standard Rate Data Service," which indicates that for the six-month period ended December 31, 1940, the average United States circulation of Liberty Magazine was 2,523,152, as against the Canadian circulation of 180,206; that from January 1 to June 30, 1941, the United States circulation was 2,302,298 and the Canadian 190,622. Percentagewise, the ratio of the Canadian circulation to that of the United States is approximately .0666 for the first period and .0764 for the second period, with an average for the two periods of .0715. Other testimony was offered to the effect that the Canadian serial rights to the works of other lesser authors were worth from $ 1,000 to $ 1,500.
At the time the licensing agreement was settled upon, the parties apparently made no effort to segregate the value paid*164 for the United *189 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. Estate of Alexander Marton, supra.
We are next concerned with the problem of whether the petitioners are entitled to any personal exemption. They claim an exemption of $ 800 and rely upon section 214 of the Internal Revenue Code, which is set out in the margin. 3
Nonresident alien individuals, *165 by a distinction drawn in the Revenue Act of 1936 and subsequent acts through the code, are accorded different treatment depending upon whether or not they are engaged in a trade or business in the United States. Those not engaged in a trade or business or not having an office or place of business in the United States are taxable at a flat rate, depending upon their citizenship, on their gross income of the types covered by section 211, received from sources within the United States. This tax is in lieu of the normal tax and surtax payable by other taxpayers. But, if such nonresident alien individual has a gross income from sources within the United States of more than $ 24,000, a different treatment is available under section 211 (a) (2).
The exemption claimed by petitioners is shown by section 214, supra, to be a credit against net income. It is only on incomes covered by the above exception, that is, incomes in excess of $ 24,000 from United States sources, that nonresident alien individuals are allowed any credits or deductions. Section 19.214-1 (a) (1) and (2) of Regulations 103 4 is set out in the margin. Petitioner does not claim the benefit of the exception and, *166 since his gross income in the taxable year amounted to only approximately $ 11,000, it is apparent that he is not entitled to it.
*167 *190 Finally, the petitioner claims that the 10 percent of the gross proceeds which was paid to his agent during the taxable year, by virtue of an exclusive contract, is not taxable as income to him. The theory advanced seems to be that of a partnership or joint venture. It is said that the legal title to the entire proceeds of the contract was in the agent from the beginning, and its only duty was to account to the petitioner for 90 percent thereof; that it was the agent's continued efforts that produced the income; and that the sale was made in the name of the agent.
We are not impressed by that line of argument. The facts show that Reynolds & Son agreed to act as petitioner's literary agent in this country and that the agent was to receive 10 percent of the receipts as a commission. Such fee is the same as that which is customarily paid literary agents. No unusual arrangements were brought to our attention and there is no evidence whatsoever that the parties were engaged in a partnership or joint venture of any sort. Had that been the case, it appears that the income would have been taxed without regard to section 211 (a).
What has been said above in connection with *168 the claimed personal exemption applies to the commissions here considered. See Regulations 103, sec. 19.213-1 (a) (1) and (2). It follows that petitioners are not entitled to the claimed exemption, nor are they permitted to deduct the agent's commissions in computing their tax liability. See Francois Lang, 45 B. T. A. 256.
Decision will be entered for the respondent.
Footnotes
1. SEC. 211. TAX ON NONRESIDENT ALIEN INDIVIDUALS.
(a) No United States Business or Office. --
(1) General rule. --
(A) Imposition of Tax. -- There shall be levied, collected, and paid for each taxable year, in lieu of the tax imposed by sections 11 and 12↩, upon the amount received, by every nonresident alien individual not engaged in trade or business within the United States, from sources within the United States as interest (except interest on deposits with persons carrying on the banking business), dividends, rents, salaries, wages, premiums, annuities, compensations, remunerations, emoluments, or other fixed or determinable annual or periodical gains, profits, and income, a tax of 30 per centum of such amount, except that such rate shall be reduced, in the case of a resident of any country in North, Central, or South America, or in the West Indies, or of Newfoundland, to such rate (not less than 5 per centum) as may be provided by treaty with such country.
2. SEC. 119. INCOME FROM SOURCES WITHIN UNITED STATES.
(a) Gross Income From Sources in United States. -- The following items of gross income shall be treated as income 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, patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, franchises, and other like property; and
* * * *
(c) Gross Income from Sources Without 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.↩
3. SEC. 214. CREDITS AGAINST NET INCOME.
In the case of a nonresident alien individual who is not a resident of a contiguous country, the normal tax exemption allowed by section 25 (a) (3) shall be only $ 500 and the surtax exemptions allowed by section 25 (b) (1) (B) and (C)↩ shall not be allowed.
4. Sec. 19.214-1. Credits to nonresident alien individuals. -- (a) No United States business or office. -- (1) General rule. -- In general, a nonresident alien individual not engaged in trade or business in the United States and not having an office or place of business therein at any time during the taxable year is not allowed any credits under section 25, the tax being imposed upon the amount of gross income received.
(2) Aggregate more than $ 21,600↩ [$ 24,000 for a taxable year beginning after December 31, 1939]. -- In the case of a nonresident alien individual (other than a resident of Canada) not engaged in trade or business within the United States and not having an office or place of business therein at any time during the taxable year and deriving in such year gross amount of fixed or determinable annual or periodical income from sources within the United States of more than $ 21,600, the credits allowed are those applicable in the case of nonresident alien individuals engaged in trade or business within the United States or having an office or place of business therein.