*167 Decisions will be entered under Rule 50.
1. The petitioner, a playwright, is the coauthor of the plays "My Sister Eileen" and "The Doughgirls," which were copyrighted in his name. With his coauthors, he transferred the exclusive worldwide motion picture rights to these plays to Columbia Pictures Corporation and Warner Brothers Pictures, Inc., respectively. Held, the proceeds from the sale of the movie rights to the plays are taxable to the petitioner as ordinary income in the years in which received under
2. Petitioner's wife commenced an action in May, 1943, in the Supreme Court of the State of New York, asking that a decree of separation be granted to her. The court ordered the petitioner to make payments to her as alimony pendente lite. A decree of separation was not entered until December 21, 1943. Held, the payments of alimony pendente lite in 1943 are not taxable to his former wife under
*48 *1202 The Commissioner has determined deficiencies in the petitioner's income tax for the years 1941 and 1943 in the respective amounts of $ 8,801.76 and $ 27,475.36. The year 1942 is involved *49 only because of the Current Tax Payment Act.
*169 The respondent has made claim for an increase in the deficiency, in his pleadings which were filed before the trial of these proceedings, in the amount of $ 8,356.67. Therefore, the total amount of the deficiency for the year 1943 is $ 35,832.03.
The respondent has conceded that he improperly included the sum of $ 15,679.41 in the petitioner's income for the year 1941. The parties have entered into a stipulation under which it*170 is agreed that other adjustments shall be made with respect to the amounts of petitioner's income for 1941 and for 1942. Also, the petitioner does not contest *1203 certain other adjustments which the respondent has made. Effect will be given to these agreements and concessions of the parties under Rule 50.
The chief issue to be decided in this proceeding is whether the proceeds from the transfer of the exclusive world motion picture rights to the play "My Sister Eileen" to Columbia Pictures and the transfer of the exclusive world motion picture rights of the play "The Doughgirls" to Warner Brothers Pictures, are taxable as capital gains or ordinary income. Petitioner, as a coauthor, had the copyright to both plays. The second issue is whether the petitioner can deduct, under
The petitioner filed his income tax return for 1941 with the collector for the sixth district of California. He filed his returns for the years 1942 and 1943 with the collector for the third district of New York.
The record in this proceeding consists of an agreed statement of facts and exhibits, from which *171 we make the following findings of fact.
FINDINGS OF FACT.
The facts which have been stipulated are adopted as part of the findings of fact. The stipulation is incorporated herein by this reference. The parties are now agreed upon certain facts which are material to certain items of income in either 1941, 1942, or 1943, which are to be disposed of by the parties under a Rule 50 recomputation. It is unnecessary to restate these facts in the findings of fact, and we do not do so. The facts which are necessary to an understanding of the issues to be decided are as follows:
Issue 1. -- The petitioner has followed the occupation of playwright since before the year 1941, and he is the coauthor of the plays "My Sister Eileen" and "The Doughgirls." During the year 1941 the petitioner and his wife were residents of California. During 1942 and 1943 they were residents of New York.
(a) Facts relating to the transfer of the world motion picture rights to a play entitled "My Sister Eileen." At some time prior to September 19, 1940, the petitioner and Jerome Chodorov (hereinafter Chodorov) collaborated in the writing of the play "My Sister Eileen," founded on the novel of the same name. *172 This play was copyrighted in their names on or before January 21, 1941. Prior to the writing of the play, the petitioner and Chodorov entered into an agreement with Ruth McKenney, the author of the novel "My Sister Eileen," whereby she granted to them "the sole and exclusive right and license to all dramatic rights" including stage and motion picture dramatization of her novel and authorized them to have presented and produced the play which they were to write based on her book. The royalties *1204 and proceeds accruing from the dramatization of the book were to be divided 50 per cent to the author of the novel and 50 per cent to the dramatists, the petitioner and Chodorov.
On October 7, 1940, Max Gordon entered into a dramatic production contract with the petitioner and Chodorov, as the "Author" of the play. Under this contract the "Author" leased "the sole and exclusive right to produce and present the said play or other literary property on the speaking stage in the United States of America and the Dominion of Canada" in exchange for royalties from the production of the play based on gross weekly box office receipts. The dramatists expressly retained, among other stated*173 rights, the motion picture rights to their dramatization. On November 14, 1940, the petitioner and Chodorov entered into an agreement with Max Gordon, the producer of the play, whereby, in exchange for a contribution of 25 per cent of the capital required for the production of the play, they received a 25 per cent interest in the sole and exclusive license which had been granted to the producer to produce or cause to be produced the play "My Sister Eileen." On December 26, 1940, "My Sister Eileen" opened in New York as a stage production of Max Gordon. This stage production ran continuously on Broadway for over two years. Pursuant to the agreement of October 7, 1940, with Max Gordon, the petitioner received author's royalties from this production in the amounts of $ 25,633.98 in 1941, $ 22,494.56 in 1942, and $ 462.19 in 1943.
On August 12, 1941, the petitioner and Chodorov, as the "Owners" of the play, entered into an agreement with Columbia Pictures Corporation as the "Purchaser" *50 for the disposition of the motion picture rights to the play, "My Sister Eileen," which included the following:
(1) "The Owners hereby grant, sell, assign, and set over to the Purchaser, forever," the*174 world motion picture rights to the dramatic work, "My Sister Eileen," "together with all the benefits of the copyrights in such work with respect to such motion picture rights and of all remedies for enforcing such copyrights."
(2) "The Owners hereby grant to the Purchaser the exclusive right to make motion picture versions" of the play, "My Sister Eileen," and "the exclusive, unlimited, and unrestricted right to produce, reproduce, distribute, exhibit and otherwise exploit and dispose of such motion picture versions, and to secure copyright and copyright registration therein in all countries of the world in the Purchaser's name or otherwise."
(3) "The Owners hereby appoint the Purchaser their true and lawful attorney irrevocable, in the Owner's name or otherwise, but for the Purchaser's sole benefit and at the Purchaser's expense, to enforce and protect such motion picture rights under any and all copyrights and renewals of copyrights and to prevent the infringement thereof and to litigate, collect and receipt for all damages arising from any infringement of such rights and to join the Owners in the Purchaser's sole judgment, as a party plaintiff or defendant in any such suit for*175 infringement, on condition that the Purchaser indemnify the Owners and *1205 hold them harmless from any and all costs and expenses by reason thereof. At the Owners' option they may become parties to any such suits and proceedings and shall have the further right to litigate, collect and receive all damages for infringement of all rights except those herein specifically granted to Purchaser."
(4) Article 9 of the agreement provided that in the event of any renewals or extensions of the United States copyright in the play, the Purchaser shall have under all the renewed and extended copyrights all of the rights in the play which in the agreement had been "granted, sold, assigned, and set over to the Purchaser."
(5) Article 13 provided that the term "Owners" used in the agreement included their "heirs, executors, administrators, next of kin, successors and assigns"; that the term "Purchaser" used in the agreement included "its successors and assigns"; and that the Purchaser shall have the unlimited right "to sell, assign, transfer or otherwise dispose of this agreement, and/or any or all of its right, title and interest thereunder, in whole or in part."
(6) Article 17 provided *176 that the agreement "shall inure to the benefit of and be binding upon the respective heirs, executors, administrators, next of kin, successors and assigns of the parties hereto."
Under this agreement the petitioner and Chodorov also granted to the corporation a one-half interest in the radio broadcast rights to the motion picture version of "My Sister Eileen" and the exclusive right to enter into agreements with third parties for the exploitation of these radio rights. They expressly reserved all rights not specifically granted, including the publication, television and radio, and production rights on the spoken stage to their play. It was agreed that the purchaser would not have the right to produce any sequels, but that the authors would "not produce or license or otherwise grant or convey the right to produce or permit voluntarily the production of any motion picture or televised motion picture sequel" prior to certain specified dates. This agreement was consented to and approved by Ruth McKenney.
In consideration for the rights which it acquired, Columbia Pictures Corporation agreed to pay $ 225,000, of which the petitioner's share was to be $ 40,500. He received payments under*177 this agreement disposing of his motion picture rights in the play, as follows:
| Commissions | Net amount | ||
| Year received | Gross amount | and | received by |
| assessments | petitioner | ||
| 1941 | $ 13,116.00 | $ 1,699.19 | $ 11,416.81 |
| 1942 | 15,061.20 | 3,372.79 | 11,688.41 |
| 1943 | 12,322.80 | 246.46 | 12,076.34 |
| Total | 40,500.00 | 5,318.44 | 35,181.56 |
The petitioner included the above net amount of $ 11,416.81 in ordinary income in his income tax return for the year 1941 and the above net amount of $ 11,688.41 in ordinary income in his income tax return for the year 1942. In 1943 the petitioner reported 50 per cent *1206 of the above net amount of $ 12,076.34, or $ 6,038.17, as net long term capital gain.
(b) Facts relating to the transfer of the world motion picture rights to a play entitled "The Doughgirls." On January *51 22, 1943, the petitioner and George S. Kaufman (hereinafter Kaufman) copyrighted a play, entitled "The Doughgirls," in the petitioner's name. This was their own original work. Prior thereto, on November 6, 1942, the petitioner and Kaufman entered into a dramatic production contract with Max Gordon whereby Gordon was leased the sole and exclusive right*178 to produce and present the play on the speaking stage in the United States and Canada and limited rights to foreign stage production. The dramatists expressly retained, among other stated rights, the motion picture rights to their dramatization. The petitioner and Kaufman were to receive royalties from the production of this play based on gross weekly box office receipts. On November 14, 1942, the petitioner acquired from Max Gordon, in exchange for a contribution of 12 1/2 per cent of the capital required for the production, a 12 1/2 per cent interest in the sole and exclusive right which had been granted to the producer to produce the play. On December 31, 1942, "The Doughgirls" opened in New York as a stage production of Max Gordon and played for 671 performances on Broadway. Pursuant to the agreement of November 6, 1942, with Max Gordon, the petitioner received author's royalties from this stage production in 1943 in the amount of $ 132,789.27. Pursuant to the agreement of November 14, 1942, the petitioner received producer's share of profits from this stage production in 1943 in the amount of $ 29,188.36. The petitioner also received in 1943 $ 332.05 representing book *179 royalties from the play "The Doughgirls."
On June 25, 1943, the petitioner and Kaufman, as the "Owner," entered into an agreement with Warner Brothers Pictures, Inc., as the "Purchaser," for the disposition of the motion picture rights to "The Doughgirls," which included the following:
(1) The Owner agrees to "grant, bargain, sell, assign, transfer and set over" to the Purchaser: (a) the "exclusive complete and entire motion picture rights, including common law and statutory copyright in the same throughout the world, together with all benefits of the copyright from such writings ["The Doughgirls"], the title and the theme thereof, and of all remedies held thereunder, with respect to such motion picture rights." (b) "The exclusive right to make motion picture versions" of the play, "The Doughgirls," and "to produce and reproduce" motion picture photoplays and sound records of every kind based upon that play; and the "exclusive right" to secure copyright registration and protection of such motion picture photoplays and sound records in all countries of the world in the Purchaser's name or otherwise.
(2) Article 7 of the agreement provided that the "Owner hereby appoints the Purchaser*180 as the Owners' irrevocable attorney in fact, with the right, but not the obligation, for the sole benefit of the Purchaser, and at Purchaser's expense, *1207 to enforce and protect all rights herein granted under any and all copyrights and to prevent infringement thereof, and to litigate, collect and receipt for all damages arising from any infringement of such rights, using the Owner's name, in Purchaser's discretion and to join, in Purchaser's sole judgment, the Owner as a party plaintiff or defendant in any suit or procedure."
(3) Article 9 of the agreement provided that the "Purchaser" might "assign, transfer and grant the within rights, or any part thereof" without limit.
(4) Article 15 provided that the "agreement shall bind the parties hereto, their respective heirs, successors, administrators, executors and assigns."
(5) Article 17 of the agreement provided that the "Purchaser shall have the absolute and unlimited right" to use the play for motion picture purposes "in any manner it may, in its uncontrolled discretion, deem advisable, with the same force and authority as if the Purchaser were the author" of the play.
The motion picture company was also given the right *181 to produce and release sequels upon payment of $ 31,250 for each sequel. The authors expressly reserved all rights not specifically granted, including the stage, book, periodical, and radio rights, and the television rights to presentation with live actors. Warner Brothers Pictures, Inc., agreed to pay to the authors $ 50,000 in 1943 and additional installements of $ 50,000 each for the succeeding four years. Of each of these payments of $ 50,000, the petitioner was to receive the gross amount of $ 22,500. In his income tax return for 1943 the petitioner reported the receipt of $ 22,500, less agent's commissions and Guild assessments of $ 2,684.25, or a net amount of $ 19,815.75. However, the net amount was not included in gross income. Rather, the petitioner treated the receipts as a long term capital gain and reported in his income only 50 per cent, or $ 9,907.87.
The petitioner kept his books during the years 1941, 1942, and 1943 and made his Federal income tax returns for those years on the cash basis of accounting. *52 He had no recognized losses in 1942 or 1943 from sales, exchanges, or compulsory or involuntary conversions of property.
The petitioner stated his occupation*182 to be that of playwright in his income tax returns filed for 1941, 1942, and 1943. His trade or business during those years was that of playwright, and the movie rights to the plays, "My Sister Eileen" and "The Doughgirls" were property held by him primarily for sale to customers in the ordinary course of his trade or business.
Issue 2. -- In May, 1943, the petitioner's wife, Germaine S. Fields, commenced an action in the Supreme Court of the State of New York against her husband, in which she asked that a decree of separation be granted to her and that her husband be compelled to provide suitably out of his estate and earnings for her support and maintenance.
In May, 1943, she filed a motion in the aforesaid proceeding for alimony pendente lite and for counsel fees, and on June 23, 1943, the Supreme Court of the State of New York referred the matter of the *1208 defendant's assets and income to a referee and ordered that, "* * * pending a coming in of said referee's report, the defendant is directed to pay to the plaintiff the sum of $ 1,000 per month for her maintenance and support." Pursuant to the motion for alimony pendente lite and counsel fees, on November*183 22, 1943, the Supreme Court of the State of New York ordered Joseph Fields, the petitioner herein, to pay to Germaine S. Fields, during the pendency of the action in that court, the amount of $ 1,250 per month from June 1, 1943.
On December 21, 1943, the Supreme Court of the State of New York ordered "that the plaintiff, Germaine Sarlabous Fields, be and she hereby is separated from the defendant, Joseph Albert Fields, and from his bed and board forever," and, further, "that the defendant pay to the plaintiff for her support the sum of $ 1,250 on the first day of each and every month commencing on the first day of January, 1944."
By reason of, and pursuant to, the orders of the Supreme Court of the State of New York, of June 23, 1943, and November 22, 1943, the petitioner paid to Germaine S. Fields the amounts of $ 5,666.66 and $ 3,416.67, respectively, or a total of $ 9,083.33, in the calendar year 1943, which payments were made prior to the separation decree of December 21, 1943. The petitioner deducted in his income tax return for the year 1943 this amount of $ 9,083.33, which he described as alimony to Mrs. Germaine S. Fields as provided by court decree. During the period in*184 which the petitioner made these payments, his wife was not legally separated or divorced from him under a decree of separate maintenance or divorce.
OPINION.
Issue 1. -- The main issue in this proceeding is whether the sums received by the petitioner during 1942 and 1943 for the exclusive motion picture rights to his plays, "My Sister Eileen" and "The Doughgirls," are taxable as long term capital gains under
*185 The petitioner argues that the payments by the motion picture companies were made in exchange for his sale of a property interest in the copyrights of "My Sister Eileen" and "The Doughgirls" within the meaning of
This Court, in
The Copyright Act, 61 Stat. 652,
*189 But in
The procedural justification*190 for the majority rule no longer has basis in fact, since an exclusive licensee now has the right to sue for infringement, subject to the formality of joining the owner as a party plaintiff or as a party defendant. In
"Taxation is not so much concerned with the actual refinements of title as it is with actual command over the property taxed -- the actual benefit for which the tax is paid."
We are familiar with the decisions cited by respondent holding that purported assignments of patent rights which failed to grant the right to the assignee to sell the patent or license its use were in themselves only licenses * * * [Citing cases.] The question presented in these cases was the right of the so-called assignee to maintain a suit for infringement which right was denied because the right to sell the patents or license their use had been retained by the assignor.
*192 In none of the cited cases did the court have the situation here existing. The questions there presented were entirely different from the one before us for decision. The right to maintain a suit at law is often controlled by the question of the possession of the naked legal title. Here we have a question of income tax liability where legal title is of little consequence and the inquiry is as to the ownership of the beneficial interest. We are not to determine whether petitioner or Eli Lilly & Co. could maintain a suit for infringement in its own name, but merely whether petitioner, under its contract with Eli Lilly & Co., divested itself irrevocably of certain capital investments in consideration of the payment made to it by the latter company.
* * * Legal title alone, without beneficial ownership, and held for the interest of another, is without value. * * *
See also
There is nothing inherent in the nature of a copyright which precludes the separate sale of the several parts which make up the whole. 3 The*193 Copyright Act segregates the various exclusive rights derived under the registration of a copyright into separately numbered paragraphs. The major rights arising under the copyright of a play are (1) the exclusive right to publish the play; (2) the exclusive right to present the play on the speaking stage; (3) the exclusive right to present the play on the radio; and (4) the exclusive right to make and exhibit motion pictures of the play. Each of these exclusive rights is enforceable by the owner against all persons. Each is substantial in itself and may be exploited independently of any of the others. Each may form the basis of a new copyright secured in the name of the holder of the exclusive right.
*1212 Only one*194 case has considered whether or not the transfer of the exclusive motion picture rights in a play is a "sale" within the meaning of
* * * Nor does it seem to me to be material that the exclusive license which the author granted to the Paramount Company did not convey "title" * * *.
Copyright and literary property are monopolies; they entitle the owner to prohibit various kinds of reproduction, and to relieve individuals of these prohibitions by licenses. The licenses may do no more than excuse what would otherwise be infringements; or they may be exclusive, as in the case at bar. An exclusive license requires the author to protect the licensee against other infringement, and is for the most purposes treated as "property." I think that it is "property" within
Columbia Pictures Corporation and *195 Warner Brothers Pictures, Inc., acquired full beneficial ownership of the exclusive motion picture rights to "My Sister Eileen" and "The Doughgirls," respectively, under their agreements with the petitioner; they received "actual command of the property." The petitioner retained nothing but the naked legal title. Mr. Justice Holmes, in
The notion of property starts, I suppose, from confirmed possession of a tangible object and consists in the *55 right to exclude others from interference with the more or less free doing with it as one wills. But in copyright property has reached a more abstract expression. The right to exclude is not directed to an object in possession or owned, but is in vacuo, so to speak. It restrains the spontaneity of men where but for it there would be nothing of any kind to render their doing as they saw fit.
See also
The agreements transferring the exclusive motion picture rights to*196 the plays gave the motion picture companies "the right to exclude others from interference with the more or less free doing" with them as the transferees willed. For the duration of the monopoly granted by the Copyright Act, the motion picture companies could assert their monopoly of their respective motion picture rights against the world, including the petitioner himself. Although the transferors retained the power, under the Copyright Act, to sue for damages for infringement of the exclusive motion picture rights, under the agreements this power could be exercised only for the benefit of the transferees. The motion picture companies also had the power, themselves, to sue for infringement of their exclusive rights by the simple formality of joining the "owners" as nominal parties plaintiff.
The case of
* * * No suggestion appears that Congress intended or wished to relieve from taxation the readily accessible and long-established*199 source of revenue to be found in the payments made to nonresident aliens for the use of patents or copyrights in the United States. * * * To have exempted these nonresident aliens from these readily collectible taxes derived from sources within the United States would have discriminated in their favor against resident citizens of the United States who would be required to pay their regular income tax on such *1214 income, if treated as royalties within the meaning of our gross income provisions, or at least to pay a tax upon them as capital gains, if treated as income from sales of capital within the meaning of our capital gains provisions. No such purpose to discriminate can be implied.
In
* * * Because of the differing histories and purposes of
The grants of the motion picture rights to the plays, "My Sister Eileen" and "The Doughgirls," while not disposing of all the property in the copyright of those plays, did dispose of all the petitioner's property in the motion picture rights. Such a grant is a "sale" for the purposes of
Having arrived at the conclusion that the transfer of the motion picture rights constituted a "sale" for the purposes of
Under
*1215 But there is a difference between property used in the trade or business and property*202 held primarily for sale to customers. These are two mutually exclusive purposes; property can not be held for use and for sale at the same time.
Under the existing law, the gain or loss from the sale or exchange of depreciable property is not treated as a capital gain or capital loss, but as an ordinary gain or an ordinary loss. This rule was originally inserted as a relief provision to enable corporations to have the full benefit of a loss from the sale of machinery, instead of being limited by the capital loss provisions, which would permit it only a certain percentage of the loss. It was felt at that time that the taxpayer should not be denied the full loss because it sold the property at a loss instead of abandoning the property. While this rule provided relief in case a loss was realized, it appears that many taxpayers are able to dispose of their depreciable property at a gain over its depreciated cost. To treat such a gain as an ordinary gain will result in an undue hardship to the taxpayer. * * *
In order for the taxpayer to come within the provisions of
*1216 See also
In
The petitioner in this proceeding has not shown that he was in a position to exploit the motion picture rights personally, or that he had done so in the past or contemplated doing so in the future with other literary works. He was not engaged in the highly technical business of making motion pictures. He has not shown that the motion picture rights to the plays in question were used by him in his trade or business. Rather, the motion picture rights were held primarily for sale to customers, in this case motion picture companies, in the ordinary course of his trade or business.
It is held that the proceeds from the transfer of the motion picture rights to the plays, "My Sister Eileen" and "The Doughgirls" can not be treated as long term capital gains under
Issue 2. -- The petitioner claims a deduction under
The right to a deduction under
This question was considered in
It is held that the payments pendente lite which the petitioner made*207 to his wife in 1943 are not deductible. The respondent's determination under this issue is sustained.
Decisions will be entered under Rule 50.
Footnotes
1.
SEC. 117 . CAPITAL GAINS AND LOSSES.* * * *
(j) Gains and Losses From Involuntary Conversion and From the Sale or Exchange of Certain Property Used in the Trade or Business. --
(1) Definition of property used in the trade or business. -- For the purposes of this subsection, the term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in
section 23 (l) , held for more than 6 months, * * *(2) General rule. -- If, during the taxable year, the recognized gains upon sales or exchanges of property used in the trade or business, plus the recognized gains from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business and capital assets held for more than 6 months into other property or money, exceed the recognized losses from such sales, exchanges, and conversions, such gains and losses shall be considered as gains and losses from sales or exchanges of capital assets held for more than 6 months. * * *↩
2. The leading cases in which this view has been adopted are
Witmark & Sons v. Pastime Amusement Co., 298 Fed. 470 ; affd.,2 Fed. (2d) 1020 ;Goldwyn Pictures Corporation v. Howells Sales Co., 282 Fed. 9 ; certiorari denied.,262 U.S. 755">262 U.S. 755 ;New Fiction Publishing Co. v. Star Co., 220 Fed. 994 ;Empire City Amusement Co. v. Wilton, 134 Fed. 132,↩ 133 .3. E. g., section 5 of the English Copyright Act of 1911 expressly allows partial assignments and specifically recognizes the partial assignee as the owner↩ of the rights assigned, with all the accruing rights and privileges of ownership. See also the Canadian Copyright Act of 1927, sec. 12.