Opinion
Docket No. 6468.
1950-06-30
SAX ROHMER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Watson Washburn, Esq., and Royal E. Mygatt, Esq., for the petitioner. William B. Springer, Esq., for the respondent.
1. Where petitioner, a nonresident alien author, not engaged in trade or business in the United States, assigned to his wife the right to receive one-half of the income from the transfer of the serial rights to a story which he had written, held, the entire payments received from the transfer are income to petitioner.
2. Where petitioner received lump-sum payments for the American and Canadian serial rights to certain of his literary works, held, the amounts received for the American rights are includible in his income under section 211(a) of the Revenue Act of 1938.
3. Where petitioner omitted from gross income in his return an amount properly includible therein which was more than 25 percent of the income reported, held, the 5-year period of limitation contained in section 275(c) of the Revenue Act of 1938 is applicable.
4. Since evidence provides basis for allocation of total receipts for serial rights in United States and Canada, held, that 95 percent of total consideration was for use of serial rights to stories in United States, and 5 percent was for use of serial rights in Canada; and held, further, that only the consideration which is attributable to the use of the serial rights in the United States is includible in petitioner's income from sources within the United States.
5. Where petitioner had gross income greater than $21,600 from the sources enumerated in section 211(a) of the Revenue Act of 1938 held, petitioner is entitled to deduct the expenses allocable to such income. Watson Washburn, Esq., and Royal E. Mygatt, Esq., for the petitioner. William B. Springer, Esq., for the respondent.
The Commissioner originally determined a deficiency of $1,011.48 in the petitioner's income tax for the year 1938. In an amended answer, the Commissioner determined an additional deficiency of $2,433.29, making a total asserted deficiency of $3,444.77. The petitioner claims that he is entitled to a refund of $2,928.
There are five questions raised in this proceeding: (1) Whether lump-sum payments made to petitioner's wife for the serial rights to literary works of which he was the author are properly includible in petitioner's income; (2) whether lump-sum payments received by petitioner for the serial rights to certain of his literary works are properly includible in his income for 1938; (3) whether the assessment of the deficiency in question is barred by the period of limitation contained in section 275(a) of the Revenue Act of 1938; (4) whether income received by petitioner for the use of his literary property was properly allocable between sources within and sources without the United States; and (5) whether respondent erred in disallowing any deductions, earned income credit, or personal exemption to petitioner under section 211 of the Revenue Act of 1938.
The petitioner filed his return for the year 1938 with the collector for the district of Maryland.
The record in this proceeding consists of oral testimony and various exhibits.
FINDINGS OF FACT.
Issues 1 and 2.— The petitioner is a British subject who, at all times material to this proceeding, was a nonresident alien author, not engaged in trade or business within the United States and having no office or place of business therein.
Petitioner and his wife, Rose Elizabeth Rohmer, were married in 1914. Petitioner's wife, who was also an author, assisted him in his writings by discussing with him the plots for the various stories and, as they progressed, by making occasional criticisms and suggestions. She also handled the receipt of money, the payment of expenses, and the keeping of records, and aided petitioner in setting a price on his work.
Several years prior to 1938, petitioner organized a British corporation, ‘Fu Manchu, Ltd.,‘ to which petitioner paid all the proceeds which he received from his writings, both from sources within and without the United States. Petitioner owned 50 percent of the stock of the corporation, and his wife owned the remaining 50 percent. ‘Fu Manchu, Ltd.‘ was used by petitioner solely for accounting purposes and neither earned nor was entitled to any of the income in question in this proceeding.
During the year 1938 Paul R. Reynolds & Son was petitioner's exclusive literary agent in the United States. During the early part of 1938, petitioner and Paul R. Reynolds, Sr., discussed the outline of the serial novel, ‘Drums of Fu Manchu,‘ with William L. Chenery, the editor of ‘Collier's‘ magazine. On April 15, 1938, petitioner, through Paul R. Reynolds & Son, submitted an outline of the story to ‘Collier's.‘ The first part of ‘Drums of Fu Manchu‘ which was written by petitioner was submitted to ‘Collier's‘ on July 5, 1938, and the rest of the novel as written by him was submitted to the magazine on August 23, 1938.
On October 3, 1938, ‘Collier's‘ purchased the first American and Canadian serial rights to ‘Drums of Fu Manchu‘ for $33,750. In payment for the novel, ‘Collier's‘ issued four post-dated checks payable to Paul R. Reynolds & Son as follows:
+--------------------------+ ¦October 18, 1938 ¦$10,000¦ +------------------+-------¦ ¦November 9, 1938 ¦5,000 ¦ +------------------+-------¦ ¦November 15, 1938 ¦10,000 ¦ +------------------+-------¦ ¦November 22, 1938 ¦8,750 ¦ +--------------------------+
Attached to each check was a form which Paul R. Reynolds & Son endorsed before cashing the check, as follows:
Received from the Crowell Publishing Company the above sum, payment in full for manuscript, copyright and first American and Canadian serial rights in (part) payment on new serial by Sax Rohmer with warranty of authorship and ownership. The book rights and dramatic rights, will be released to authors upon request.
Prior to October 25, 1938, petitioner's American counsel, Watson Washburn, advised him that he might effect a tax savings by assigning to his wife a one-half interest in his literary property. On October 25, 1938, petitioner executed the following instrument, purporting to assign an undivided one-half interest in ‘Drums of Fu Manchu‘ to his wife:
* * * SAX ROHMER, being the author of a certain original unpublished novel in manuscript, consisting of 436 typewritten pages, containing further adventures of Fu Manchu and entitled ‘Drums of Fu Manchu‘ does hereby assign, transfer and set over unto his wife, ROSE ELIZABETH ROHMER, as undivided one-half interest in all his literary property, right, title and interest in and to said manuscript, including all profits that may arise from copyrighting the same throughout the world and from printing, publishing and selling the same in serial or book form and in newspapers and magazines, including all dramatic, radio, motion picture, either silent or talking, and television rights of every nature and description throughout the world, and undivided one-half interest to be hers in perpetuity.
Petitioner sent notice of this assignment to Paul R. Reynolds & Son with instructions that the proceeds from the sale of any rights in the story were to be equally divided between petitioner and his wife. No notice of the assignment was given to ‘Collier's‘ magazine.
‘Drums of Fu Manchu‘ was copyrighted sometime in April, 1939, by ‘Collier's‘ magazine under an agreement whereby ‘Collier's‘ would obtain the statutory copyright and then reassign all rights except the first American and Canadian serial rights to petitioner upon request.
Paul R. Reynolds & Son kept a ledger account for petitioner during 1938, but no ledger account was kept for his wife.
Petitioner is taxable on all the income from the transfer of the first American serial rights to ‘Drums of Fu Manchu.‘
During the year 1938, Paul R. Reynolds & Son received, as agent for petitioner, $42,922.10 from United States companies in payment for rights acquired in literary works written by petitioner. Of these payments, $33,750 was paid by ‘Collier's‘ for the first American and Canadian serial rights to ‘Drums of Fu Manchu‘; $1,000 was paid by ‘This Week‘ magazine for the first and second American and Canadian serial rights to the short story, ‘Cinderella's Slipper:’ $6,000 was paid by ‘This Week‘ magazine for the first and second American and Canadian serial rights to the short story, ‘Panama Plot‘; and $2,172.10 was paid for incidental American rights to various stories written by petitioner.
Issue 3.— Petitioner, through his attorney, Watson Washburn, filed a Federal income tax return for the year 1938 on June 15, 1938, in which he reported gross income of $28,021.22. He omitted from gross income an amount properly includible therein which is in excess of 25 percent of the gross income reported.
Respondent mailed a notice of deficiency in income tax for the year 1938 to petitioner on June 14, 1944. The notice of deficiency was timely.
Issue 4.— ‘Drums of Fu Manchu‘ was published serially in ‘Collier's‘ magazine for ten weeks beginning April 1, 1939.
The average paid circulation of ‘Collier's‘ magazine from July 1, 1938, through December 31, 1938, was as follows:
+------------------------+ ¦United States ¦2,638,595¦ +--------------+---------¦ ¦Canada ¦68,709 ¦ +--------------+---------¦ ¦Miscellaneous ¦17,147 ¦ +------------------------+
The average net circulation of “Collier's” magazine from January 1, 1939, through June 30, 1939, was as follows:
+------------------------+ ¦United States ¦2,745,051¦ +--------------+---------¦ ¦Canada ¦72,053 ¦ +--------------+---------¦ ¦Miscellaneous ¦19,009 ¦ +------------------------+
No segregation of the consideration paid for the American rights from the consideration paid for the Canadian rights was made in the sales of the joint American and Canadian serial rights to the stories, ‘Drums of Fu Manchu,‘ ‘Cinderella's Slipper,‘ and ‘Panama Plot.‘
Petitioner received $32,062.50 for the first American serial rights to ‘Drums of Fu Manchu,‘ $950 for the first and second American serial rights to ‘Cinderella's Slipper,‘ and $5,700 for the first and second American serial rights to ‘Panama Plot.‘ He received $1,687.50 for the first Canadian serial rights to ‘Drums of Fu Manchu,‘ $50 for the first and second Canadian serial rights to ‘Cinderella's Slipper,‘ and $300 for the first and second Canadian serial rights to ‘Panama Plot.‘
Issue 5.— During 1938 petitioner incurred expenses in connection with income earned in the United States as follows:
+-----------------------------------------------------------------------------+ ¦Expense of maintaining portion of London flat and one room at ¦ ¦ ¦petitioner's country residence in Surrey, used for writing, ¦$593.97 ¦ ¦reference, and professional purposes ¦ ¦ +--------------------------------------------------------------------+--------¦ ¦Secretarial, postage, stationery, and typing expenses ¦507.14 ¦ +--------------------------------------------------------------------+--------¦ ¦Telephone, telegram, and cable expenses ¦236.30 ¦ +--------------------------------------------------------------------+--------¦ ¦Books, newspapers, magazines, and journals for background reference ¦81.89 ¦ ¦purposes ¦ ¦ +--------------------------------------------------------------------+--------¦ ¦Traveling and hotel expense, including trip to Rivieria for ¦ ¦ ¦background material and part of cost of trip to United States ¦1,500.00¦ ¦regarding sale of his publications ¦ ¦ +--------------------------------------------------------------------+--------¦ ¦Entertainment and publicity expenses ¦715.52 ¦ +--------------------------------------------------------------------+--------¦ ¦Expenses of Fu Manchu, Ltd., ¦ ¦ +--------------------------------------------------------------------+--------¦ ¦Office and secretarial expenses ¦46.11 ¦ +--------------------------------------------------------------------+--------¦ ¦Accounting and auditing ¦307.44 ¦ +--------------------------------------------------------------------+--------¦ ¦Typing and Clippings expense ¦47.09 ¦ +--------------------------------------------------------------------+--------¦ ¦Miscellaneous expenses ¦105.50 ¦ +-----------------------------------------------------------------------------+
Petitioner paid British income taxes for the year 1938 in the amount of $1,760.82, of which $1,320.61 was allocable to income earned in the United States.
Petitioner paid commissions totaling $4,292.22 to Paul R. Reynolds & Son during the year 1938. Of this amount $4,088.47 was allocable to income from sources within the United States, and $203.75 was allocable to income from sources without the United States.
OPINION.
HARRON, Judge:
Issue 1.— The question under this issue is whether the entire income received from the transfer of the first American and Canadian serial rights to the story, ‘Drums of Fu Manchu,‘ was income to petitioner, or whether only one-half the income from the transfer of these rights is income to petitioner because of the assignment by him to his wife of a one-half interest in the story. This assignment was executed after petitioner transferred the first American and Canadian serial rights to ‘Collier's‘ magazine.
In Wodehouse v. Commissioner, 178 Fed.(2d) 987, the Court of Appeals for the Fourth Circuit held that where a similar assignment of a one-half interest in literary works written by Wodehouse was made by the author to his wife prior to any transfer of the assigned stories:
* * * In reality, then, taxpayer, in substance not in form and in spirit not in letter, attempted merely to assign to his wife a share in his future income. And that, for federal income tax purposes, is not permitted.
The case for taxing to petitioner the entire income received for the serial rights to ‘Drums of Fu Manchu‘ is even stronger in this proceeding than it was in the Wodehouse case, supra. In the instant proceeding, petitioner in form as well as substance assigned to his wife the right to receive one-half the income which he had already earned from the transfer to ‘Collier's‘ of serial rights to his novel, ‘Drums of Fu Manchu.‘
Outright assignment of the right to receive income has been summarily disposed of as a tax avoidance device by the Supreme Court in a number of cases. In Helvering v. Eubank, 311 U.S. 122, the Supreme Court held that the assignor of the right to collect insurance premiums on a contract already performed by him was taxable on whatever premiums were collected. And in Lucas v. Earl, 281 U.S. 111, Justice Holmes observed that regardless of the motive behind the assignment of the right to receive income, the ‘fruit‘ must be attributed to the ‘tree.‘ Cf. Helvering v. Clifford, 309 U.S. 331; Helvering v. Horst, 311 U.S. 112; Harrison v. Schaffner, 312 U.S. 579; Commissioner v. Sunnen, 333 U.S. 591.
The case of Wodehouse v. Commissioner, 177 Fed.(2d) 881, decided by the Court of Appeals for the Second Circuit contrary to the decision of the Court of Appeals for the Fourth Circuit in Wodehouse v. Commissioner, 178 Fed.(2d) 987, despite almost identical facts, is not contrary to our decision in this proceeding. In the case before the Second Circuit, that court based its decision upon the fact that Wodehouse assigned to his wife an interest in the stories before he had received any right to income from them and distinguished Helvering v. Eubank, supra, on that ground. But in this proceeding, petitioner had a contract right to receive the income in question before he made any assignment of an interest in the story to his wife. The dissenting judge noted in the Second Circuit case that:
My brothers concede, as in the light of Helvering v. Eubank, 311 U.S. 122, they must, that if Wodehouse had given his wife a half-interest in the royalties after he had sold the novel, the income would be taxable to him.
It is held that the entire payments received for the transfer of the first American and Canadian serial rights to ‘Drums of Fu Manchu‘ are income to petitioner.
Issue 2.— The question under the second issue is whether lump-sum payments received by petitioner in exchange for the serial, broadcasting, or newspaper rights to certain of his literary works is properly includible in his income as a nonresident alien.
This question was considered by the Supreme Court in the recent case of Wodehouse v. Commissioner, 337 U.S. 369. The Supreme Court held that the receipt of such lump-sum payments constitutes the receipt of ‘gross income from sources within the United States as used in sections 119(a), 211(a), and 212(a) of the Internal Revenue Code,‘ and is therefore includible in the taxable income of the nonresident alien. See, also, Sabatini v. Commissioner, 98 Fed.(2d) 753, affirming 32 B.T.A. 705; Rohmer v. Commissioner, 153 Fed.(2d) 61, affirming 5 T.C. 183, certiorari denied, 328 U.S. 862.
It is held that the lump-sum payments received by petitioner in exchange for the serial rights to ‘Drums of Fu Manchu‘ are includible in his income.
Issue 3.— The question under this issue is whether the assessment of the deficiency in question is barred by the three-year period of limitation contained in section 275(a) of the Revenue Act of 1938.
Since we have held under the first two issues that petitioner failed to include in his gross income amounts properly includible therein, which are in excess of 25 percent of the gross income which he did include, the five-year period of limitation contained in section 275(c) of the Revenue Act of 1938, rather than the three-year period contained in section 275(a), is applicable to this proceeding. It is held, therefore, that the statute of limitations has not tolled against the assessment of the deficiency in question.
Issue 4.— The question under the fourth issue is whether the income received by petitioner for the use of his literary property is properly allocable between sources within and sources without the United States.
If there is a proper basis upon which a specific portion of the total consideration paid petitioner for serial rights to his stories can be allocated between sources within and sources without the United States, then the amounts paid for their use without the United States are not includible in petitioner's income. See Wodehouse v. Commissioner, 178 Fed.(2d) 987; Wodehouse v. Commissioner, 177 Fed.(2d) 881; Sax Rohmer, 5 T.C. 183, affd., 153 Fed.(2d) 61, certiorari denied, 328 U.S. 862; cf. Cohan v. Commissioner, 39 Fed.(2d) 540, reversing 11 B.T.A. 743. Section 211(a) of the Revenue Act of 1938 taxes nonresident alien individuals not engaged in trade or business within the United States and not having an office or place of business therein only upon income received from sources within the United States.
Based upon the testimony of the expert witnesses, the circulation figures put in evidence, and ‘the economic common sense of the entire situation here presented,‘ (Wodehouse v. Commissioner, 178 Fed.(2d) 987) it is held that 95 percent of the income from the transfer of the serial rights to the stories, ‘Drums of Fu Manchu,‘ ‘Cinderella's Slipper,‘ and ‘Panama Plot,‘ is attributable to sources within the United States and 5 percent is attributable to sources without the United States.
Issue 5.— The question under the final issue is whether petitioner is entitled to any deductions, earned income credit, or personal exemption in computing his net income subject to tax.
Under the first two issues, it has been held that petitioner received gross income for the year 1938 from sources within the United States, and our holdings increase his income to a figure greater than $21,600. Under section 211 of the Revenue Act of 1938,
therefore, petitioner is entitled to deduct the expenses incurred which were allocable to gross income from sources within the United States as specified in that section.
SEC. 211. TAX ON NONRESIDENT ALIEN INDIVIDUALS.(a) NO UNITED STATES BUSINESS OF OFFICE.(1) GENERAL RULE.— 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 and not having an office or place of business therein, 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 10 per centum of such amount, * * *(c) NO UNITED STATES BUSINESS OR OFFICE AND GROSS INCOME OF MORE THAN $21,600.— A nonresident alien individual not engaged in trade or business within the United States and not having an office or place of business therein who has a gross income for any taxable year of more than $21,600 from the sources specified in subsection (a)(1), shall be taxable without regard to the provisions of subsection (a)(1), except that—(1) The gross income shall include only income from the sources specified in subsection (a)(1);(2) The deductions (other than the so-called ‘charitable deduction‘ provided in section 213(c) shall be allowed only if and to the extent that they are properly allocable to the gross income from the sources specified in subsection (a)(1);(3) The aggregate of the normal tax and surtax under sections 11 and 12 shall, in no case, be less than 10 per centum of the gross income from the sources specified in subsection (a)(1); and
In the deficiency notice, respondent refused to allow deduction for expenses which petitioner claimed were allocable to income from sources within the United States on the ground that petitioner had failed to submit any evidence that they had actually been incurred. At the trial of this proceeding, petitioner introduced evidence which establishes that he incurred expenses which are allocable to income from sources within the United States. From the evidence, facts have been found with respect to the items of expenses and the amounts thereof which are allocable to income from sources within the United States. The various items total $9,550.04. It is held that the foregoing total amount is deductible under section 211(c) of the 1938 Act. It is held further that petitioner is entitled to an earned income credit and to a personal exemption.
Decision will be entered under Rule 50.