Opinion
Docket No. 35558.
1954-03-31
SAX ROHMER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Watson Washburn, Esq., for the petitioner. Paul M. Stewart, Jr., Esq., for the respondent.
Watson Washburn, Esq., for the petitioner. Paul M. Stewart, Jr., Esq., for the respondent.
1. Petitioner, a nonresident alien author, sold the serial rights to a novel to an American publisher for $33,750. After receiving part payment of $10,000, he assigned a one-half interest in this literary work to his wife, who had rendered various professional and other services in writing the novel. Held, in the absence of proof that such services were rendered as consideration for the assignment, the entire value of the interest transferred constitutes a taxable gift.
2. Five percent of the purchase price of the serial rights was paid for their use in Canada. Respondent determined that this did not result in a nontaxable transfer, by a nonresident alien, of property situated outside the United States. Held, respondent sustained; the assignment transferred no interest in property situated outside the United States.
3. The publisher's payments for the serial rights were made payable to petitioner's literary agent and were in his possession at the time of the assignment. He deducted his 10 percent commissions before remitting the balance to petitioner and his wife. Held, such commissions were a charge upon the proceeds of the sale of the serial rights, and one-half of the commissions must be deducted in arriving at the value of the interest transferred to petitioner's wife.
4. Petitioner's literary agent also made 10 percent withholding tax deductions before remitting the balance of the proceeds of the serial rights to petitioner and his wife. Held, in the absence of specific instructions in the written assignment, it must be assumed that petitioner's income taxes on the proceeds of serial rights were to be deducted from his one-half share thereof.
5. Petitioner's gift tax return was filed by his agent, and not ratified by petitioner within a reasonable time. Held, an unratified return was not sufficient to invoke the running of the statutory period of limitation.
6. Petitioner was notified by respondent that he must ratify the gift tax return filed for him by his agent. Petitioner forwarded respondent's notification to his American attorney, to whom he had previously given authority under a power of attorney, to act for him with regard to all tax matters. Held, petitioner's reliance on his American attorney constitutes reasonable cause for failure to file a properly ratified gift tax return as required by statute.
This proceeding involves a deficiency in gift tax for the calendar year 1938 of $206.25 and a penalty of $51.56 asserted against Sax Rohmer (hereinafter referred to as the petitioner).
The issues to be determined are: (1) Whether petitioner's assignment to his wife of a one-half interest in his literary work, ‘Drums of Fu Manchu,‘ constitutes a gift, taxable to petitioner; (2) if so, the value of the gift; (3) whether the assessment of a gift tax against petitioner for the year 1938 is barred by the statute of limitation; and (4) whether a 25 percent penalty should be imposed for failure to file a return as provided by section 3612(d)(1) of the Internal Revenue Code.
The parties have stipulated that the facts as found by this Court in Sax Rohmer, 14 T.C. 1467 (1950),
shall be found as facts in the present proceeding. Certain other facts were also stipulated.
That case concerned the income tax consequence to petitioner of receipts from the same literary work here in issue.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein.
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, 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 paid to it.
During the year 1938 Paul R. Reynolds & Son was petitioner's exclusive literary agent in the United States.
On October 3, 1938, ‘Collier's‘ purchased the first American and Canadian serial rights to petitioner's novel, ‘Drums of Fu Manchu,‘ for $33,750. In payment for the novel, ‘Collier's‘ issued four postdated checks payable to Paul R. Reynolds & Son as follows:
+----------------------+ ¦Oct. 18, 1938 ¦$10,000¦ +--------------+-------¦ ¦Nov. 9, 1938 ¦5,000 ¦ +--------------+-------¦ ¦Nov. 15, 1938 ¦10,000 ¦ +--------------+-------¦ ¦Nov. 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. He informed petitioner that it would facilitate the filing of separate returns in the United States, with a consequent reduction in tax. Under English law, the income of husband and wife had to be returned jointly, so that any division of earnings between them was of no tax consequence in that country. 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, an 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.
The value of the one-half interest in ‘Drums of Fu Manchu‘ at the time of its assignment to petitioner's wife was $12,562.50, calculated as follows:
+----------------------------------------------------+ ¦Balance due on serial rights ¦$23,750¦ ¦ +------------------------------------+-------+-------¦ ¦Less: Agent's 10 per cent commission¦2,375 ¦ ¦ +------------------------------------+-------+-------¦ ¦ ¦ ¦$21,375¦ +------------------------------------+-------+-------¦ ¦Motion picture rights ¦ ¦2,000 ¦ +------------------------------------+-------+-------¦ ¦Book rights ¦ ¦1,750 ¦ +------------------------------------+-------+-------¦ ¦ ¦ ¦$25,125¦ +----------------------------------------------------+
1/2 of $25,125=$12,562.50.
The respondent has conceded that petitioner's wife received no interest, under this assignment, in the initial $10,000 payment for the serial rights which was made to the petitioner prior to the execution of the assignment.
Five percent of the $33,750 payments made by the Crowell Publishing Company for the serial rights was for the use of these rights in Canada. Upon receipt of these payments from the publisher, petitioner's agent, Paul R. Reynolds & Son, deducted 10 percent as its commission and an additional 10 percent for petitioner's withholding tax. The balance was then forwarded to petitioner and his wife.
Petitioner's attorney filed a 1938 gift tax return, as agent, with the Baltimore collector of internal revenue on May 6, 1939. This return reported the October 25 assignment and part of the net amounts received by the petitioner and his wife thereunder, but claimed that they were exempt from tax. The following month he filed, with the Baltimore collector, petitioner's power of attorney in his favor, giving him general authority to file all tax papers for petitioner. On February 6, 1940, the Deputy Commissioner of Internal Revenue wrote to the petitioner in reference to his gift tax return for 1938, which had been filed by his agent, stating, in part, as follows:
It is noted that no ratification of the return is on file in this office. You are advised that Article 20 of Regulations 79 relating to the Gift Tax Act specifically provides that if by reason of illness, absence or nonresidence, a return is made by an agent, such return must be ratified within a reasonable time by the donor or other person liable for its filing. The ratification must be in the form of an affidavit, filed with the Commissioner, and must specifically state that the return made by the agent has been carefully examined and that the affiant ratifies such return as his own.
Until the return is ratified by you it cannot be considered as the return required by the statute for the calendar year 1938. You are therefore requested to submit the required ratification at the earliest practicable date in order that the audit of the return may be completed.
On March 23, 1940, petitioner's attorney, Watson Washburn, answered this letter in petitioner's behalf, stating that petitioner's power of attorney authorizing Washburn to file all tax papers had previously been filed with the Baltimore collector. He also stated that if any further ratification was required, he would obtain it from the petitioner. No answer was received to that letter, and the matter was next brought to petitioner's attention in August 1946, when a 30-day letter was sent to the petitioner.
On November 15, 1950, petitioner and his wife filed formal ratification of their donor and donee gift tax returns for 1938 with the Baltimore collector.
Petitioner made a taxable gift to his wife in 1938 in the amount of $12,562.50.
Petitioner's failure to file a timely gift tax return as required by statute was due to reasonable cause.
OPINION.
RICE, Judge:
The primary issue for our consideration is whether petitioner made a taxable gift by the assignment to his wife of a one-half interest in his literary work, ‘Drums of Fu Manchu.‘ Although we have already held in a previous opinion, Sax Rohmer, 14 T.C. 1467 (1950), that this assignment was an anticipatory assignment of income and therefore did not relieve petitioner of the income tax liability thereon, this does not preclude its being taxable under the gift tax statute. See Higgins v. Commissioner, 129 F.2d 237 (C. A. 1, 1942), certiorari denied 317 U.S. 658 (1942); Commissioner v. Beck's Estate 129 F.2d 243 (C.A. 2, 1942); Commissioner v. Prouty, 115 F.2d 331 (C.A. 1, 1940); and cf. James H. Hogle, 7 T.C. 986 (1946), affd. 165 F.2d 352 (C.A. 10, 1947).
Petitioner contends that this assignment was made as consideration for various professional and other services rendered by his wife in the writing of this novel, and that a gift resulted only to the extent that the value of the interest transferred exceeded the value of such services. However, we are unable to find, on the basis of this record, that these services were, in fact, given as consideration for the assignment of an interest in the novel rather than being in the nature of gratuitous services a wife will render in the aid of her husband's professional and business pursuits, whenever she may be of help. It is true that petitioner had followed a practice of dividing his income equally with his wife, but the evidence does not convince us that this was pursuant to an agreement requiring her to furnish consideration. Consideration must be bargained for in order to support a contract and negative a gift; and ‘nothing can be treated as a consideration that is not intended as such by the parties.‘ Fire Insurance Association v. Wickham, 141 U.S. 564, 579 (1891). See 1 Williston, Contracts, sec. 101; Restatement, Contracts, sec. 75. The written assignment which effected the transfer of a one-half interest in the petitioner's novel makes no mention of a contract requiring the performance of services by his wife. Rather, the record discloses that it was executed on the advice of petitioner's attorney to split their income in the attempt to effectuate tax savings. Financial dealings between husband and wife are especially subject to the scrutiny of the taxing authorities. P. B. Fouke, 2 B.T.A. 219 (1925). The evidence does not convince us that there was a preexisting agreement which required such services as the consideration for a one-half share in petitioner's income. In the absence of proof that his wife's services were rendered as consideration for this assignment, the interest transferred to her by the assignment must be deemed a gift unreduced by the value of such services.
The next issue concerns the value of the one-half interest in petitioner's novel at the time he transferred it to his wife. He contends, that in computing its value at that date, there must be deducted the allocable share of the Canadian serial rights, the literary agent's 10 percent commission, and the United States Government's 10 percent withholding tax. We will examine each of these points individually.
Petitioner argues that, since he was a nonresident alien, the 5 percent portion of the purchase price of the serial rights which was paid for their use in Canada is exempt from tax pursuant to section 501(b) of the Revenue Act of 1932.
However, petitioner did not transfer to his wife any property situated in Canada, or elsewhere outside of the United States, under this assignment. The sum total of what she acquired consisted of a one-half interest in the remaining proceeds from the sale of the serial rights, which were still owing to petitioner at that time, plus a one-half interest in all remaining rights in the manuscript. Both the proceeds of the serial rights and the manuscript were property ‘situated within the United States‘ at the time of the assignment, and the transfer of an interest therein in properly subject to the gift tax.
SEC. 501. IMPOSITION OF TAX.(b) The tax shall apply whether the transfer is in trust or otherwise, whether the gift is direct or indirect, and whether the property is real or personal, tangible or intangible; but, in the case of a nonresident not a citizen of the United States, shall apply to a transfer only if the property is situated within the United States. The tax shall not apply to a transfer made on or before the date of the enactment of this Act.
It is petitioner's contention that the literary agent's 10 percent commissions on the sale of the various rights must be deducted to arrive at the value of the gift made to his wife. Section 506 of the Revenue Act of 1932, incorporated into the Code as section 1002, provided that, in determining the value of property transferred by gift, ‘the value thereof at the date of the gift shall be considered the amount of the gift.‘ This was further amplified by Regulations 79 (1936 ed.), article 19(1), which provided that the value of the property would be ‘the price at which such property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell.‘ Insofar as the serial rights are concerned, petitioner's wife received a one-half interest in the remaining proceeds of their sale to an American publisher. At the time of the assignment, these proceeds consisted of 3 postdated checks aggregating $23,750. They were made payable to the order of petitioner's American literary agent, and were in his possession.
Although the contract between petitioner and his literary agent is not in evidence, it is apparent from the record that the agent's commissions were a charge upon the proceeds of all sales arranged by him. In the absence of any specific instructions in the assignment directing that the interest transferred to petitioner's wife was to be free of this burden, it must be presumed that she took her interest subject to this charge; accordingly, one-half of this charge must be deducted in determining the value of the interest transferred to her. Estate of Frank Miller Gould, 14 T.C. 414 (1950), and other cases cited by respondent are distinguishable on their facts.
However, the literary agents' commissions on the motion picture and book rights stand on a different footing. The parties have agreed that the value of these rights at the date of the assignment is measurable by the prices at which they were subsequently sold. We have adopted these selling prices as their value at the date of the assignment, since it does not appear that there was any change in their value during the period between assignment and sale; and we do not believe that the agent's commissions are deductible in this situation. The gift tax is a transfer tax which reaches the entire value of the interest transferred at the time of the transfer. It is immaterial that these rights had no utility or value to the donee other than the net amount of money she might realize upon their sale. The tax is imposed upon the amount which ‘a willing buyer‘ would have paid the transferor for them, and we have found that this amount is the same as that for which they were subsequently sold. Furthermore, the donee's business expenses incurred in the subsequent sale of these rights cannot detract from their value at the date of acquisition, since it is possible that she might have arranged their sale without the services and expense of an agent. Simply because petitioner and his wife chose to employ the services of an agent in procuring the subsequent sale of these rights does not require the deduction of one-half the expenses of such sale from the value of the interest at the time it was transferred to petitioner's wife.
We come now to the last item which petitioner contends should be deducted in arriving at the value of the interest transferred, namely, the 10 percent withholding tax which was deducted by petitioner's literary agent before remitting the proceeds from the sale of the serial rights. This Court has previously decided that petitioner was taxable on the entire income from this literary work from sources within the United States despite the assignment of a one-half interest therein to his wife. It is he, and not she, who must bear this tax. The assignment makes no mention of his wife's interest being charged with the payment of one-half of petitioner's income taxes on this literary work; and we must assume that it was not. Therefore, petitioner's withholding payments on the total proceeds cannot be used to lower the value of the gift on the date made.
Petitioner has raised a procedural objection to the deficiency and penalty determined by the respondent, namely, that they are barred by the running of the 3-year statute of limitation. Petitioner's attorney filed a gift tax return in May 1939, as petitioner's agent, and in accordance with a power of attorney submitted to the respondent. In February 1940, the respondent wrote to the petitioner, calling his attention to the requirement that a gift tax returned filed by an agent must be ratified by the donor within a reasonable time.
The letter further stated that ‘Until this return is ratified by you it cannot be considered as the return required by the statute for the calendar year 1938.‘ Petitioner's attorney answered this letter the following month; and, after referring to the power of attorney previously submitted, stated that if ‘a further ratification is required, please let me know, and I will obtain the same from Mr. Rohmer and forward it to you.‘ Respondent made no answer to this letter. In August 1946, a 30-day letter was sent to petitioner. Respondent's position is that petitioner's return, signed by an agent and not ratified within a reasonable time, was not sufficient to invoke the running of the statutory period of limitation. Petitioner argues that respondent's failure to answer his attorney's letter constitutes a waiver of the statutory requirement that the return be =filed under oath. In the alternative, he argues that it constitutes a waiver of the regulation which prescribes that an unratified return shall not be considered the return required by the statute.
Revenue Act of 1932. Title III, Gift Tax.SEC. 507. RETURNS.(a) REQUIREMENT.— Any individual who within the calendar year 1932 or any calendar year thereafter makes any transfers by gift (except those which under section 504 are not to be included in the total amount of gifts for such year) shall make a return under oath in duplicate. * * *Regulations 79 (1936 ed.) ART. 20. Persons required to file return. * * * If by reason of illness, absence, or nonresidence, a return is made by an agent, such return must be ratified within a reasonable time by the donor or other person liable for its filing; otherwise the return filed by the agent will not be considered the return required by the statute. Supplemental data may be submitted at the time of ratification. The ratification must be in the form of an affidavit, filed with the Commissioner, and must specifically state that the return made by the agent has been carefully examined and that the affiant ratifies such return as his own.
Although it appears that petitioner and his attorney acted in good faith in this matter, respondent's failure to reply cannot be considered a waiver of the statute. The taxpayer must comply meticulously with all named conditions in order to secure the benefits of the limitation. Lucas v. Pilliod Lumber Co., 281 U.S. 245 (1930). Section 507 expressly required that a return be filed by the donor ‘under oath.‘ Petitioner was permitted to furnish such oath either on the return originally filed or by means of ratification, and he did neither. ‘There is no provision of law authorizing the Commissioner to waive either the oath or the signatures required by the statute. ‘ Pilliod Lumber Co., 7 B.T.A. 591 (9127, affd. Lucas v. Pilliod Lumber Co., supra. Therefore, however desirable it may be that the Commissioner answer all letters addressed to him, his failure to do so could not waive the statutory requirement that petitioner's return be filed under oath. Petitioner's unsworn return was not sufficient to start the period of limitation running.
The petitioner cites United States v. Kales, 314 U.S. 186 (1941); Angelus Milling Co. v. Commissioner, 325 U.S. 293 (1945), rehearing 140 (E. D., Mo., 1951), in support of his argument that respondent had cases, the respondent had taken some affirmative action which the taxpayer could justifiably deem a waiver. In the instant case, the conduct which petitioner relies on as constituting waiver was simply respondent's failure to amplify his previous explicit statement of the requirements of the statute and regulations.
The respondent called petitioner's attention to the requirement of ratification, and clearly stated that until this was done, the return filed by petitioner's agent could not ‘be considered as the return required by the statute.‘ The power of attorney which had been submitted simply enabled petitioner's attorney to act as petitioner's agent with the respondent. Respondent's letter can only be construed as a request that petitioner confirm the accuracy of the return filed for him by his agent. Respondent was under no duty to restate to petitioner's attorney that, until such confirmation was timely received, the return filed by petitioner's attorney could not be considered as the petitioner's return.
Moreover, these cited cases all involve claims for refund where the question was whether the information filed by the taxpayer, though defective in form, was sufficient to apprise the respondent of the full extent of the taxpayer's claim. The Court in each case was concerned lest petitioner may have been prejudiced by the acts of respondent and induced thereby to forego the filing of timely corrections to thus imperfectly filed claims. But we are not concerned here with the optional filing of a claim for refund. The mandatory requirement that a gift tax return filed by one's agent be ratified has not been complied with, and we can find no waiver of this requirement by reason of respondent's failure to restate his position when the petitioner had already been clearly informed with respect to it.
Petitioner also contends that the ratification which he submitted in November 1950 is valid, and relates back to the return filed by his agent in 1939. Regulations 79 (1936 ed.), article 20, prescribes that a ratification be filed within a reasonable time. Under the facts of this case such ratification, filed 11 years after the return it was meant to confirm, cannot be considered as having been filed within a reasonable time; and the doctrine of ‘relation back‘ cannot be availed of.
The last issue remaining for our consideration is whether petitioner is liable for a 25 percent penalty under 3612(d)(1) of the Internal Revenue Code
for failure to file a gift tax return a prescribed by the statute. Petitioner argues that reliance on his American attorney constitutes reasonable cause for failure to file the required ratification and thus to perfect his return. C. R. Lindback Foundation, 4 T.C. 652 (1945), affd. 150 F.2d 986 (C.A. 3, 1945). This is a question of fact to be decided according to the particular circumstances of each case. The petitioner was a nonresident alien, and the record discloses that he relied completely upon his American attorney for advice in regard to taxes which might be due this country. When he received respondent's letter requesting ratification of the return previously filed for him by his attorney, petitioner promptly forwarded this letter to his attorney. We think that the reliance of a nonresident alien, then residing in England, upon his American attorney for counsel upon United States taxes is reasonable cause for failure to submit the required ratification. Respondent argues that it was incumbent upon petitioner to ascertain that action his American attorney had taken on the matter. However, petitioner had previously given to his American counsel a power of attorney empowering him to act for petitioner in all tax matters. Although petitioner was mistaken in this particular instance, he presumably believed that this enabled the expeditious handling of all tax matters including the ratification here in issue. Petitioner's conduct in this matter was reasonable and prompt; and must be held to constitute reasonable cause for failure to file a gift tax return as required by law.
SEC. 3612. RETURNS EXECUTED BY COMMISSIONER OR COLLECTOR.(d) ADDITIONS TO TAX.—(1) FAILURE TO FILE RETURN.— In case of any failure to make and file a return or list within the time prescribed by law, or prescribed by the Commissioner or the collector in pursuance of law, the Commissioner shall add to the tax 25 per centum of its amount, except that when a return is filed after such time and it is shown that the failure to file it was due to a reasonable cause and not to willful neglect, no such addition shall be made to the tax: Provided, That in the case of a failure to make and file a return required by law, within the time prescribed by law or prescribed by the Commissioner in pursuance of law, if the last date so prescribed for filing the return is after August 30, 1935, then there shall be added to the tax, in lieu of such 25 per centum: 5 per centum if the failure is not for more than 30 days, with an additional 5 per centum for each additional 30 days or fraction thereof during which failure continues, not to exceed 25 per centum in the aggregate.
Decision will be entered under Rule 50.