Opinion
Docket No. 32207.
1952-12-22
PELHAM G. WODEHOUSE, 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.
During the taxable years, petitioner assigned one-half interests in manuscripts to his wife. The assignments were made in France where petitioner and his wife, British subjects, were residing. They were later sent to this country for sale and copyright here. Petitioner received one-half of the net income from such sales and his wife the other half. Held, the assignments constituted transfers within the meaning of the gift tax statute and are not taxable under such statute, because they were transfers by a nonresident alien of property situated outside the United States. Held, further, the payments of one-half of the net income to petitioner's wife, resulting from the sales in this country, were made as a result of the assignments and did not constitute taxable gifts.
Respondent determined deficiencies and penalties in gift tax for the years 1938 and 1939, as follows:
+------------------------------+ ¦Year ¦Deficiency ¦Penalty ¦ +------+-------------+---------¦ ¦1938 ¦$1,355.56 ¦$338.89 ¦ +------+-------------+---------¦ ¦1939 ¦2,072.78 ¦518.20 ¦ +------------------------------+
The questions to be decided are: (1) whether petitioner made any taxable gifts of property, within the United States, to his wife in 1938 or 1939; (2) the applicability of the doctrine of res judicata or the doctrine of collateral estoppel; (3) whether assessment for the year 1938 is barred by the statute of limitations; (4) the value of any taxable gifts, and (5) whether the penalties for 1938 and 1939 were erroneously applied.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein.
Petitioner is a British subject who, during the years in question, resided in France with his wife, Ethel Wodehouse. He is a well known writer of novels and short stories.
On January 3, 1938, petitioner executed the following instrument:
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned, PELHAM G. WODEHOUSE, being the author of a certain original unpublished novel in manuscript, consisting of typewritten pages, entitled ‘The cow-Creamer‘, does hereby assign, transfer and set over unto his wife, ETHEL WODEHOUSE, an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, said undivided one-half interest to be hers in perpetuity.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 3rd day of January, 1938.
Witnesses: P. G. WODEHOUSE (L. S.)
(Signature illegible)
Lloyds & National Provincial Foreign Bank Limited
59, Rue St. Jean, Le Touquet, Paris-Plage
Bank Manager
Either the original or a copy of a portion of the manuscript had been sent to the Saturday Evening Post (Curtis Publishing Company) by the Reynolds Agency (petitioner's agent in the United States and Canada and hereinafter referred to as Reynolds) on October 22, 1937. The completed manuscript was delivered in the United States on or about February 5, 1938. The novel was copyrighted in this country and accepted by the Curtis Publishing Company on February 22, 1938, with payment made to Reynolds on the same date, by a check for $40,000 for publishing rights. Book rights were sold to Doubleday, Doran & Co. for $5,000.
On September 1, 1938, petitioner, by written agreement, assigned a one-half interest or share in the manuscript and copyright of one of his novels, ‘Uncle Fred in the Springtime,‘ to his wife. The original manuscript was sent to this country during September 1938. The manuscript was revised, copyrighted in the United States, and accepted by the Curtis Publishing Company on December 13, 1938. Payment to Reynolds for publishing rights in the amount of $40,000 was made on the same date. The book rights were sold to Doubleday, Doran & Co. during 1939 for $5,000.
Copies of both assignments were sent to petitioner's attorney, Watson Washburn, in New York City, and he notified Reynolds that all contracts and payments for the sale of the novels were to be made for the joint benefit of petitioner and his wife. Reynolds, after deducting commissions and taxes from the proceeds of the receipts for the publishing rights of the two novels, on or about March 1, 1938, mailed $17,100 to Ethel Wodehouse in France for serial rights to the novel, ‘The Cow Creamer,‘ in the form of a dollar draft, payable to her, by Paul R. Reynolds & Son; and $17,000 for the serial rights to ‘Uncle Fred in the Springtime,‘ in the form of a dollar draft, payable to Ethel Wodehouse and mailed to her in France, by Paul Reynolds & Son, on or about December 19, 1938.
During 1939, petitioner made assignments to his wife, similar to those of 1938, for the novel, ‘Quick Service‘ (December 1, 1939), and five short stories— ‘Sonny Boy‘ (March 1, 1939), ‘The Editor Regrets‘ (March 1, 1939), ‘Bramley Is So Bracing‘ (May 19, 1939), ‘Scratch Man‘ (May 19, 1939), and ‘Dudley Is Back to Normal‘ (sometime during 1939). ‘Quick Service‘ was accepted and copyrighted in the United States by January 16, 1940, payment being made by check to Reynolds, in the amount of $40,000, on that date. After deducting commission and withholding tax, Reynolds deposited $17,000 with the National City Bank, New York City, for the account of Ethel Wodehouse, by Paul R. Reynolds & Son, on or about January 22, 1940. Petitioner's agent was unable to sell the short story, ‘Dudley Is Back to Normal,‘ in the United States, and the manuscript was never published. The other short stories were sold during 1939 in this country for a total selling price of $14,000, 15 per cent of which was allocable to Canadian rights, 5 per cent payable to Reynolds for commission, and 10 per cent subject to withholding tax.
Notice of each of these assignments was given to Reynolds by Washburn. The property which was the subject of each assignment was situated in France at the time of the transfer.
The Court of Appeals for the Second Circuit, in considering the appeal from this Court as to whether the income received from the sale of the novel, ‘Quick Service,‘ was entirely taxable to petitioner, held that the assignment of said novel was a valid gift for income tax purposes. Wodehouse v. Commissioner, 177 F.2d 881 (C.A. 2, 1949). The Court of Appeals for the Fourth Circuit, in considering the assignments of the two novels in 1938, ‘The Cow Creamer‘ and ‘Uncle Fred in the Springtime,‘ on appeal from this Court, held that the assignments were invalid for Federal income tax purposes. Wodehouse v. Commissioner, 178 F.2d 987 (C.A. 4, 1949).
Federal donor and donee gift tax returns for the year 1938 were filed with the Baltimore collector of internal revenue during 1939. Such returns referred to the assignments, ‘The Cow Creamer‘ and ‘Uncle Fred in the Springtime,‘ and reported no gift tax liability. The returns were signed ‘Watson Washburn, Agent for Pelham G. Wodehouse, a non-resident aline.‘ On August 16, 1946, a 30-day letter was issued on the return filed for 1938. Petitioner was in German custody from June 1940 to the middle of 1944 and stayed in France until April 1947, because he could not obtain a visa to the United States until such time. He filed final notice of his entry into the United States with the respondent on April 3, 1948. On November 13, 1950, petitioner and his wife filed a ratification of their 1938 gift tax returns and filed gift tax returns for 1939 and 1940, claiming no taxable gifts, with the Baltimore collector. The notice of deficiency was issued by respondent on December 14, 1950.
In his notice of deficiency, respondent determined the petitioner made total gifts for the year 1938 as follows:
+--------------------------------------------------------------+ ¦Publishing rights in “The Cow Creamer” ¦$20,000.00¦ +---------------------------------------------------+----------¦ ¦Book rights in “The Cow Creamer” ¦2,500.00 ¦ +---------------------------------------------------+----------¦ ¦Publishing rights in “Uncle Fred in the Springtime”¦20,000.00 ¦ +---------------------------------------------------+----------¦ ¦Cash from sundry royalties ¦95.72 ¦ +---------------------------------------------------+----------¦ ¦Total ¦$42,595.72¦ +--------------------------------------------------------------+
Respondent determined that petitioner made total gifts to his wife, during 1939, as follows:
+--------------------------------------------------------+ ¦Publishing rights in “Quick Service” ¦$20,000.00¦ +---------------------------------------------+----------¦ ¦Book rights in “Uncle Fred in the Springtime”¦2,500.00 ¦ +---------------------------------------------+----------¦ ¦Publishing rights in “Sonny Boy” ¦1,750.00 ¦ +---------------------------------------------+----------¦ ¦Publishing rights in “The Editor Regrets” ¦1,750.00 ¦ +---------------------------------------------+----------¦ ¦Publishing rights in “Bramley Is So Bracing” ¦1,750.00 ¦ +---------------------------------------------+----------¦ ¦Publishing rights in “Scratch Man” ¦1,750.00 ¦ +---------------------------------------------+----------¦ ¦Total ¦$29,500.00¦ +--------------------------------------------------------+
A 25 per cent penalty was determined by respondent for each year. By amended answer, respondent claims that if the assignments themselves are not the subject matter of the gifts, then the payments to Ethel Wodehouse, by Reynolds, of one-half of the profits resulted in taxable gifts. Under such theory, respondent does not contend that the novel, ‘Quick Service,‘ is taxable as a gift in 1939 since payment was made in 1940, which year is not before this Court.
OPINION.
RICE, Judge:
Under section 501 of the Revenue Act of 1932 (applicable to the years before us), a tax was imposed upon the transfer by any individual, resident or nonresident, of property by gift. Subsection (b) of said section provided in part that ‘in the case of a nonresident not a citizen of the United States, (the tax) shall apply to a transfer only if the property is situated within the United States.‘ In the instant case, petitioner made assignments during 1938 and 1939 to his wife of half interests in a series of novels and short stories which he had written. Such assignments were essentially similar in nature and were signed by petitioner and at least one witness. At the time of the assignments, both the petitioner and his wife were living in France. The assignments were executed in France, with the exception of a portion of ‘The Cow Creamer‘ which had been sent to this country during 1937. However, such fact does not affect our finding since the completed manuscript was not sent until after petitioner had made the assignment. Some of these assignments have already been considered by this Court initially, and by the Courts of Appeals for the Second and Fourth Circuits, on appeal, with respect to whether the income received from the sales of publishing and book rights of the manuscripts in this country were entirely taxable to petitioner.
A transfer of property might be invalid for income tax purposes but valid for gift tax purposes so that the donor would be subject to income tax on any income arising out of such property as well as a gift tax on such transfer. 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 A. Hogle, 7 T.C. 986 (1946), affd. 165 F.2d 352 (C.A. 10, 1947). We feel that the assignments in the instant case constituted a transfer of the type contemplated by the gift-taxing statutes in effect during the years in question, but that they concerned transfers made by a nonresident alien of property situated outside the United States.
Respondent argues that the situs of the property was within and not outside, the United States, on the theory that the assignments covered the right to profit from ‘copyrights of literary works in the United States.‘ He maintains that the stories and novels were copyrighted in the United States; the proceeds came from the buyer thereof, who was located in the United States; that the stories were purchased with the expectation of receiving income from readers in the United States; and that the payments were made to petitioner's agent in the United States. Such argument, however, loses sight of the fact that, at the time of the assignments, the manuscripts had not as yet been copyrighted and that the interests petitioner's wife had in the copyrights, as a property right, flowed from the assignments. This is amply borne out by the example of the short story, ‘Dudley Is Back to Normal,‘ which petitioner's agent was unable to sell in the United States, which has never been published, and upon which respondent has claimed no tax. What was actually assigned in France was a half interest in the various manuscripts and all property rights which might arise from, or accrue to, the holder of such interest. We have held that the situs of the property at the time of the transfer was France, and such transfers, therefore, are not taxable under section 501(b) of the Revenue Act of 1932 as they concern transfers by a nonresident alien of property situated outside the United States. Respondent, therefore, erred in his determination of deficiencies in gift tax for the years 1938 and 1939 arising from such transfers.
By amended answer, respondent has asserted that if no gift tax is owing as a result of the assignments, the payments to petitioner's wife of one-half of the profits from the sale of publishing and book rights of the various manuscripts in this country resulted in taxable gifts. On this issue respondent has the burden of proof. The payments to petitioner's wife of the profits resulting from such sales were not in the nature of taxable gifts, but were the results of rights which accrued to her under the terms of the assignments executed by petitioner in France.
Because of the conclusions we have reached, it is unnecessary to consider the other questions raised and argued by the parties in this case.
Decision will be entered for the petitioner.