Committee Prints

therefore not liable under section 117(a) (1) (A). So, too, when General (now President) Eisenhower was ready to publish his wartime memoirs, "Crusade in Europe," he accepted an offer from a newspaper syndicate to sell the book, film and magazine rights to his memoirs "in one whole package." Thus, the transfer could be considered a "sale," subject to the capital-gains treatment under section 117 (a) (1), since the exception in subsection (A) [that of "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business"] did not apply. The creators of the "Amos and Andy" show were also benefited by their nonprofessional standing as writers. When they sold to the Columbia Broadcasting System their entire interest in the names, characters, copyrights, scripts, et cetera, the Treasury Department agreed that the proceeds deserved the "capital gains" treatment; but not so with the sale of the "Jack Benny Program," which would have been worthless without Jack Benny's presence in the show, and thus, presumably qualified as property held in the "ordinary course of his business."

After it had become apparent that President Eisenhower had obtained a purported $275,000 tax saving by bringing the sale of his memoirs under the capital gains rates,32 the law was changed by the addition of subdivision (C) to 117(a) (1), adding the following exception to the definition of "capital assets":

(i) a taxpayer, whose personal efforts created such property, or

(ii) a taxpayer in whose hands the basis of such property is determined, for the purpose of determining gain from a sale or exchange, in whole or in part by reference to the basis of such property in the hands of the person whose personal efforts created such property;

It is interesting to note Senate Report No. 2375, which accompanied H.R. 8920, 81st Congressional, 2d session (1950), the so-called "Eisenhower amendment," part of which is as follows:

Section 209(a) of the House bill would amend Section 117(a)(1) of the code by revising the definition of "capital assets" so as specifically to exclude therefrom patents, copyrights, inventions, designs, literary, musical or artistic compositions and similar property, in the hands of either (1) the person whose personal efforts created such property or (2) a person deriving a basis for the property for the purpose of determining gain, from the person who created it.

Your committee has limited the scope of this amendment (redesignated as sec. 211(a) of the bill) to copyrights, literary, musical or artistic compositions, and similar property, and has eliminated the proposed change in the treatment of such property as inventions, patents and designs. Under the committee amendment, a person who writes a book or creates some other sort of artistic work will be taxed at ordinary income rates, rather than at capital-gain rates, upon gain from the sale of the work regardless of whether it is his first production in the field or not. The amendment made by section 211(a) will also exclude from the capital asset category any property similar to that specifically named; for example, a radio program which has been created by the personal efforts of the taxpayer.

The provisions of subparagraph (C) apply not only to copyrights and similar property in the hands of the taxpayer whose personal efforts created the property but also to such property held by a person in whose hands the basis of the property is determined (for the purpose of determining gain on a sale or exchange) in whole or in part by reference to the basis of such property in the hands of the person whose personal efforts created the property. Thus a sale of such property

by one who received it by gift from the creator of the property would be taxed as ordinary income. * * *

Although authors or donees of authors cannot get capital-gains tax treatment for income from the sale of a copyright property or one of the rights in that property, even if it is not held in the ordinary course of their trade or business, it would seem that there are two classes of people who can still get such favorable treatment in spite of the 1950 revision: deceased authors' estates and nonprofessional purchasers of literary properties on the open market-always provided of course that such purchaser, devisee, heir, and so forth, meets the requirements of the Sabatini, Wodehouse, Herwig, and so forth, cases and the Government rulings in relation thereto, which would make the transfer a sale rather than a license.

This, by the way, can work to the detriment, as well as the benefit of these favored classes. Take, for instance, the case of Jimmy Fidler, the radio commentator and columnist. When he bought literary properties for $5,000, expecting to sell them at a profit, and instead sold them for $250, the Court held that these properties were not held "primarily for sale to customers in the ordinary course of his trade or business," and that therefore Mr. Fidler could not deduct the loss at the higher income tax rate, but at the lower rate applicable to the sale of a capital asset.

On the other hand, there is the Fred MacMurray case (21 T.C. 15-1953), in which the Tax Court held that a motion picture actor who purchased a story for sale to a corporation which, it was expected, would produce a motion picture based on the story and starring the actor, was not engaged in the business of purchasing and selling stories for profit. Since his cost basis for the story was different from that of its original creator, the story qualified as a capital asset and any gain resulting from its sale was capital gain.

After the 1950 amendment, Miss Winsor, Amos 'n Andy, and President Eisenhower would not have fared as well as they did, taxwise, before the 1950 amendment. Thus, we can see that it now makes very little difference, if a copyright or one of the rights inherent in a copyright is sold by the author or a donee of the author, whether a "sale" or "license" has been effected. Even if it is a "sale," it is excluded from the definition of "capital asset" (permitting a capitalgains tax rate) by section 1221 of the 1954 Code (previously sec. 117(a)(1)(C)). It should be borne in mind, of course, that even the two favored recipients under this amendment, i.e., the estate of a deceased author and a purchaser for value, would not benefit from the capital-gains treatment if the consideration for the transfer is measured by a percentage of receipts from the sale, performance, exhibition or publication of the copyrighted work, is measured by the number of copies sold or performances given, or is paid for over a period generally coterminous with the grantee's use of the work.33 Thus, no matter how the copyright law pertaining to assignments and licenses is interpreted, authors and donees of authors would not be affected taxwise. Nor can it be seen how a revision of the copyright law, specifically holding a copyright to be divisible would affect the estate of a deceased author or a purchaser for value.

33 Revenue Ruling 54-409, 1954, 39 IRB 10.

CONCLUSION

1. If the copyright or one of the rights inherent in a copyright is transferred by the creator or by a person (or firm) having received the copyright as a gift from the creator (i.e., someone having the same cost basis as the creator), divisibility or indivisibility of copyright apparently makes no difference for capital gains versus ordinary income tax purposes. The proceeds of a transfer of the copyright in toto, or of one of the rights inherent in the copyright (whether it is. judged to be an outright sale, an exclusive license or a license to use) is taxable as ordinary income. This is true with respect to professional authors because section 1221 of the Internal Revenue Code (formerly sec. 117(a)(1)(A) of the Revenue Act) specifically excludes from the definition of the term "capital asset"-"property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." It is now also true with respect to amateur authors, as well as professional authors, and their donees, because of the so-called Eisenhower amendment, which specifically excludes a copyright from the definition "capital asset" when it is held by "a taxpayer whose personal efforts created such property, or a taxpayer in whose hands the basis of such property is determined, for the purpose of determining gain from a sale or exchange, in whole or in part by reference to the basis of such property in the hands of the person whose personal efforts created such property." "

2. If the copyright is transferred by someone having a different cost basis than the creator (for instance, the deceased author's estate or a purchaser in the open market), the legal tenets of the Goldsmith, Wodehouse, and Herwig cases and the Treasury rulings based on those cases would control. Thus, if the transfer is a nonexclusive license (which would not be a sale even under the theory of divisibility), the income would be taxable at ordinary income rates. If the entire copyright is transferred (which would be a sale even under the theory of indivisibility), the transaction would undoubtedly be held to be the sale of a capital asset, taxable at capital gains rates (unless held by the new holder in the ordinary course of its business). If the transfer is of less than the entire copyright, the copyright is treated as divisible and the tax status of the transferor's income depends upon other factors under the Treasury ruling 54-409, 1954, 39 IRB 10, which provides that the proceeds from "a grant of the exclusive right to exploit a copyrighted work throughout the life of the copyright in a medium of publication or expression" is taxable as a capital gain if the consideration

(1) is not measured by a percentage of receipts from the sale, performance, exhibition, or publication of the copyrighted work; (2) is not measured by the number of copies sold, performances given, or exhibitions made of the copyrighted work; and

(3) is not payable periodically over a period generally coterminous with the grantee's use of the copyrighted work.

"There is some relief available to the author or the donee of the author, if he wishes to take it. Under Section 1302 of the Internal Revenue Code (formerly Section 107b), if it took the author 24 months or more from beginning to completion; and if the compensation received in one tax year is at least 80 percent of the total amounts received for the work, the author is permitted to spread the income received on that particular work over a period of two, or a maximum of three, years. In computing the 80 percent, the author-taxpayer must take into consideration not only all the years preceding the year in which the 80 percent is received, but also the succeeding year.

25 After the author's death, his literary property acquires a different cost basis from his own. See Harriet Pilpel's article-"Tax Aspects of Copyright Property" in "1953 Copyright Problems Analyzed."

Thus, the present Treasury ruling adopts the theory that copyrights are divisible for the purpose of treating income therefrom as capital gains or ordinary income. However, the court decisions have not been consistent in applying the theory of the divisibility of copyrights for tax purposes. The trend of the more recent cases, on which the present Treasury ruling is based, is to accept the theory of divisibility. But if the courts were to revert to the theory of indivisibility reflected in earlier decisions, the Treasury ruling would presumably be changed accordingly.

SUPPLEMENT 2

DIVISIBILITY IN THE LAWS OF FOREIGN COUNTRIES

(By Arpad Bogsch)
INTRODUCTION

(A) The law of copyright is a field of law in which differences between the systems of the United States and of most foreign countries are quite fundamental. As will be seen, this is particularly true in respect to the problem of "divisibility". Consequently, the examination of foreign laws, in terms of our own particular legal system (as well as in terms of the English language) necessarily entails a considerable amount of interpretation. Since all interpretation involves imperfections, some imperfections may be present in the following analysis.

(B) There are several laws which consider partial assignment as a problem having three facets: divisibility in time, place, and rights. For example, the United Kingdom Copyright Act, 1956, provides that

An assignment of copyright may be limited in any of the following ways, or in any combination of two or more of those ways, that is to say-(a) so as to apply to one or more, but not all, of the classes of acts which by virtue of this Act the owner of the copyright has the exclusive right to do *** (b) so as to apply to any one or more, but not all, of the countries *** (c) so as to apply to part, but not the whole, of the period for which the copyright is to subsist ***1

The present paper deals only with assignments that are partial as to rights; and not with assignments that are partial as to time or territory.

(C) The present paper deals with the law of foreign countries on the following problems arising in connection with "divisibility": I. Assignability of Copyright, II. Partial Assignment, III. Recordation of Assignments, IV. Effect of Assignment on Copyright Notice, V. Capacity to Sue.

I. ASSIGNABILITY OF COPYRIGHT

(A) The entire copyright in a work, i.e., the sum total of all rights in a work, which in many foreign countries includes the droit moral ("moral rights"), is not assignable according to the law of several foreign countries. A trend in this direction may be detected in continental Europe in more recent times: copyright in toto is not assigna

1 § 36(2). Here, and in all other quotations in this chapter, the emphasis is added.

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