TeLinde v. Comm'r

Richard W. TeLinde and Catharine L. TeLinde, Petitioners, v. Commissioner of Internal Revenue, Respondent TeLinde v. Comm'r Docket No. 29712 United States Tax Court 1952 U.S. Tax Ct. LEXIS 219; 93 U.S.P.Q. (BNA) 183; 18 T.C. 91; April 18, 1952, Promulgated *219 Decision will be entered under Rule 50. Payments received by petitioner, a physician, for the sale of his first book, held to be long term capital gain, as the proceeds of the sale of a capital asset of which, under the evidence, the holding period commenced on completion and extended more than 6 months until delivery of the manuscript. Joshua W. Miles, Esq., and D. Sylvan Friedman, Esq., for the petitioners. Stephen P. Cadden, Esq., for the respondent. Opper, Judge. OPPER *183 *91 Petitioners challenge respondent's determination of deficiencies in income tax for the years 1947 and 1948, of $ 8,756.87 and $ 935.42, respectively, all of which is in dispute. The issue in controversy is whether *92 payments received in connection with the publication of a book were royalties, and in the alternative, if the amounts constituted proceeds from the sale of a capital asset, whether the asset was held for more than 6 months. Some of the facts have been stipulated. FINDINGS OF FACT. The stipulated facts are hereby found accordingly. Petitioners, husband and wife, filed joint returns for the years in question with the collector of internal revenue at Baltimore, *220 Maryland. Petitioner Richard W. TeLinde, hereinafter called petitioner, is a physician, surgeon, lecturer, and the writer of many articles on medical subjects. He graduated from medical school in 1920, subsequently taking special training in gynecology. Since 1925 he has been engaged in the private practice of medicine, specializing in gynecology. Since 1939 he has been a professor of gynecology at the Johns Hopkins University, and gynecologist-in-chief at the Johns Hopkins Hospital. During petitioner's years of specialization in practice and as a teacher he prepared and accumulated notes and illustrations relating to his special field. On some occasions he spoke before various medical societies, receiving no payment for such effort aside from his compensation as professor at the University. Prior to August 1941 petitioner was approached by representatives of J. B. Lippincott Company, hereinafter called the publisher, who suggested to petitioner that he had material which could be used as the basis for a book on gynecology. Thereafter petitioner had various discussions with the publisher's representatives. On August 20, 1941, petitioner and the publisher entered into a "Memorandum*221 of Agreement." There have never been *184 any amendments to that document. The agreement was stated to be: "* * * relative to the publication of a work of approximately 500-550 pages, 7 x 10 vol., tentatively entitled, 'Operative Gynecology,' to include description of approximately 80 or 90 operations, the illustrations to be line drawings to be drawn by Mr. James F. Didusch under the Author's direction and supervision, * * *" to be published in May 1943. The instrument provided, in part, that petitioner agreed: (a) To grant, and he does hereby grant, to the Publisher the exclusive right to publish the said work in book form throughout the world. To permit the Publisher to take out the United States copyright in the name of The Publisher; he or his legal representative to execute the necessary renewal papers if so requested. (b) To deliver to the Publisher on or before November 15, 1942, the complete manuscript copy of the said work properly prepared for the use of the compositors, together with the originals of such illustrations as it may be mutually decided to use. *93 The instrument stated, among other matters, that petitioner guaranteed that he was the sole proprietor of the*222 said work, and that he would indemnify the publisher for losses incurred if the work violated any copyright or contract, or contained libelous or objectionable matter. Petitioner agreed to read proof, to perform other necessary duties while the work was passing through the press, and to make revisions for any future editions. Petitioner also agreed that so long as the agreement was in force, he would not permit to be published any other material written or edited by him which would interfere with the sale of the book. The publisher agreed, among other matters, to determine typography and layout for text and illustrations; to manufacture and publish the work at its expense, the plates and books to be its property; to take out United States copyright in its name; to pay "royalties" to petitioner of 10 per cent of the list price on sales in the United States and 5 per cent of the list price upon copies sold in, or for export to, foreign countries, and "in lieu of royalty" on privileges of reprint or other reproduction, to pay to petitioner 50 per cent of sums received. "Royalty accounts" were to be computed and statements were to be rendered and paid on specified dates during each*223 year. The instrument concluded by providing that: This agreement shall continue in force for the entire term of copyright and all renewals thereof, but in the event that any time after two years from the date of the first publication of the said work, the Publisher deems it no longer merchantable or profitable, and gives written notice to the Author of his desire and intention to discontinue publication, this contract shall terminate, and subsequent rights of the Publisher shall revert to the Author. The Author shall have a thirty-day option to purchase the plates and stock at not more than manufacturing cost, in default of which the Publisher shall have the right to sell remaining copies and sheets as a remainder, free of royalty, and to melt the plates. After August 20, 1941, petitioner proceeded to assemble his material and to prepare the manuscript. Although he had already done some work, most of his work was done subsequent to that date. Petitioner's method of procedure was to collect the material from his talks, lectures, and teaching, to add further matter from unwritten ideas which he had in mind, and to write out the manuscript in longhand. His secretary typed out his*224 written drafts, making minor corrections in grammar and punctuation. Further alterations were made by petitioner in the draft of each chapter. On undisclosed dates between August 20, 1941, and the summer of 1944, petitioner finished the various chapters. All of the chapters were written and the major portion of his work on the manuscript was completed by the summer of 1944. Thereafter some minor corrections, rearrangements, typing, and proofreading were done, which were completed in January 1945. The publisher desired a completed manuscript. In August 1945 petitioner delivered the manuscript to *94 the publisher. Subsequently minor changes were made by petitioner upon receipt of the galley proofs. The book "Operative Gynecology," as published, has 750 pages and about 38 chapters. It is abundantly illustrated, the last plate being numbered 309, with a substantial part of the text being devoted to matter descriptive of the illustrations. Each chapter deals with a phase of gynecology, and contains descriptions of various operations, their techniques, possible complications, and related problems. The work contains some original material as well as knowledge well established*225 in the field of gynecology. On October 2, 1946, the publisher copyrighted the book. That day was also the date of publication. On the same date the publisher sold the first copies, although orders had been received in advance of that date. In addition to being published in English, it was translated *185 and published in Spanish in Argentina and in Portuguese in Brazil. The publisher made an accounting to petitioner for the proceeds of both domestic and foreign sales. Petitioner has never entered into any other contracts granting motion picture, television, radio, camera, lantern slide, pamphlet, magazine, or lecture rights, or any other rights to reproduce or use the book. On April 30, 1947, petitioner received his first payment from the publisher in the amount of $ 6,676.45. On October 31, 1947, he received his second payment in the amount of $ 7,066.75. Petitioner's tax return for 1947 reported as income the above sum of $ 6,676.45. The 1947 return did not report the second payment of $ 7,066.75. That amount was included in petitioner's 1948 return which reported payments received in the latter year. Both returns treated all payments from the publisher as "long-term capital *226 gains." Respondent's notice of deficiency stated: "It is held that the royalties paid to you by J. B. Lippincott Co. in connection with book entitled Operative Gynecology, are taxable as ordinary income. In the alternative, if it should be held to have been a sale, the asset in that event was held less than 6 months and the amount would be taxable as a short-term capital gain." OPINION. The parties are apparently in agreement that what petitioner transferred to his publisher was a capital asset. They differ first as to whether that transfer was a sale on the one hand or a license on the other, so that in the former event it would be subject to the capital gains provisions. While the contract to assign is not entirely without ambiguity, it seems to us its fair intendment is that petitioner transferred, for the full term of the copyright, and the publisher received all of the rights incorporated in the property, leaving nothing for which petitioner *95 could issue licenses to others or use himself. This has been treated as the essential touchstone for determining whether such an arrangement was in fact a sale. ;*227 ; cf. , certiorari denied . The copyright was to be issued in the name of the publisher. The book is referred to as "its property." Although petitioner was to receive compensation for "reprint or other reproduction," the publisher was specifically granted such rights as translation into foreign languages and it is evident that the publisher and not petitioner was to be in position to grant any such license. It is even provided that petitioner cannot publish "any other material written or edited by him which would interfere with the sale" of the book. Under such circumstances, the provision for reassignment to petitioner if publication does not succeed can as well be viewed in the light of a reconveyance as of the reservation of any present right in the property on petitioner's part. And it is by now too well settled to admit of any discussion that mere payment of a consideration on the basis of sales or otherwise in a fashion commonly referred to as "royalties" does not suffice*228 to transmute what would otherwise be a sale into a mere license. . We are accordingly satisfied that the transfer was a capital transaction. A further alternative issue is presented by respondent's insistence that even so we are dealing with a short term gain because petitioner's holding period was less than 6 months. In this respect also we view the determination as erroneous. It is evident that the original agreement dealt with property which was not yet in existence. Under such circumstances, as the parties virtually agree, it was impossible to pass present title or to consider that the contract was itself a sale. . It follows that the contract did not encompass the passage of title. By the middle of 1944 the work had been substantially completed, and by January of 1945 even such mechanical operations as the typing, proofreading, and correction of the manuscript were finished. Not later than that date and probably as of the middle of 1944 it is thus necessary to conclude that petitioner had in his hands the completed article which he*229 had contracted to deliver. Delivery, however, did not take place until August of 1945. This brought about the passage of title under these facts. See . There was thus a period of at least six months and probably a year during which petitioner held the property while it was in existence and prior to its sale. The holding period to authorize treatment as a long term capital gain is accordingly furnished by the record. . *96 We conclude that petitioner's treatment of the proceeds as long term capital gain was correct. In view, however, of the failure to report the receipt of a part of the payment as of the year in which it was received, Decision will be entered under Rule 50.