86 U.S.P.Q. (BNA) 48">*48 14 T.C. 1202">*1202 The Commissioner has determined deficiencies in the petitioner's income tax for the years 1941 and 1943 in the respective amounts of $ 8,801.76 and $ 27,475.36. The year 1942 is involved 86 U.S.P.Q. (BNA) 48">*49 only because of the Current Tax Payment Act.

1950 U.S. Tax Ct. LEXIS 167">*169 The respondent has made claim for an increase in the deficiency, in his pleadings which were filed before the trial of these proceedings, in the amount of $ 8,356.67. Therefore, the total amount of the deficiency for the year 1943 is $ 35,832.03.

The respondent has conceded that he improperly included the sum of $ 15,679.41 in the petitioner's income for the year 1941. The parties have entered into a stipulation under which it1950 U.S. Tax Ct. LEXIS 167">*170 is agreed that other adjustments shall be made with respect to the amounts of petitioner's income for 1941 and for 1942. Also, the petitioner does not contest 14 T.C. 1202">*1203 certain other adjustments which the respondent has made. Effect will be given to these agreements and concessions of the parties under Rule 50.

The chief issue to be decided in this proceeding is whether the proceeds from the transfer of the exclusive world motion picture rights to the play "My Sister Eileen" to Columbia Pictures and the transfer of the exclusive world motion picture rights of the play "The Doughgirls" to Warner Brothers Pictures, are taxable as capital gains or ordinary income. Petitioner, as a coauthor, had the copyright to both plays. The second issue is whether the petitioner can deduct, under section 23 (u), payments which he made to his wife as alimony pendente lite during 1943.

The petitioner filed his income tax return for 1941 with the collector for the sixth district of California. He filed his returns for the years 1942 and 1943 with the collector for the third district of New York.

The record in this proceeding consists of an agreed statement of facts and exhibits, from which 1950 U.S. Tax Ct. LEXIS 167">*171 we make the following findings of fact.

FINDINGS OF FACT.

The facts which have been stipulated are adopted as part of the findings of fact. The stipulation is incorporated herein by this reference. The parties are now agreed upon certain facts which are material to certain items of income in either 1941, 1942, or 1943, which are to be disposed of by the parties under a Rule 50 recomputation. It is unnecessary to restate these facts in the findings of fact, and we do not do so. The facts which are necessary to an understanding of the issues to be decided are as follows:

Issue 1. -- The petitioner has followed the occupation of playwright since before the year 1941, and he is the coauthor of the plays "My Sister Eileen" and "The Doughgirls." During the year 1941 the petitioner and his wife were residents of California. During 1942 and 1943 they were residents of New York.

(a) Facts relating to the transfer of the world motion picture rights to a play entitled "My Sister Eileen." At some time prior to September 19, 1940, the petitioner and Jerome Chodorov (hereinafter Chodorov) collaborated in the writing of the play "My Sister Eileen," founded on the novel of the same name. 1950 U.S. Tax Ct. LEXIS 167">*172 This play was copyrighted in their names on or before January 21, 1941. Prior to the writing of the play, the petitioner and Chodorov entered into an agreement with Ruth McKenney, the author of the novel "My Sister Eileen," whereby she granted to them "the sole and exclusive right and license to all dramatic rights" including stage and motion picture dramatization of her novel and authorized them to have presented and produced the play which they were to write based on her book. The royalties 14 T.C. 1202">*1204 and proceeds accruing from the dramatization of the book were to be divided 50 per cent to the author of the novel and 50 per cent to the dramatists, the petitioner and Chodorov.

On October 7, 1940, Max Gordon entered into a dramatic production contract with the petitioner and Chodorov, as the "Author" of the play. Under this contract the "Author" leased "the sole and exclusive right to produce and present the said play or other literary property on the speaking stage in the United States of America and the Dominion of Canada" in exchange for royalties from the production of the play based on gross weekly box office receipts. The dramatists expressly retained, among other stated1950 U.S. Tax Ct. LEXIS 167">*173 rights, the motion picture rights to their dramatization. On November 14, 1940, the petitioner and Chodorov entered into an agreement with Max Gordon, the producer of the play, whereby, in exchange for a contribution of 25 per cent of the capital required for the production of the play, they received a 25 per cent interest in the sole and exclusive license which had been granted to the producer to produce or cause to be produced the play "My Sister Eileen." On December 26, 1940, "My Sister Eileen" opened in New York as a stage production of Max Gordon. This stage production ran continuously on Broadway for over two years. Pursuant to the agreement of October 7, 1940, with Max Gordon, the petitioner received author's royalties from this production in the amounts of $ 25,633.98 in 1941, $ 22,494.56 in 1942, and $ 462.19 in 1943.

On August 12, 1941, the petitioner and Chodorov, as the "Owners" of the play, entered into an agreement with Columbia Pictures Corporation as the "Purchaser" 86 U.S.P.Q. (BNA) 48">*50 for the disposition of the motion picture rights to the play, "My Sister Eileen," which included the following:

(1) "The Owners hereby grant, sell, assign, and set over to the Purchaser, forever," the1950 U.S. Tax Ct. LEXIS 167">*174 world motion picture rights to the dramatic work, "My Sister Eileen," "together with all the benefits of the copyrights in such work with respect to such motion picture rights and of all remedies for enforcing such copyrights."

(2) "The Owners hereby grant to the Purchaser the exclusive right to make motion picture versions" of the play, "My Sister Eileen," and "the exclusive, unlimited, and unrestricted right to produce, reproduce, distribute, exhibit and otherwise exploit and dispose of such motion picture versions, and to secure copyright and copyright registration therein in all countries of the world in the Purchaser's name or otherwise."

(3) "The Owners hereby appoint the Purchaser their true and lawful attorney irrevocable, in the Owner's name or otherwise, but for the Purchaser's sole benefit and at the Purchaser's expense, to enforce and protect such motion picture rights under any and all copyrights and renewals of copyrights and to prevent the infringement thereof and to litigate, collect and receipt for all damages arising from any infringement of such rights and to join the Owners in the Purchaser's sole judgment, as a party plaintiff or defendant in any such suit for1950 U.S. Tax Ct. LEXIS 167">*175 infringement, on condition that the Purchaser indemnify the Owners and 14 T.C. 1202">*1205 hold them harmless from any and all costs and expenses by reason thereof. At the Owners' option they may become parties to any such suits and proceedings and shall have the further right to litigate, collect and receive all damages for infringement of all rights except those herein specifically granted to Purchaser."

(4) Article 9 of the agreement provided that in the event of any renewals or extensions of the United States copyright in the play, the Purchaser shall have under all the renewed and extended copyrights all of the rights in the play which in the agreement had been "granted, sold, assigned, and set over to the Purchaser."

(5) Article 13 provided that the term "Owners" used in the agreement included their "heirs, executors, administrators, next of kin, successors and assigns"; that the term "Purchaser" used in the agreement included "its successors and assigns"; and that the Purchaser shall have the unlimited right "to sell, assign, transfer or otherwise dispose of this agreement, and/or any or all of its right, title and interest thereunder, in whole or in part."

(6) Article 17 provided 1950 U.S. Tax Ct. LEXIS 167">*176 that the agreement "shall inure to the benefit of and be binding upon the respective heirs, executors, administrators, next of kin, successors and assigns of the parties hereto."

Under this agreement the petitioner and Chodorov also granted to the corporation a one-half interest in the radio broadcast rights to the motion picture version of "My Sister Eileen" and the exclusive right to enter into agreements with third parties for the exploitation of these radio rights. They expressly reserved all rights not specifically granted, including the publication, television and radio, and production rights on the spoken stage to their play. It was agreed that the purchaser would not have the right to produce any sequels, but that the authors would "not produce or license or otherwise grant or convey the right to produce or permit voluntarily the production of any motion picture or televised motion picture sequel" prior to certain specified dates. This agreement was consented to and approved by Ruth McKenney.

In consideration for the rights which it acquired, Columbia Pictures Corporation agreed to pay $ 225,000, of which the petitioner's share was to be $ 40,500. He received payments under1950 U.S. Tax Ct. LEXIS 167">*177 this agreement disposing of his motion picture rights in the play, as follows:

The petitioner included the above net amount of $ 11,416.81 in ordinary income in his income tax return for the year 1941 and the above net amount of $ 11,688.41 in ordinary income in his income tax return for the year 1942. In 1943 the petitioner reported 50 per cent 14 T.C. 1202">*1206 of the above net amount of $ 12,076.34, or $ 6,038.17, as net long term capital gain.

(b) Facts relating to the transfer of the world motion picture rights to a play entitled "The Doughgirls." On January 86 U.S.P.Q. (BNA) 48">*51 22, 1943, the petitioner and George S. Kaufman (hereinafter Kaufman) copyrighted a play, entitled "The Doughgirls," in the petitioner's name. This was their own original work. Prior thereto, on November 6, 1942, the petitioner and Kaufman entered into a dramatic production contract with Max Gordon whereby Gordon was leased the sole and exclusive right1950 U.S. Tax Ct. LEXIS 167">*178 to produce and present the play on the speaking stage in the United States and Canada and limited rights to foreign stage production. The dramatists expressly retained, among other stated rights, the motion picture rights to their dramatization. The petitioner and Kaufman were to receive royalties from the production of this play based on gross weekly box office receipts. On November 14, 1942, the petitioner acquired from Max Gordon, in exchange for a contribution of 12 1/2 per cent of the capital required for the production, a 12 1/2 per cent interest in the sole and exclusive right which had been granted to the producer to produce the play. On December 31, 1942, "The Doughgirls" opened in New York as a stage production of Max Gordon and played for 671 performances on Broadway. Pursuant to the agreement of November 6, 1942, with Max Gordon, the petitioner received author's royalties from this stage production in 1943 in the amount of $ 132,789.27. Pursuant to the agreement of November 14, 1942, the petitioner received producer's share of profits from this stage production in 1943 in the amount of $ 29,188.36. The petitioner also received in 1943 $ 332.05 representing book 1950 U.S. Tax Ct. LEXIS 167">*179 royalties from the play "The Doughgirls."

On June 25, 1943, the petitioner and Kaufman, as the "Owner," entered into an agreement with Warner Brothers Pictures, Inc., as the "Purchaser," for the disposition of the motion picture rights to "The Doughgirls," which included the following:

(1) The Owner agrees to "grant, bargain, sell, assign, transfer and set over" to the Purchaser: (a) the "exclusive complete and entire motion picture rights, including common law and statutory copyright in the same throughout the world, together with all benefits of the copyright from such writings ["The Doughgirls"], the title and the theme thereof, and of all remedies held thereunder, with respect to such motion picture rights." (b) "The exclusive right to make motion picture versions" of the play, "The Doughgirls," and "to produce and reproduce" motion picture photoplays and sound records of every kind based upon that play; and the "exclusive right" to secure copyright registration and protection of such motion picture photoplays and sound records in all countries of the world in the Purchaser's name or otherwise.

(2) Article 7 of the agreement provided that the "Owner hereby appoints the Purchaser1950 U.S. Tax Ct. LEXIS 167">*180 as the Owners' irrevocable attorney in fact, with the right, but not the obligation, for the sole benefit of the Purchaser, and at Purchaser's expense, 14 T.C. 1202">*1207 to enforce and protect all rights herein granted under any and all copyrights and to prevent infringement thereof, and to litigate, collect and receipt for all damages arising from any infringement of such rights, using the Owner's name, in Purchaser's discretion and to join, in Purchaser's sole judgment, the Owner as a party plaintiff or defendant in any suit or procedure."

(3) Article 9 of the agreement provided that the "Purchaser" might "assign, transfer and grant the within rights, or any part thereof" without limit.

(4) Article 15 provided that the "agreement shall bind the parties hereto, their respective heirs, successors, administrators, executors and assigns."

(5) Article 17 of the agreement provided that the "Purchaser shall have the absolute and unlimited right" to use the play for motion picture purposes "in any manner it may, in its uncontrolled discretion, deem advisable, with the same force and authority as if the Purchaser were the author" of the play.

The motion picture company was also given the right 1950 U.S. Tax Ct. LEXIS 167">*181 to produce and release sequels upon payment of $ 31,250 for each sequel. The authors expressly reserved all rights not specifically granted, including the stage, book, periodical, and radio rights, and the television rights to presentation with live actors. Warner Brothers Pictures, Inc., agreed to pay to the authors $ 50,000 in 1943 and additional installements of $ 50,000 each for the succeeding four years. Of each of these payments of $ 50,000, the petitioner was to receive the gross amount of $ 22,500. In his income tax return for 1943 the petitioner reported the receipt of $ 22,500, less agent's commissions and Guild assessments of $ 2,684.25, or a net amount of $ 19,815.75. However, the net amount was not included in gross income. Rather, the petitioner treated the receipts as a long term capital gain and reported in his income only 50 per cent, or $ 9,907.87.

The petitioner kept his books during the years 1941, 1942, and 1943 and made his Federal income tax returns for those years on the cash basis of accounting. 86 U.S.P.Q. (BNA) 48">*52 He had no recognized losses in 1942 or 1943 from sales, exchanges, or compulsory or involuntary conversions of property.

The petitioner stated his occupation1950 U.S. Tax Ct. LEXIS 167">*182 to be that of playwright in his income tax returns filed for 1941, 1942, and 1943. His trade or business during those years was that of playwright, and the movie rights to the plays, "My Sister Eileen" and "The Doughgirls" were property held by him primarily for sale to customers in the ordinary course of his trade or business.

Issue 2. -- In May, 1943, the petitioner's wife, Germaine S. Fields, commenced an action in the Supreme Court of the State of New York against her husband, in which she asked that a decree of separation be granted to her and that her husband be compelled to provide suitably out of his estate and earnings for her support and maintenance.

In May, 1943, she filed a motion in the aforesaid proceeding for alimony pendente lite and for counsel fees, and on June 23, 1943, the Supreme Court of the State of New York referred the matter of the 14 T.C. 1202">*1208 defendant's assets and income to a referee and ordered that, "* * * pending a coming in of said referee's report, the defendant is directed to pay to the plaintiff the sum of $ 1,000 per month for her maintenance and support." Pursuant to the motion for alimony pendente lite and counsel fees, on November1950 U.S. Tax Ct. LEXIS 167">*183 22, 1943, the Supreme Court of the State of New York ordered Joseph Fields, the petitioner herein, to pay to Germaine S. Fields, during the pendency of the action in that court, the amount of $ 1,250 per month from June 1, 1943.

On December 21, 1943, the Supreme Court of the State of New York ordered "that the plaintiff, Germaine Sarlabous Fields, be and she hereby is separated from the defendant, Joseph Albert Fields, and from his bed and board forever," and, further, "that the defendant pay to the plaintiff for her support the sum of $ 1,250 on the first day of each and every month commencing on the first day of January, 1944."

By reason of, and pursuant to, the orders of the Supreme Court of the State of New York, of June 23, 1943, and November 22, 1943, the petitioner paid to Germaine S. Fields the amounts of $ 5,666.66 and $ 3,416.67, respectively, or a total of $ 9,083.33, in the calendar year 1943, which payments were made prior to the separation decree of December 21, 1943. The petitioner deducted in his income tax return for the year 1943 this amount of $ 9,083.33, which he described as alimony to Mrs. Germaine S. Fields as provided by court decree. During the period in1950 U.S. Tax Ct. LEXIS 167">*184 which the petitioner made these payments, his wife was not legally separated or divorced from him under a decree of separate maintenance or divorce.

OPINION.

Issue 1. -- The main issue in this proceeding is whether the sums received by the petitioner during 1942 and 1943 for the exclusive motion picture rights to his plays, "My Sister Eileen" and "The Doughgirls," are taxable as long term capital gains under section 117 (j) of the Internal Revenue Code, ¹ as contended by the 14 T.C. 1202">*1209 petitioner, or whether they are taxable as ordinary income, as contended by the respondent.

1950 U.S. Tax Ct. LEXIS 167">*185 The petitioner argues that the payments by the motion picture companies were made in exchange for his sale of a property interest in the copyrights of "My Sister Eileen" and "The Doughgirls" within the meaning of section 117 (j) of the Internal Revenue Code, and, therefore, are taxable as long term capital gains. In order for the payments to come within section 117 (j), the petitioner must show, in this case, that they were gains from (1) the sale, (2) of property used in his trade or business which is subject to the allowance for depreciation, (3) and held for more than six months. The respondent takes the view that the petitioner received these payments as royalties for the grant of a license for the use of his properties, and that the receipts from such a transfer are taxable as ordinary income. In 86 U.S.P.Q. (BNA) 48">*53 the alternative, the respondent argues that even if the transfer of the motion picture rights to the plays constituted a sale of property, the proceeds from their transfer can not be treated as long term capital gains under section 117 (j) because the properties were not used in the petitioner's trade or business.

This Court, in Clifford H. Goldsmith, 1 T.C. 711;1950 U.S. Tax Ct. LEXIS 167">*186 affirmed on another ground, 143 Fed. (2d) 466; certiorari denied, 323 U.S. 774">323 U.S. 774, considered issues, under similar facts, substantially the same as the issues in this proceeding. However, the applicability of section 117 (j), which was added to the Internal Revenue Code by section 151 (b) of the Revenue Act of 1942, was not considered in the Goldsmith case, which involved deficiencies for the years 1938 and 1939. The applicability of section 117 (j) to the facts of this proceeding presents a new question. We have undertaken to review certain principles of law and other authorities, as set forth immediately hereafter, which we believe pertinent to the question. Applying these principles and authorities to the facts in this proceeding, we believe that the analysis of the similar facts and the rationale of the Court of Appeals for the Second Circuit in the Goldsmith case, supra, as set forth in its opinion, should be followed in this proceeding; and we come to the conclusion that the payments in question were received by the petitioner in exchange for his sale of a property interest in the copyrights, but that the1950 U.S. Tax Ct. LEXIS 167">*187 proceeds from their transfer can not be treated as long term capital gains under section 117 (j) because the properties were not used in the petitioner's trade or business.

The Copyright Act, 61 Stat. 652, 17 U.S. C., section 1, makes no specific provision for an assignment of only part of the rights secured under the registration of a copyright; the efficacy of partial assignments is left to the more uncertain rules of case law. If the copyright is viewed as an indivisible unit, any agreement disposing of less than the totality of the rights derived under the registration of the copyright 14 T.C. 1202">*1210 merely confers the privilege of using the copyright in a particular manner and is, therefore, in the nature of a license agreement. This has been the preponderant view adopted by the courts, although it has been stated primarily in those cases which were concerned with whether the owner of a copyright is a necessary party to any suit for its infringement.² These cases dealt with procedural matters and were based upon a similar theory in patent law. See Waterman v. Mackenzie, 138 U.S. 252">138 U.S. 252; Gayler v. Wilder, 10 How. 476">10 How. 476.1950 U.S. Tax Ct. LEXIS 167">*188 The rationale of the decisions was that the rule was necessary to protect the infringer against harassment by successive law suits. Widenski v. Shapiro, Bernstein & Co., 147 Fed. (2d) 909; Marks Music Corporation v. Vogel Music Co., 140 Fed. (2d) 266; Witmark & Sons v. Pastime Amusement Co., 298 F. 470; affd., 2 Fed. (2d) 1020; cf. 138 U.S. 252">Waterman v. Mackenzie, supra;10 How. 476">Gayler v. Wilder, supra.

1950 U.S. Tax Ct. LEXIS 167">*189 But in Roberts v. Myers, 20 Fed. Cas. 898, No. 11,906, it was expressly stated that a copyright was divisible in an opinion which upheld the right of an exclusive licensee to an injunction against the infringement of his rights to a play. And in Ford v. Blaney Amusement Co., 148 F. 642; Fitch v. Young, 230 F. 743; affd., 239 F. 1021; and Public Ledger Co. v. New York Times, 275 F. 562; affd., 279 F. 747; certiori denied, 258 U.S. 627">258 U.S. 627, it was said that a copyright was divisible to the extent that the Copyright Act recognized separate rights comprising the copyright. See also Manners v. Morosco, 258 F. 557; reversed on another ground, 252 U.S. 317">252 U.S. 317; Photo Drama Motion Picture Co. v. Social Uplift Film Corporation, 213 F. 374; affd., 220 F. 448; Black v. Allen Co., 42 F. 618.

The procedural justification1950 U.S. Tax Ct. LEXIS 167">*190 for the majority rule no longer has basis in fact, since an exclusive licensee now has the right to sue for infringement, subject to the formality of joining the owner as a party plaintiff or as a party defendant. In Independent Wireless Telegraph Co. v. Radio Corporation of America, 269 U.S. 459">269 U.S. 459, it was held that an exclusive licensee of certain rights under a patent may join the patent owner as a codefendant if he is within the jurisdiction of the court, or as involuntary plaintiff if he is without the jurisdiction and declines to join in the suit. This holding has been applied to the field of copyright law. See Page & Co. v. Fox Film Corporation, 83 Fed. (2d) 196; Stephens v. Howells Sales Co., 16 Fed. (2d) 805; cf. Federal Rules of Civil Procedure, rule 19 (a).

"Taxation is not so much concerned with the actual refinements of title as it is with actual command over the property taxed -- the actual benefit for which the tax is paid." Corliss v. Bowers, 281 U.S. 376">281 U.S. 376, 281 U.S. 376">378. 14 T.C. 1202">*1211 See also Helvering v.86 U.S.P.Q. (BNA) 48">*54 Clifford, 309 U.S. 331">309 U.S. 331;1950 U.S. Tax Ct. LEXIS 167">*191 Griffiths v. Helvering, 308 U.S. 355">308 U.S. 355, 308 U.S. 355">357; Klein v. United States, 283 U.S. 231">283 U.S. 231, 283 U.S. 231">234. In Parke, Davis & Co., 31 B. T. A. 427, the contract recited that, in consideration of certain payments to be made, the licensor sells and grants to the licensee the exclusive right, license, and privilege to make and use, but not to sell, the invention covered by the patents. Each party agreed not to sell the invention or license its use without the consent of the other. The question before the Board was whether the transaction was a license or a sale. In holding that it constituted a sale for income tax purposes, the Board said:

We are familiar with the decisions cited by respondent holding that purported assignments of patent rights which failed to grant the right to the assignee to sell the patent or license its use were in themselves only licenses * * * [Citing cases.] The question presented in these cases was the right of the so-called assignee to maintain a suit for infringement which right was denied because the right to sell the patents or license their use had been retained by the assignor.

1950 U.S. Tax Ct. LEXIS 167">*192 In none of the cited cases did the court have the situation here existing. The questions there presented were entirely different from the one before us for decision. The right to maintain a suit at law is often controlled by the question of the possession of the naked legal title. Here we have a question of income tax liability where legal title is of little consequence and the inquiry is as to the ownership of the beneficial interest. We are not to determine whether petitioner or Eli Lilly & Co. could maintain a suit for infringement in its own name, but merely whether petitioner, under its contract with Eli Lilly & Co., divested itself irrevocably of certain capital investments in consideration of the payment made to it by the latter company.

* * * Legal title alone, without beneficial ownership, and held for the interest of another, is without value. * * *

See also Goldsmith v. Commissioner, supra; Seattle Brewing & Malting Co., 6 T.C. 856, 869; affd., 165 Fed. (2d) 216.

There is nothing inherent in the nature of a copyright which precludes the separate sale of the several parts which make up the whole. ³ The1950 U.S. Tax Ct. LEXIS 167">*193 Copyright Act segregates the various exclusive rights derived under the registration of a copyright into separately numbered paragraphs. The major rights arising under the copyright of a play are (1) the exclusive right to publish the play; (2) the exclusive right to present the play on the speaking stage; (3) the exclusive right to present the play on the radio; and (4) the exclusive right to make and exhibit motion pictures of the play. Each of these exclusive rights is enforceable by the owner against all persons. Each is substantial in itself and may be exploited independently of any of the others. Each may form the basis of a new copyright secured in the name of the holder of the exclusive right.

14 T.C. 1202">*1212 Only one1950 U.S. Tax Ct. LEXIS 167">*194 case has considered whether or not the transfer of the exclusive motion picture rights in a play is a "sale" within the meaning of section 117 of the Internal Revenue Code. In Goldsmith v. Commissioner, supra, which involved facts similar to those in this proceeding, the majority of the Second Circuit Court of Appeals held that the transfer of the exclusive motion picture rights to a play constituted a "sale" for purposes of section 117. Judge Learned Hand said:

* * * Nor does it seem to me to be material that the exclusive license which the author granted to the Paramount Company did not convey "title" * * *.

Copyright and literary property are monopolies; they entitle the owner to prohibit various kinds of reproduction, and to relieve individuals of these prohibitions by licenses. The licenses may do no more than excuse what would otherwise be infringements; or they may be exclusive, as in the case at bar. An exclusive license requires the author to protect the licensee against other infringement, and is for the most purposes treated as "property." I think that it is "property" within § 117 (a) (1); that its grant is a "sale" * * *.

Columbia Pictures Corporation and 1950 U.S. Tax Ct. LEXIS 167">*195 Warner Brothers Pictures, Inc., acquired full beneficial ownership of the exclusive motion picture rights to "My Sister Eileen" and "The Doughgirls," respectively, under their agreements with the petitioner; they received "actual command of the property." The petitioner retained nothing but the naked legal title. Mr. Justice Holmes, in White-Smith Music Co. v. Apollo Co., 209 U.S. 1">209 U.S. 1, 209 U.S. 1">18, 209 U.S. 1">19, which involved substantive questions of copyright law, said:

The notion of property starts, I suppose, from confirmed possession of a tangible object and consists in the 86 U.S.P.Q. (BNA) 48">*55 right to exclude others from interference with the more or less free doing with it as one wills. But in copyright property has reached a more abstract expression. The right to exclude is not directed to an object in possession or owned, but is in vacuo, so to speak. It restrains the spontaneity of men where but for it there would be nothing of any kind to render their doing as they saw fit.

See also Photo Drama Motion Picture Co. v. Social Uplift Film Corporation, supra, at page 378.

The agreements transferring the exclusive motion picture rights to1950 U.S. Tax Ct. LEXIS 167">*196 the plays gave the motion picture companies "the right to exclude others from interference with the more or less free doing" with them as the transferees willed. For the duration of the monopoly granted by the Copyright Act, the motion picture companies could assert their monopoly of their respective motion picture rights against the world, including the petitioner himself. Although the transferors retained the power, under the Copyright Act, to sue for damages for infringement of the exclusive motion picture rights, under the agreements this power could be exercised only for the benefit of the transferees. The motion picture companies also had the power, themselves, to sue for infringement of their exclusive rights by the simple formality of joining the "owners" as nominal parties plaintiff. Page & Co. v. Fox 14 T.C. 1202">*1213 ;Stephens v. Howells Sales Co., supra.The grants to the motion picture companies were not limited as to either territory or time; they were "world-wide" and "forever." The companies, in both transactions, were given the right to freely alienate the interests which they received. 1950 U.S. Tax Ct. LEXIS 167">*197 The language used throughout both agreements is that of sale and outright conveyance, and this was obviously the intention of the parties. In both agreements the owners of the motion picture rights expressly "grant," "sell," "assign" and "set over," "forever," the "exclusive" motion picture rights throughout the "entire world." In each agreement the "owners" appoint the purchaser their irrevocable attorney, for his sole benefit, to enforce and protect all rights transferred to the purchaser, and they give the purchaser the right to sell, assign, transfer and grant the motion picture rights, or any part thereof, without limit. Each agreement expressly recites that it shall be binding not only upon the parties thereto, but also upon their respective heirs, executors, administrators, successors, and assigns.

The case of Wodehouse v. Commissioner, 337 U.S. 369">337 U.S. 369, is clearly distinguishable from the present proceeding. That case involved a nonresident alien, not engaged in trade or business within the United States, who received lump sum payments in exchange for the exclusive serial or book rights throughout the United States to certain literary properties. 1950 U.S. Tax Ct. LEXIS 167">*198 The payments received were held to constitute "gross income from sources within the United States" as used in sections 119 (a), 211 (a), and 212 (a) of the Internal Revenue Code. The majority decision did not consider the inherent nature of a copyright or whether or not it was divisible. Rather, it pitched its consideration of the taxability of the payments upon fiscal practice as indicated by the special treatment given by Congress over the years to the taxation of the income of nonresident alien individuals. The rationale of the decision was that under the Revenue Act of 1934 sums received by a nonresident alien for the use of a copyright in the United States constituted taxable gross income, and that the Revenue Act of 1936 made it clear that "receipts from royalties, as expressly and broadly defined in section 119 (a) and subjected to withholding at the source of income under section 143 (b)" were included in income from sources within the United States as defined in section 211 (a). The Court said (337 U.S. 369">337 U.S. 369, at pp. 390-1):

* * * No suggestion appears that Congress intended or wished to relieve from taxation the readily accessible and long-established1950 U.S. Tax Ct. LEXIS 167">*199 source of revenue to be found in the payments made to nonresident aliens for the use of patents or copyrights in the United States. * * * To have exempted these nonresident aliens from these readily collectible taxes derived from sources within the United States would have discriminated in their favor against resident citizens of the United States who would be required to pay their regular income tax on such 14 T.C. 1202">*1214 income, if treated as royalties within the meaning of our gross income provisions, or at least to pay a tax upon them as capital gains, if treated as income from sales of capital within the meaning of our capital gains provisions. No such purpose to discriminate can be implied.

In Rohmer v. Commissioner, 153 Fed. (2d) 61, 65, affirming 5 T.C. 183; certiorari denied, 328 U.S. 862">328 U.S. 862, which involved facts similar to the Wodehouse case, the court distinguished between section 117, under which the question in this proceeding arises, and section 211, which was involved 86 U.S.P.Q. (BNA) 48">*56 in that case as it was in the Wodehouse case:

* * * Because of the differing histories and purposes of section1950 U.S. Tax Ct. LEXIS 167">*200 117 and section 211 (a) (1) (A), respectively, we think that the views expressed by the majority in the Goldsmith case have no bearing here. It is well to remember that the concepts employed in construing one section of a statute are not necessarily pertinent when construing another with a distinguishable background.

The grants of the motion picture rights to the plays, "My Sister Eileen" and "The Doughgirls," while not disposing of all the property in the copyright of those plays, did dispose of all the petitioner's property in the motion picture rights. Such a grant is a "sale" for the purposes of section 117.

Having arrived at the conclusion that the transfer of the motion picture rights constituted a "sale" for the purposes of section 117, there remains the question of whether the proceeds realized are taxable as long term capital gains under section 117 (j). The applicability of section 117 (j) to facts similar to those present in this proceeding is before us for the first time. Since the petitioner has failed to show that the motion picture rights were used by him in his trade or business, we believe that the respondent was correct in his determination that the proceeds1950 U.S. Tax Ct. LEXIS 167">*201 from the transfer of the motion picture rights are not taxable as long term capital gains.

Under section 117 (a) (1) the term "capital assets" does not include, among other exclusions, "property held by the taxpayer primarily for 86 U.S.P.Q. (BNA) 48">*57 sale to customers in the ordinary course of his trade or business" and "property, used in the trade or business, of a character which is subject to the allowance for depreciation." Admittedly, the property in question is not a capital asset because of these exclusionary clauses. The petitioner, however, argues that the payments that he received are taxable as capital gains under section 117 (j), which provides that "recognized gains upon sales or exchange of property used in the trade or business" and held for more than six months, "shall be considered as gains * * * from sales or exchanges of capital assets held for more than 6 months." "Property used in the trade or business" is defined to mean (1) "property used in the trade or business, of a character which is subject to the allowance for depreciation," and (2) real property used in the trade or business.

14 T.C. 1202">*1215 But there is a difference between property used in the trade or business and property1950 U.S. Tax Ct. LEXIS 167">*202 held primarily for sale to customers. These are two mutually exclusive purposes; property can not be held for use and for sale at the same time. Section 117 (a) (1), in its exclusionary clauses, recognizes this difference, the difference between, for example, machinery used in the business to manufacture goods and the goods manufactured which are held for sale to customers. "Property used in the trade or business, of a character which is subject to the allowance for depreciation" was first incorporated into section 117 as an exclusion from the definition of capital assets by the Revenue Act of 1938. Prior to that time, capital assets had been defined to exclude "stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business." The Revenue Act of 1942 added section 117 (j) which allowed gains from the sale of depreciable property used in the trade or business to be treated as capital gains. House Report No. 2333, 77th Cong., 1st sess., to accompany the Revenue1950 U.S. Tax Ct. LEXIS 167">*203 Bill of 1942 (p. 45), explained the insertion of this provision:

Under the existing law, the gain or loss from the sale or exchange of depreciable property is not treated as a capital gain or capital loss, but as an ordinary gain or an ordinary loss. This rule was originally inserted as a relief provision to enable corporations to have the full benefit of a loss from the sale of machinery, instead of being limited by the capital loss provisions, which would permit it only a certain percentage of the loss. It was felt at that time that the taxpayer should not be denied the full loss because it sold the property at a loss instead of abandoning the property. While this rule provided relief in case a loss was realized, it appears that many taxpayers are able to dispose of their depreciable property at a gain over its depreciated cost. To treat such a gain as an ordinary gain will result in an undue hardship to the taxpayer. * * *

Albright v. United States, 173 Fed. (2d) 339, considered the question of whether the normal sale of livestock, for the purpose of maintaining his herd at a regular size, by a farmer whose principal income was derived from1950 U.S. Tax Ct. LEXIS 167">*204 the sale of dairy products and hogs could be treated as the sale of capital assets under section 117 (j). In deciding that the provisions of section 117 (j) were applicable, the court held that the animals culled from the herd were actually used in the taxpayer's business and were not held primarily for sale to customers in the ordinary course of his trade or business. The test used by the court was that:

In order for the taxpayer to come within the provisions of section 117 (j) permitting him to treat the sales from his dairy and breeding herds as sales of capital assets, the burden is upon him to show * * * that the animals were not held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.

14 T.C. 1202">*1216 See also Nelson A. Farry, 13 T.C. 8.

In Goldsmith v. Commissioner, supra, which involved facts similar to those in this proceeding, the court said that the copyright of the play in that case was not property used in the trade or business of the playwright, but, instead, was property held by him primarily for sale to customers. See also Harold T. Avery, 47 B. T. A. 538;1950 U.S. Tax Ct. LEXIS 167">*205 Regulations 111, sec. 29.117-7; cf. Walter G. Morley, 8 T.C. 904.

The petitioner in this proceeding has not shown that he was in a position to exploit the motion picture rights personally, or that he had done so in the past or contemplated doing so in the future with other literary works. He was not engaged in the highly technical business of making motion pictures. He has not shown that the motion picture rights to the plays in question were used by him in his trade or business. Rather, the motion picture rights were held primarily for sale to customers, in this case motion picture companies, in the ordinary course of his trade or business.

It is held that the proceeds from the transfer of the motion picture rights to the plays, "My Sister Eileen" and "The Doughgirls" can not be treated as long term capital gains under section 117 (j), but, instead, are includible in the ordinary income of the petitioner for the years in which received.

Issue 2. -- The petitioner claims a deduction under section 23 (u) of the Internal Revenue Code for the payments made by him in 1943 to his wife as alimony pendente lite from the time she instituted suit1950 U.S. Tax Ct. LEXIS 167">*206 for legal separation in May, 1943, until a decree of separation was entered on December 21, 1943.

The right to a deduction under section 23 (u) depends upon whether or not the payments in question come within the scope of section 22 (k) so as to be includible in the gross income of the wife.

This question was considered in George D. Wick, 7 T.C. 723; affd., per curiam, 161 Fed. (2d) 732, in which this Court held that payments of alimony pendente lite which are made prior to the entry of a decree of divorce or of legal separation are not taxable to the wife under section 22 (k) and, therefore, are not deductible by the husband under section 23 (u). See also Smith v. Commissioner, 168 Fed. (2d) 446; Robert L. Daine, 9 T.C. 47; affd., 168 Fed. (2d) 449. The facts on this issue are substantially the same as the facts in George D. Wick, supra.See also Terrell v. Commissioner, 179 Fed. (2d) 838.

It is held that the payments pendente lite which the petitioner made1950 U.S. Tax Ct. LEXIS 167">*207 to his wife in 1943 are not deductible. The respondent's determination under this issue is sustained.

Decisions will be entered under Rule 50.