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June 15, 1950


The opinion of the court was delivered by: KAUFMAN

The question presented by this case is whether or not plaintiffs are entitled to recover, with interest, $ 60,300 which was paid to defendant on account of taxes claimed to have become due as the result of a certain transaction between plaintiffs and Samuel Goldwyn, Inc., a New York corporation, and Samuel Goldwyn, individually.

The case was submitted to the court for decision on a stipulation of facts from which the court finds:

Plaintiffs are corporations organized and existing under the laws of the Kingdom of Great Britain and Northern Ireland, and are engaged in the business of producing and distributing motion pictures. Their places of business are in London, England, and they have no offices or places for the transaction of business in the United States.

 The tax payment in question was made to defendant, the Collector of Internal Revenue, for the Third District, and the transaction out of which it arose was as follows:

 On February 9, 1942, plaintiffs and Samuel Goldwyn, Inc., entered into a contract, the interest of the latter thereunder having subsequently been assigned to Samuel Goldwyn, individually. Pursuant to this agreement, the Goldwyn interests permitted plaintiffs, in the making of a motion picture called 'Spitfire', to use the services of an actor who was under contract to Goldwyn. After completion of the picture, and in accordance with Article 2 of the contract, a print of the picture was delivered to Goldwyn in September, 1942, and Goldwyn had the option, exercisable within ten days after receipt of the print, 'of acquiring the exclusive rights to distribute the said film in all parts of the world other than the British territory * * * (therein defined) * * * and Australasia'. *fn1" Art. 3(a).

 Goldwyn exercised the option on October 7, 1942 by the dispatch of a cable to General Film Distributors Limited, one of the plaintiffs, at its London office. Thereafter, on December 4, 1942, Goldwyn received the original negative and sound track of the film, and paid to General Film Distributors Limited the equivalent of 50,000 lbs (40,000 lbs and 40,000 lbs). This payment was made pursuant to a provision of the contract which reads. 'Goldwyn shall within ten days after the delivery to them of the original negative and sound track and negative cut-outs and complementary sound track (if any) of the film with sample print thereof mentioned in the foregoing sub-clause advance to the Producers the sum of Fifty thousand pounds * * * .' Art. 4(c).

 On the payment of said sum, the contract conferred on Goldwyn the right 'to make any arrangements or enter into any contracts contained such terms and conditions in connection with the distribution and advertisement of the film without any consent being required on the part of the Producers or alternatively may convey any distribution rights to others in all parts of the world other than the British territory and Australasia aforesaid to such persons and upon such terms in such form and upon such condition as Goldwyn in their discretion may think fit.' Art. 4(e).

 The contract also provided that the Producers (plaintiffs) would receive 55% of the distributors' gross, and the distributors (Goldwyn) would receive 45% thereof, and that the Producers' 55% should be retained by Goldwyn until the 'advance of Fifty thousand pounds is recouped to Goldwyn thereout.' Art. 4(g).

 Goldwyn thereafter distributed the motion picture in the United States and recouped the sum of 50,000 pounds solely out of the proceeds of this exploitation, as contemplated by the aforesaid provision of the contract.

 Subsequently, some doubt having been raised as to whether the 50,000 pound payment should have been subject to withholding tax under the Internal Revenue Code, 26 U.S.C.A. 143, 144, counsel for plaintiffs requested an advisory opinion from the United States Treasury Department. A Deputy Commissioner of Internal Revenue, by letter dated May 17, 1944, replied that the Treasury Department did not consider the transaction a sale, but rather that 'the lump sum payment amounted to the payment of an advanced royalty for the right to distribute the film in the United States.' Goldwyn thereupon withheld the sum of $ 60,300 from payments due to General Film Distributors Limited and paid the money to defendant on October 31, 1944.

 On April 9, 1945, plaintiffs made a claim for refund by defendant, which claim was disallowed. On September 12, 1946, plaintiffs made their protest, which was received by the Office of Internal Revenue Agent in Charge, Upper New York Division. More than six months having expired since the filing of the claim for refund, and no part of the sum claimed by plaintiffs having been refunded, this action was commenced on January 23, 1947. Thereafter, on February 6, 1947, plaintiffs were notified that the claim for refund had been disallowed in full by the Commissioner of Internal Revenue.

 If the lump sum payment equivalent to 50,000 pounds constituted 'fixed or determinable annual or periodic gains, profits and income' within the meaning of Sec. 143(b) of the Internal Revenue Code, it was taxable. If, on the other hand, it was the payment of the purchase price of a sale of property, it was exempt from taxation. *fn4" The pertinent statutes and regulations are set forth in the margin. *fn5"

 In a series of cases involving transactions similar to that herein, the courts have referred to the 'bundle of rights' theory. When one transfers, not the property itself, but only limited rights therein, such as literary or motion picture rights, he is considered to have granted a mere license, and the transaction, for tax purposes, is not a sale. The rule has been stated as follows: ' * * * the grant of only a particular, separate, or partial right (i.e., serial rights, motion picture rights, and the like for all time or for only a limited time) in a literary property rather than the entire package or bundle of rights, is a license and not a sale and that income received therefor, whether payable in a lump sum or in instalments, constitutes royalties (or in the nature of, or advance, royalties), and hence is taxable as ordinary income.' Fincke, An Analysis of the Income Aspects of Patents, 5 tax Law Review 361, 371.

 In Sabatini v. Commissioner, 2 Cir., 98 F.2d 753, an author granted the exclusive world-wide right, for a stated period, to produce motion pictures based on five of his works. This was held not to be a sale, but a mere license to produce the pictures: the author remained the owner of his works, ...

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