Opinion ID: 1544847
Heading Depth: 1
Heading Rank: 1

Heading: The Kodachrome Issue.

Text: The inventors of a process known as Kodachrome, which is used in the manufacture of colored film, became entitled under a licensing agreement to receive royalties from the Eastman Kodak Company. On November 1, 1930, they assigned those royalties, except certain so-called flat royalties which may now be disregarded, to Kuhn, Loeb & Company as trustee to collect and pay them to those having the right to receive them. The taxpayer was, on December 20, 1935, one of those who had a right to receive a certain percentage of such royalties from the trustee. He had acquired that right by performing certain personal services in connection with the financing of the Kodachrome process. On December 20, 1935, the petitioner assigned all his right, title and interest in Kodachrome, manufactured by the Eastman Kodak Company, to his wife and the trustee was duly advised that he had done so. During 1938, the trustee paid $10,209.50 to the taxpayer's wife and during 1939 $14,183.94 which would, but for the assignment to her, have been paid to the taxpayer as his share of the royalties. The wife reported such payments in the respective years they were received and paid income taxes thereon. The commissioner, holding that the assignment was of future payments to the taxpayer for personal services performed by him, included them in his gross income for the proper years and determined deficiencies accordingly. The taxpayer then petitioned the Tax Court to redetermine the deficiencies, alleging, among other things, that in 1935 he was the owner of an interest in the Kodachrome process of manufacturing color film. This was admitted in the respondent's answer and the Tax Court, three judges dissenting, expunged both deficiencies on the ground that the taxpayer had assigned property to his wife who received the payments from the trustee as income from that property and not as the assigned earnings of the taxpayer from his previously rendered personal services. This issue is reviewable as one of law, since it turns upon the proper construction of § 22(a) of the Internal Revenue Code, 26 U.S.C.A. Int.Rev.Code, 22(a), in the light of undisputed facts. Cf. Trust of Bingham v. Commissioner, 325 U.S. 365, 65 S.Ct. 1232, 89 L.Ed. 1670, 163 A.L.R. 1175. It is of little significance that the taxpayer in his petition in the Tax Court chose to call his right to receive part of the royalties paid by the Eastman Kodak Company an interest in the Kodachrome process and the Commissioner accepted that definition of it in his answer. It now appears that the interest was only the right to receive a percentage of the royalties. And the tax consequences of the assignment of that right are, needless to say, dependent upon the real nature of what was assigned, not upon the label attached to it by the parties. It has been well settled since Lucas v. Earl, 281 U.S. 111, 50 S.Ct. 241, 74 L.Ed. 731, that compensation derived from personal services is taxable to the one who performs the service whether or not he actually receives the compensation or transfers the right to receive it before it is earned. Burnet v. Leininger, 285 U.S. 136, 52 S.Ct. 345, 76 L.Ed. 665; Commissioner of Internal Revenue v. Tower, 327 U.S. 280, 66 S.Ct. 532, 537, 90 L.Ed. 670, 164 A.L.R. 1135. In Helvering v. Eubank, 311 U.S. 122, 61 S.Ct. 149, 85 L.Ed. 81, the principle was extended to cover the assignments of compensation due in the future for personal services performed in the past. We think the last mentioned case controlling in this instance. These payments were the result of personal services performed in the past by the taxpayer. The taxpayer did not receive for those services any part of the Kodachrome process itself or any right to control the disposition of that process. Rather, he obtained the enforceable promise of the owners of the process that he would be paid for his services a definite portion of the royalties they had the right to receive from the Eastman Kodak Company. That is to say, his interest in the process was never greater than a contract right to be paid certain ascertainable sums of money. From first to last his pay for his services was to be only in money determinable in amount by reference to a royalty agreement covering the process. This taxpayer's right to receive royalties, we think, is indistinguishable from the right, which was considered in Helvering v. Eubank, supra, to receive part of past earned commissions on future premiums on insurance contracts. There also the assignment was of the taxpayer's right, title, and interest in the contract as well as the renewal commissions. As was said in Commissioner of Internal Revenue v. Tower, supra, A person may be taxed on profits earned from property, where he neither owns nor controls it. Lucas v. Earl, supra. The issue is who earned the income    327 U.S. at page 289, 66 S.Ct. at page, 90 L.Ed. 670, 164 A.L.R. 1135. The decision on the Kodachrome issue is reversed with directions to reinstate the deficiency for each year.