## Facts

- Pierre Boulez, a French citizen residing in West Germany in 1975, was treated as a U.S. nonresident alien and filed a U.S. nonresident return for 1975.
- In 1969 (as amended in 1971 and 1974), Boulez entered a recording agreement with CBS Records under which CBS engaged him exclusively to render services as producer and/or performer for making phonograph records.
- The contract stated that all master recordings, matrices, manufactured records, and the performances embodied on them were entirely owned by CBS.
- Although the contract described payments as “royalties” and calculated them as a percentage of record sales, the agreement repeatedly framed Boulez’s role as providing services to CBS.
- With CBS’s consent, Boulez assigned the contract in 1972 to Beacon Concerts, Ltd., which supplied his services; payments flowed from CBS to Beacon and then to Boulez.
- Boulez conducted some recording sessions in the United States; CBS exploited the resulting recordings and filed copyright applications in its own name.
- Boulez reported the 1975 payments as treaty-exempt royalties on his U.S. return and paid tax on the same income in Germany; the two countries’ competent authorities did not reach agreement on characterization.
- The IRS determined a deficiency for 1975; after stipulations and concessions, the remaining dispute was whether the 1975 payments were treaty “royalties” or taxable compensation for personal services.

## Issues

1. Whether amounts paid under the CBS recording contract in 1975 were “royalties” under the U.S.–West Germany income tax treaty, exempt from U.S. tax, or compensation for personal services performed in the United States, taxable by the United States under the treaty.
2. Whether Boulez held a sufficient property or copyright interest in the sound recordings to treat the payments as royalties for the use of his property.

## Decision

- The Tax Court held the 1975 payments were not treaty “royalties” but compensation for personal services performed in the United States.
- The court found Boulez lacked an ownership interest in the sound recordings or related rights that could produce royalty income; the contract vested ownership of masters and performances in CBS.
- The deficiency was sustained on the characterization issue, with the final amount to be computed under Tax Court Rule 155.

## Legal Principles

- Royalty characterization requires that the payee own (or control) a property right being licensed; without an ownership interest, payments are not royalties even if labeled “royalties” and computed by reference to sales.
- Income classification under a tax treaty turns on the substance of the arrangement and the parties’ manifested intent, not contractual nomenclature.
- Treaty “royalties” generally cover payments for the use of, or the right to use, intellectual property rights; payments for creating a work owned by the payer are treated as compensation for services.
- Where a contract assigns ownership of recordings and performances to the recording company and the company secures copyrights in its own name, the performer’s receipts are treated as service income rather than royalties, notwithstanding the existence of copyright protection for sound recordings.

## Conclusion

The Tax Court treated Boulez’s percentage-of-sales payments from CBS as taxable compensation for U.S.-performed conducting and recording services, not treaty-exempt royalties, because CBS—not Boulez—owned the master recordings and any associated rights that could be licensed for royalties.


Boulez v. Commissioner, 83 T.C. 584 (1984)