## Facts

- P. G. Wodehouse, a British author, was a nonresident alien with no U.S. office and not engaged in a U.S. trade or business.
- In 1938 and 1941, Wodehouse received lump-sum payments “in advance and in full” from U.S. magazine and book publishers.
- The contracts granted the publishers American serial and book rights to certain literary works that were ready for copyright.
- The Commissioner treated the payments as taxable U.S.-source “rentals or royalties” for the use of copyrights in the United States and asserted deficiencies.
- Wodehouse contended the transactions were outright sales (or sales of interests) in copyright, producing non-taxable proceeds to a nonresident alien under the applicable scheme.

## Issues

1. Whether lump-sum payments to a nonresident alien for American serial and book rights constitute U.S.-source “rentals or royalties” for the use (or privilege of using) copyrights in the United States under the Revenue Act of 1938 and the Internal Revenue Code provisions at issue.
2. Whether the lump-sum, prepaid form of payment removes such amounts from the statutory category of taxable royalties.

## Decision

- The Supreme Court reversed the Fourth Circuit and held the payments were includible in “gross income from sources within the United States” as “rentals or royalties” for the U.S. use (or privilege of use) of copyrights.
- The Court held the payments remained taxable even though paid as single lump sums “in advance and in full,” rather than as periodic royalties.
- The Court effectively reinstated the Commissioner’s determination of deficiencies.
- Justice Frankfurter dissented, joined by Justices Murphy and Jackson.

## Legal Principles

- For nonresident aliens not engaged in a U.S. trade or business, amounts paid for the use of, or the privilege of using, copyrights in the United States are taxable as U.S.-source rentals or royalties when the statute so provides.
- Classification turns on the substance of what the payor acquires (a U.S. privilege to exploit copyrighted works), not on contract labels describing the transfer as a “sale.”
- Lump-sum, prepaid consideration for U.S. exploitation rights can constitute taxable royalties; payment timing and form do not convert royalty income into non-taxable sale proceeds.
- Statutory revisions to the taxation of nonresident aliens were read to preserve taxability of withholding-type income, including copyright royalties, absent clear congressional intent to exempt it.

## Conclusion

The Court held that lump-sum payments paid to a nonresident alien author by U.S. publishers for American serial and book rights are taxable U.S.-source royalties for the use (or privilege of using) copyrights in the United States, even when paid in advance and in full.


Commissioner v. Wodehouse, 337 U.S. 369 (1949)