Rev. Rul. 74-555

Advice has been requested whether payments received by a nonresident alien individual, under the circumstances described below, are rentals or royalties from sources within the United States that are subject to the 30 percent tax imposed by section 871(a)(1) of the Internal Revenue Code of 1954.

The taxpayer, a nonresident alien author, executed a contract with P, a domestic corporation, granting to P the first American serial rights in the taxpayer's exclusive output of both long and short stories for which P was to pay a stipulated sum per story. The contract also provided that P should have the right to publish in the United States all new books of the taxpayer at royalty rates mutually agreeable to the contracting parties. The contract did not prescribe in any manner what the taxpayer was to write or when it was to be written.

The question here is whether payments received by the taxpayer for books and stories written under the contract described above are compensation for labor or personal services, or rentals or royalties for the use of or for the privilege of using copyrights in the United States.

Section 871(a)(1)(A) of the Code provides that there is imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a nonresident alien individual as interest, dividends, rents, salaries, wages, premiums, annuities, compensation, remunerations, emoluments, and other fixed or determinable annual or periodical gains, profits, and income.

Section 861(a)(4) of the Code provides in relevant part that rentals or royalties for the use of or for the privilege of using copyrights in the United States shall be treated as income from sources without the United States.

Section 862(a)(3) of the Code provides that compensation for labor or personal services performed without the United States shall be treated as income from sources within the United States.

In Commissioner v. Wodehouse, 337 U.S. 369 (1949), 1949-2 C.B. 62, the Supreme Court of the United States held that sums received by a nonresident alien individual for an exclusive serial or book right throughout the United States were royalties subject to tax under the Revenue Act of 1938 as "fixed or determinable annual or periodical gains, profits or income" from United States sources.

The contract in the instant case does not prescribe in any manner what the taxpayer is to write or when it is to be written. The contract merely provides that if the taxpayer writes any new books or stories, P shall have certain rights to publish them in the United States. The contract is neither a contract of employment nor a contract for the rendition of personal services. Accordingly, payments received by the taxpayer under the contract are not compensation for labor or personal services.

The rights granted to P under the contract constitute licenses for the use of or for the privilege of using copyrights in the United States. Therefore, the payments to the taxpayer are royalties from sources within the United States subject to the tax imposed by section 871(a)(1) of the Code at the rate of 30 percent for which withholding is required under section 1441.