PAYMENT TO U.S. CORPORATION BY FOREIGN CORPORATION FOR BROADCASTING RIGHTS IS FOREIGN SOURCE INCOME

Rev. Rul. 84-78

ISSUE

Whether the amount that a domestic corporation receives from a foreign corporation for the right to broadcast a live boxing match taking place in the United States via closed circuit television only in the country in which the foreign corporation is incorporated is foreign source income under the circumstances described below.

FACTS

SITUATION 1. A domestic corporation, Y, obtained from the contestants in a prize fight, which will take place in the United States, the exclusive rights to broadcast the fight live and to record the broadcast for subsequent viewing. Y entered into a contract with FX, a foreign corporation incorporated in foreign country FC. The contract provides that for a stipulated lump-sum payment to be paid by FX to Y, FX will have the right to broadcast the prize fight via closed circuit television only to an audience in FC. The payment that Y receives from FX under the contract is to be refunded to FX if the fight is cancelled for any reason. The broadcast and the simultaneous recording of the braodcast will be protected under the copyright laws of Title 17 of the United States Code (1976 and Supp. 1979). The broadcast right that Y transfers to FX is nonexclusive, and the duration of such right is only for the live showing of the fight. FX's right to broadcast the prize fight does not include recording rights for subsequent viewing. The contract is negotiated, executed and the consideration is paid in the United States.

SITUATION 2. The facts are the same as in Situation 1, except that Y transfers to a foreign corporation, FXB incorporated in foreign country FCB, a broadcasting right in the specified prize fight that is exclusive and exercisable only in FCB.

LAW AND ANALYSIS

Section 861(a)(3) of the Internal Revenue Code provides that, subject to certain exceptions not relevant here, compensation for labor or personal services performed in the United States will be treated as income from sources within the United States.

Section 861(a)(6) of the Code provides that gains, profits, and income derived from the purchase of personal property without the United States and its sale or exchange within the United States is income from sources within the United States.

Section 1.861-7 of the Income Tax Regulations provides that gains, profits, and income derived from the purchase and sale of personal property shall be treated as derived entirely from the country in which the property is sold.

Section 862(a)(4) of the Code provides that rentals or royalties for the use of or for the privilege of using without the United States copyrights and other like properties shall be treated as income from sources without the United States.

In Rev. Rul. 74-555, 1974-2 C.B. 202, a nonresident alien taxpayer executed a contract with a domestic corporation which gave the corporation the exclusive right to publish in the United States all books, and long and short stories written by the taxpayer. The revenue ruling holds that the payments received by the taxpayer under the contract are royalties for the use of, or for the privilege of using, copyrights in the United States and are not compensation for labor or personal services because the contract did not give the corporation any control over what the taxpayer was to write or when it was to be written, but merely the right to publish any books or stories that were written.

Rev. Rul. 54-409, 1954-2 C.B. 174, holds that a copyright is divisible into separate properties, and that if the owner of a copyright granted to another the exclusive right to exploit the copyrighted work in a particular medium throughout the life of the copyright, then the consideration received for the use of the copyright would be treated as proceeds from the sale of property as long as this consideration was not received in certain periodic forms which were regarded as characteristic of royalty payments. Rev. Rul. 60-226 modified this position by providing that the sale result reached in Rev. Rul. 54-409 would hold regardless of the form of the consideration paid for the right to use the copyright. Although the holding of Rev. Rul. 60-226 has been overridden in part by statute in the case of certain forms of consideration (see section 871(e) of the Code), the ruling remains applicable in the present case.

The source of the payment received by Y in exchange for the grant of the right to broadcast the prize fight as United States or foreign income is dependent upon whether the characterization of the income is compensation for labor or personal services, income derived from the sale of personal property, or royalties for the use of or for the privilege of using a copyright or other like property, or some other type of income.

SITUATION 1. The contract entered into between Y and FX does not give FX any control over when or where the prize fight will take place or how the arrangements for the fight will be made, nor does it confer any legal rights over the contestants in the fight; it merely gives FX the right to broadcast the fight if it occurs. Further, the activities of Y are not exclusively performed for the benefit of FX, such that FX would own the product of Y's labor. See Ingram v. Bowers, 57 F.2d 65 (2d Cir. 1932) aff'g. 47 F.2d 925 (S.D.N.Y. 1931). Accordingly, the payment received by Y is not compensation for labor or personal services.

The broadcasting right that Y transfers to FX is not exclusive, and the duration of such right is not for the remaining life of Y's copyright, but is only for the live broadcast of the specified prize fight. FX cannot exploit the broadcast for the life of the copyright since it has no recording rights. The payment that Y receives from FX for such right, therefore, is not income derived from the sale of personal property. Rev. Ruls. 54-509 and 60-226. The payment that Y receives from FX for such right is for the use of, or for the privilege of using, a copyright without the United States.

SITUATION 2. Although the broadcasting right that Y transfers to FXB is exclusive, the duration of such right is not for the remaining life of Y's copyright, but is limited only to the live broadcast of the specified prize fight. Because the broadcasting right that Y transfers is for less than the remaining life of Y's copyright, the payment that Y receives from FXB for such right is not income derived from the sale of personal property, even though the right is for the exclusive use of FXB. See Rev. Ruls. 54-409 and 60-226, and Pickren v. United States, 249 F. Supp. 560 (M.D. Fla. 1965), aff'd. 378 F.2d 595 (5th Cir. 1967), in which the court held that the grant of exclusive rights in secret formulas and trade names for less than the remaining lives of such properties did not constitute a sale. The payment that Y receives from FXB for the broadcasting right is for the use of, or for the privilege of using, a copyright without the United States. See also Oak Manufacturing Co. v. United States, 301 F.2d 259 (7th Cir. 1962).

HOLDINGS

SITUATION 1. The payment that Y receives from FX is foreign source income under section 862(a)(4).

SITUATION 2. The payment that Y receives from FXB is foreign source income under section 862(a)(4).