What do George Santayana and Tax Court Have In Common?

Daniel M. Cory and the publication of Persons and Places, the autobiography of George Santayana.  Cory v. Commissioner of Internal Revenue, 23 T.C. 775 (1955).

Cover of Time, Feb. 3 1936, George Santayana

Mr. Cory, a philosopher in his own right, was a close friend and assistant to George Santayana.  In an effort to provide some compensation for the services of Cory, Santayana bequeathed unto Cory the publishing rights for his autobiography, Persons and Places.  The autobiography was published in 1944, eight years before his death.  At the time of his death, Santayana was an internationally admired figure in the field of philosophy.  So, rights to the royalties were of significant value.

The issue raised by the IRS was how to classify the income from the publication.  Cory reported the payments from the publisher as long term capital gains from the sale of the book.  The IRS objected, arguing that the income should be treated as ordinary income, thus taxed at a higher rate.  For tax attorneys, the intrigue in the case comes from two issues.  First, was the gift of the license completed before the publication of the book and, second, are proceeds from the publishing contract treated as ordinary income or capital gains?