Paparazzi and Assignment of Income

A few weeks ago, the Wall Street Journal reported on the phenomenon of celebrities tipping off paparazzi as to their whereabouts, so as to gain a measure of control over seemingly unposed photos. (WSJ & co. are poopyheads for not putting their archives online, but the Google cache has it for now.) It included the following remarkable incident:

In January, when rumors In January, when rumors swirled in the press that [Angelina] Jolie might be pregnant with the child of actor Brad Pitt, Ms. Jolie arranged for an employee of the charity Yéle Haiti to take a picture of her with her growing belly.

Ms. Jolie then let Yéle Haiti sell the picture to People, according to Mr. Hackett, the magazine’s managing editor, and a representative for Mr. Pitt. A person familiar with the situation says People paid $400,000 for the picture. It appeared on the cover of the magazine with the headline: “Angelina Reveals: ‘Yes, I’m Pregnant.’”

Leave aside the ethics, the economics, and the cultural significance of these events, fascinating as they me. Instead, indulge me in the following question: What are the tax consequences of allowing someone to take a profitable picture of you?

In the actual case, the tax issues appear to be largely irrelevant, because Yéle Haiti is presumably tax-exempt as a non-profit. Even if Angelina has income from the transaction, she has an offsetting deduction.

No, the more interesting case arises if the photographer is just some individual. Also according to the WSJ, Gwyneth Paltrow and Chris Martin let a photographer named Steve Sands take the first photo of them leaving the hospital with Apple, a photo Sands then sold to People for $125,000. What then? The interesting question I see is whether the transaction constitutes $125,000 of income to Sands (as it almost certainly would if the photograph was taken without Paltrow’s consent or acquiescence) or whether it should be regarded as $125,000 of income to Paltrow followed by a gift of a $125,000 asset from Paltrow to Sands (as it would if someone else took a photo of Paltrow under contract and she gave the negatives to Sands). The actual facts sit somewhere interesting in the middle.

Should Paltrow and Sands be free to characterize the transaction as they wish (so long as they do so consistently with each other) or should the IRS impute a particular characterization of it? Is the wink-wink-nudge-nudge agreement the assignment of an amorphous possibility for Sands to create a $125,000 asset? Is it the gift of future personal services from Paltrow to Sands? Or is it the assignment of a full-blown asset worth $125,000 immediately after its creation? For bonus points, is the income involved capital or ordinary? (Possible hint: Read § 1221 closely.)

I’m sure these questions have more definite answers than I’m letting on. Some of them are rhetorical socractic brainteasers, but some are quite legitimate puzzlement on my part. It would take a better tax lawyer than me to know where to go next. Any better tax lawyers in the audience?