DocketNumber: Docket No. 9072-86
Judges: TANNENWALD
Filed Date: 6/13/1991
Status: Non-Precedential
Modified Date: 11/21/2020
*315
SUPPLEMENTAL MEMORANDUM OPINION
The present proceeding is a result of the reversal by the Court of
At the outset, we note that our disposition of the instant case, at this point in time, is circumscribed by: (1) The opinion of the Court of Appeals for the Eighth Circuit in reversing our prior disposition of the case; (2) our earlier findings of fact, *317 except for our ultimate determination in respect of the existence of the requisite profit objective; and (3) the decision and opinion by the same Court of Appeals, subsequent to the reversal herein, in
*318 We deal first with respondent's assertion that the acquisition/distribution arrangements lacked economic substance. In A transaction devoid of economic substance is not recognized for tax purposes.
We think the necessary corollary of the holding of the Court of Appeals that the requisite profit objective existed herein is that the acquisition/distribution arrangements had economic substance. See also
*320 Respondent asserts that
The threshold question is whether the partnership acquired ownership of the film "Heartbeat" for tax purposes. This is a factual issue to be determined by reference to the written agreements read in light of the attendant facts and circumstances. See
"For tax purposes, a sale of a motion picture occurs when there is a transfer of all substantial rights of value in the motion picture copyright. *322 [Citation omitted.] No sale occurs if the transferor retains substantial proprietary rights in the motion picture."
Furthermore, as those findings of fact show, under the distribution agreement, the partnership granted Orion all advertising, distribution, exhibition, and exploitation rights in the film in perpetuity. Although Orion agreed to consult the partnership regarding certain matters, in particular the initial advertising campaign, release date and marketing strategy, Orion's decisions as to these matters were to be final. *323 Further, under the distribution agreement, the partnership was required to deliver to Orion a laboratory access letter. Under this letter, Orion had exclusive access to the material that was in the laboratory, including, among other things, the original film negative and sound negative.
Finally, our prior findings of fact further reflect the facts that Orion agreed that it was holding the partnership's copyright interest in the film in trust where the copyright notice was in Orion's name and that the copyright notice on the movie was to read "Copyright * * * Orion Pictures Company 'All Rights Reserved.'" Similarly, in advertising and publicity, "Heartbeat" was to be characterized as "An Orion Pictures Release Through Warner Bros., a Warner Communications Company."
Petitioners assert that the finding of the Court of Appeals that "the distribution arrangements for 'Heartbeat' [were] in conformance with industry standards, except that Orion's fees were lower than the prevailing fees in the industry" (
The intangible contractual right to share in the film's profits is a depreciable asset.
We deal with these conflicting views within a narrow frame of reference highlighted by the Eighth Circuit's articulation of its ultimate view that we erroneously determined "that the partners could not have had a bona fide belief that
Additionally, the Eighth Circuit emphasized as an element leading to its ultimate conclusion of an erroneous determination on our part "the opportunity for Heartbeat Associates to earn a substantial ultimate profit" (
One further observation. The partnership used a 4-year life in its depreciation calculation (which*328 respondent has not disputed) and the double declining balance method, which respondent correctly points out is not available to the partnership if we hold, as we do, that the asset was an intangible property, i.e., a contract right, rather than the film itself. See sec. 167(c);
It does not follow, however, that because the partnership's depreciable basis includes the nonrecourse purchase note, it should be considered "at risk" as to that note or the nonrecourse marketing note for the purpose of determining the limitation on the amount of the loss from "Heartbeat" deductible under section 465. 4*329 Clearly, the inclusion of these two items in the amount considered at risk is precluded by section 465(b)(4), 5 and petitioners have recognized this result by conceding that "nonrecourse loans are not 'at risk' amounts." 6
*330 We now turn to the question of the availability of the investment tax credit.
We turn next to the question of the proper treatment of the *331 $ 450,000 advertising expense and the $ 800,000 marketing strategy fee. Respondent contends that these amounts were merely a means whereby Orion received interest-free loans to finance the costs of the film, that the deductions in respect thereof were an attempt to convert part of the cash purchase price into a currently deductible expense when in actuality such amounts should have been capitalized, and that these expenses were those of the distributor, Orion, and not the partnership.
As our prior findings of fact show, the partnership obtained three loans from Chemical Bank of New York (Chemical Bank), including a $ 550,000 nonrecourse marketing loan, a $ 237,500 initial principal and $ 400,000 maximum principal recourse marketing loan, and a $ 300,000 initial and $ 540,000 maximum principal additional recourse financing loan, to pay for these expenditures and other items. We held that the recourse marketing loan and the recourse additional financing loan were genuine debt and that the fact that some of the interest payments which were made on these loans were made by Orion did not alter this conclusion, given the fact that the partnership included these amounts paid by Orion in*332 its income. Similarly, we held that the nonrecourse marketing loan was not contingent, speculative, or in substance an obligation of Orion and was an actual transfer of cash by a third party, rather than a note taken by the seller as part of the putative purchase price. We also held that Orion's obligation to lend the amount of the interest payments to the partnership did not make the loan Orion's obligation. We also noted that, as with the recourse notes, the partnership included in income all interest payments made by Orion. These findings and conclusions were left undisturbed by the Court of Appeals. However, they were articulated in the context of deciding whether the obligations involved constitute genuine debts of the partnership for the purpose of determining the availability of a deduction for the interest thereon. They do not, in our opinion, dispose of the question of the proper tax treatment of the use of the proceeds of such borrowings, which is the issue now before us.
In
We next address the deductibility of the following partnership expenditures during 1980:
Expenses | Amount |
Guaranteed Payments to Partners | $ 85,000 |
Professional Fees | 63,154 |
Printing | 1,541 |
Messenger | 1,169 |
Bank Service Charges | 53 |
Miscellaneous Office | 4,617 |
Payments allocable to organizational and syndication fees of a partnership must be capitalized. Organization costs, if the taxpayer elects, are amortizable over a 60-month period, but syndication costs are not amortizable. See
The $ 60,000 payment to Mr. Malamed was in consideration for his services in finding "Heartbeat," negotiating its purchase and distribution with Orion and Warner, preparing the various partnership documents and loan agreements, and managing the partnership. The $ 25,000 payment to Mr. Glass was in consideration for his services in negotiating the purchase and distribution of the film and for managing the activities of the partnership. These expenditures are properly characterized as organizational costs which are not currently deductible 8 or nondeductible syndication fees. We do not share petitioners' view that the deductibility of the $ 85,000 guaranteed payments is supported by the fact that the partnership capitalized and did not deduct $ 151,387.93 of syndication fees. We likewise hold that the $ 63,154 legal fees represent nondeductible organizational or syndication fees.
Finally, we address respondent's assertion in his amended answer that petitioners are liable under section 6621(c) for interest on an underpayment at the rate of 120 percent of the statutory rate. During the years in issue, this section provided that increased interest would be due if a "substantial underpayment" (that is an underpayment of more than $ 1,000) is attributable*336 to a "tax motivated transaction." Certain transactions are defined to be "tax motivated" by section 6621(c)(3). To the extent that our conclusions herein are based upon the application of section 465(a) and the disallowance of deductions which should have been properly treated as organization or syndication expenditures, we hold that respondent has carried his burden of proof and that the increased interest rate will come into play if the amount of the underpayment exceeds $ 1,000. Sec. 6621(c)(3)(A)(ii) and (iv); sec. 301.6621-2T, Q & A-3(4), Temporary Proced. and Admin. Regs.,
To reflect the foregoing,
1. Unless otherwise indicated, all section references are to the Internal Revenue Code as amended and in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. The same situation exists in
3. In our prior opinion, see
4. Respondent has conceded that petitioners are "at risk" within the meaning of sec. 465 as to their pro rata share of the recourse purchase note, recourse marketing loan, and the additional recourse financing loan.↩
5. Sec. 465(b)(4) provided:
(4) Exception. -- Notwithstanding any other provision of this section, a taxpayer shall not be considered at risk with respect to amounts protected against loss through nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements.↩
6. Petitioners' concession undermines the suggestion, in their reply brief, that the issues set forth in footnote 20 to our prior opinion did not include the question whether the nonrecourse notes were "at risk" -- a suggestion which, in any event, is without merit. In calculating the amounts "at risk," there may be a duplication of items aggregating $ 29,375. Any adjustment in this regard should be accomplished in the Rule 155 computation. In this connection, we reject petitioners' contention that the "double-counting" issue is not before us. We note that, contrary to petitioners' assertion that this issue was not advanced until respondent's brief on remand, it was in fact raised in respondent's original trial brief herein and that petitioners' position was not advanced in their reply brief on remand and appears to have been an afterthought when the Court asked for their position in an order issued after all briefs on remand had been filed and directed primarily to the "at risk" problem. We also note that because of our holding herein, particularly with respect to the unavailability of the double-declining method of depreciation, the loss limitation under sec. 465 may not come into play.↩
7. The parties do not dispute that "Heartbeat" was a qualified film under
8. There is no evidence that the partnership made the required election for amortization.↩
9. Any differences between the parties with respect to the data contained in petitioners' Second Supplemental Statement can be disposed of in connection with the computations under Rule 155.↩
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