Santa Monica Pictures, LLC, Perry Lerner, Tax Matters Partner, (2005)

Docket Number: 6163-03, 6164-03

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Santa Monica Pictures, LLC, Perry Lerner, Tax Matters Partner, (2005)

T.C. Memo. 2005-104

UNITED STATES TAX COURT SANTA MONICA PICTURES, LLC, PERRY LERNER, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent CORONA FILM FINANCE FUND, LLC, PERRY LERNER, TAX MATTERS PARTNER,

Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent Docket Nos. 6163-03, 6164-03.* Filed May 11, 2005.

George W. Connelly, Jr., Linda S. Paine, and Phyllis Ann Guillory, for petitioner.

James P. Thurston, H. Clifton Bonney, Jr., and Kenneth C. Peterson, for respondent.

* Petitioner in docket No. 6163-03 is Santa Monica Pictures, LLC (SMP), Perry Lerner, Tax Matters Partner. Petitioner in docket No. 6164-03 is Corona Film Finance Fund, LLC (Corona), Perry Lerner, Tax Matters Partner. By Order dated Jan. 16, 2004, we consolidated these cases for purposes of trial, briefing, and opinion. References to petitioner in this opinion are to Perry Lerner in his capacity as tax matters partner of SMP and Corona.

TABLE OF CONTENTS FINDINGS OF FACT ....................................... 13 I. The Ackerman Group ................................. 13 A. Perry Lerner ................................... 13

B. Peter Ackerman ................................. 14

C. Somerville S Trust ............................. 15

D. Rockport Capital, Inc. ......................... 16

E. Rockport Advisors, Inc. ........................ 16

F. Crown Capital Group ............................ 16 II. The Credit Lyonnais Group ........................... 17 A. Credit Lyonnais ................................. 17

B. Consortium de Realisation ....................... 18

C. Generale Bank Nederlands ........................ 19 III. Metro-Goldwyn-Mayer, Inc. ........................... 19 A. History of MGM Before 1990 ...................... 19

B. Pathe Acquisition of MGM ........................ 20

C. Sealion Corp. ................................... 20

D. Cashflow Problems of MGM-Pathe .................. 21

E. Facility Agreements with CLBN ................... 22

F. Credit Lyonnais Takes Control of MGM ............ 23

G. 1993 Financial Restructuring .................... 26

H. Carolco Pictures, Inc. .......................... 29

I. Sealion Settlement ............................. 33

J. Credit Lyonnais Decides to Sell New MGM ......... 33 IV. Safari Acquisition Co. .............................. 34 A. The Safari Consortium ........................... 34

B. Safari Indicates Its Interest In New MGM ........ 35

C. Investigation of MGM ............................ 36

D. Kerkorian Moves In and Buys MGM ................. 38

E. Debt Release and Assumption Agreement ........... 39

F. Subparticipation Agreement ...................... 40

G. Dissolution of MGM Holdings and Formation of SMHC ......................................... 41 V. The CDR Transaction ................................. 41 A. Initial Contact with Mr. Jouannet ............... 41

B. Negotiation and Drafting Process ................ 43

1. Rockport Capital Confirms Its Interest ...... 43

2. Draft Term Sheet and Letter Agreements ...... 44

3. Further Negotiation and Drafting ............ 48

4. Santa Monica Pictures, LLC, is Formed ....... 49

C. Final Agreements and Documents .................. 49

1. Side Letter Agreement ....................... 49

2. Exchange and Contribution Agreement ......... 51

3. SMP LLC Agreement ........................... 53 a. Amendment No. 1 ......................... 55 b. Amendment No. 2 ......................... 55

4. Deposit Account Agreement ................... 57

5. Advisory Fee Agreement ...................... 57

6. Consent ..................................... 58

D. Assignment to Santa Monica Finance, B.V. ........ 58

E. Exercise of the Put ............................. 59 VI. Film Rights Contributed to SMHC ..................... 59

A. Film Titles and Development Projects ............ 59

B. History of the EBD Film Library ................. 61

1. Epic Productions ............................ 61

2. EBD (Rotterdam) Finance, B.V. ............... 62

3. Selection of Film Titles for CDR ............ 62

4. Assignments Before the Contributions to SMHC ..................................... 63

5. Storage Conditions of the EBD Film Library ..................................... 64 VII. Due Diligence for the CDR Transaction ............... 65

A. James Rhodes .................................... 65

B. Troy & Gould .................................... 67

1. Chain-of-Title and Record Search ............ 67

2. Access Letters .............................. 69 VIII. Other Film Activities ............................... 70 IX. Relationship with TroMetro Films, LLC ............... 71

A. John H. van Merkensteijn ........................ 71

B. TroMetro Films, LLC ............................. 71

C. TroMetro's Purchases of SMP's Receivables ....... 72

1. First Note Purchase Agreement ............... 72

2. Second Note Purchase Agreement .............. 74

3. Purchase Price Determinations ......

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