Siegel v. Comm'r of Internal Revenue
| Decision Date | 26 April 1982 |
| Docket Number | Docket Nos. 8571-79,8704-79. |
| Citation | 78 T.C. 659 |
| Parties | CHARLES H. SIEGEL and MARY ANN G. SIEGEL, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENTEDGAR L. FEININGER and GRACE K. FEININGER, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners purchased a 4.95- and 9.9-percent limited interest, respectively, in a partnership in the fall of 1974. Prior to that time, the general partner, on behalf of the limited partnership, purchased a movie for a total of $900,000, consisting of $55,000 cash, recourse notes in the amount of $92,500, and a 6-percent nonrecourse note in the amount of $752,500, secured only by the movie. An additional payment denoted “prepaid interest” of $42,500 was also made by the partnership in 1974. The general partner was actively involved in the exploitation of the film and made an extensive effort to make the movie a success. The partnership reported substantial losses during its first 5 years due to the claimed depreciation deductions and the fact that the movie was unsuccessful at the box office. Held: The partnership did not have any actual investment in the movie to the extent of the $752,500 nonrecourse note, as the note unreasonably exceeded the fair market value of the property securing the note. Therefore, the partnership may not include the face amount of the note in the depreciable basis of the movie and the deduction for “prepaid interest” is disallowed. Held, further, no depreciation deduction is allowable on the balance of the cost basis of the movie under the income-forecast method, as the partnership did not have any income in the years in issue under its method of accounting. Held, further, the partnership is not entitled to a deduction for various claimed expenses. Held, further, petitioners are not entitled to an investment tax credit in 1974 attributable to the purchase of the film as it was not “new” property as required under sec. 48(k), I.R.C. 1954. Held, further, the purchase and exploitation of the movie by the partnership was an activity engaged in for profit, and the partnership is entitled to the deductions claimed under sec. 162, except to the extent otherwise not allowable. Sheldon E. Friedman and Robert J. Kaufman, for the petitioners.
Albert L. Sandlin, Jr., for the respondent.
In these consolidated cases, respondent determined deficiencies for the years and in the amounts as follows:
The issues for decision are (1) whether each petitioner, as a limited partner of D. N. Co., is entitled to a claimed deduction for a distributive share of losses reported by the partnership and, if so, in what amount; and (2) whether each petitioner is entitled to a claimed investment credit.
Some of the facts have been stipulated and are found accordingly.
All of petitioners resided in Atlanta, Ga., at the time of the filing of their petitions in this case. Charles H. Siegel and Mary Ann G. Siegel, husband and wife, filed joint Federal income tax returns for each of the calendar years 1974, 1975, and 1976. Edgar L. Feininger and Grace K. Feininger, husband and wife, filed joint Federal income tax returns for each of the calendar years 1974, 1975, and 1976.
During the years 1974, 1975, and 1976, Edgar L. Feininger and Charles H. Siegel (petitioners) were limited partners in D. N. Co., a limited partnership, of which Richard Bridges was the general partner. In 1972, Mr. Feininger was vice president of Bryant Land Corp., a wholesale heating and air-conditioning company in Atlanta, Ga. In September 1972, he exercised an option to sell his 40-percent interest for $200,000, which amount was payable over the next 3 years. On July 31, 1973, he purchased a company called Economy Binder Co. and has remained with that firm since that time. Mr. Siegel graduated from Yale Law School in 1966, and at the time of trial, was the chairman of the board and executive vice president of R. A. Siegel Co., a wholesale distributor of flooring and carpets, which had a valid subchapter S election in effect for the years in issue.
Beginning in the fall of 1972, Mr. Feininger began purchasing investments solely in reliance upon the advice of Robert Schwap, who at that time was an associate of Richard Bridges. In 1972, he bought a partnership interest in Petro Search, which was involved in buying small gas companies. He had no expertise in the area of oil and gas ventures. This investment turned out to be a very profitable one for Mr. Feininger. Based on the advice of Mr. Schwap, he also invested in Urban Improvement Co., which was involved in the rehabilitation of apartments. At the time of trial, this investment had not proved to be a profitable one.
In the fall of 1974, Mr. Schwap recommended that Mr. Feininger invest in D. N. Co., a limited partnership which was formed with the intent of purchasing and exploiting a movie. Mr. Schwap explained that it was his opinion that the film, “Dead of Night,” would make money. He also stated that this was a high-risk investment but that it did have some tax benefits. Mr. Feininger, on October 21, 1974, signed a subscription agreement for the purchase of one unit amounting to a 4.95-percent interest in the limited partnership for $11,700. He has never viewed the film, “Dead of Night,” owned by D. N. Co., and he knew nothing about the motion picture industry.
Prior to his investment in D. N. Co., Mr. Siegel had invested in two apartment projects, one oil-drilling venture, and a raw-land investment. He did not have any expertise in the area of oil and gas ventures or apartments. He was approached in the fall of 1974 by Reese Inge, who at that time was an associate of Richard Bridges, about an investment in a motion picture. After talking with Mr. Inge about 4 or 5 times about motion pictures, he relied on Mr. Inge's advice and on October 23, 1974, signed a subscription agreement for two units amounting to a 9.9-percent interest in the limited partnership, at a cost of $23,400. At the time of his purchase of a limited partnership interest in D. N. Co., Mr. Siegel felt that although highly risky, the investment did have profit potential and favorable tax benefits. Mr. Siegel did not discuss the advisability of an investment in the D. N. Co. partnership with anyone other than Mr. Inge. Mr. Siegel had no expertise in the movie industry and has never viewed the film, “Dead of Night.”
The subscription agreement signed by each petitioner stated that by executing the agreement, he would be deemed to have executed the limited partnership agreement dated October 9, 1974. Sometime prior to signing the subscription agreement, each petitioner had received a copy of the Private Placement Memorandum which described the various aspects of the limited partnership, including the purchase and distribution of the film entitled “Dead of Night,” and the tax implications for each potential investor. Petitioners also received a document entitled “The D. N. Company Tax Recap for 1 Unit.” This document stated that in return for the purchase of one unit at $11,700, an investor could expect to realize, assuming a tax bracket of 53 percent, total tax reductions of $21,513, or a profit, resulting from the tax reduction over 3 years, of $9,813. Petitioners also received a document which described the possible consequences for the purchaser of a one-unit ($11,700) investment, assuming box office proceeds from $1,250,000 to $10 million. In addition to the projection of the net deduction and taxable income at liquidation to a limited partner, the documents stated that, at the following box office amounts, the specified amount of cash would be paid on a nonrecourse note which was given by the partnership as part of the purchase price of the movie: At $2,188,000 of box office proceeds, $56,000 would be paid on the note; at $3,100,000, $111,000 would be paid on the note; at $5 million, $225,000 would be paid on the note; and at $10 million, $525,000 would be paid on the note.
Mr. Bridges has a degree in industrial management from Georgia Tech and has, at one time or another, been licensed in real estate, insurance, and as a securities principal. He was president of, among other companies, FAI Investment Analysts, which was involved generally in the investment planning business. He has personally, or through his companies, been involved at some time in movie investments, oil and gas investments, land syndications, and the insurance business. In the fall of 1973, he was involved with the films “Klansman” and “Hurry Up or I'll Be 30.” Along with “Dead of Night,” he was also involved with three other films at that time and has been involved with many others since then. With some of the films, Mr. Bridges would form a limited partnership or some other business entity to purchase the movie, and then sell interests to unrelated investors. With others, the limited partnerships he had formed would be involved in the production of the films, often as part investors along with other companies such as Allied Artists, Gloria Films, and Columbia Pictures. When Mr. Bridges formed a limited partnership, his companies were paid a fee...
To continue reading
Request your trial
-
Waddell v. Comm'r of Internal Revenue
...of their intent. Sec. 1.183-2(a), Income Tax Regs.; Fuchs v. Commissioner, supra; Dean v. Commissioner, supra; Siegel v. Commissioner, 78 T.C. 659, 699 (1982); Engdahl v. Commissioner, 72 T.C. 659, 666 (1979). There are a few factors mentioned in the regulations that tend to indicate the ab......
-
Thurner v. Commissioner
...objective facts than to petitioner's self-serving testimony regarding intent. Fox v. Commissioner, supra at 1022; Siegel v. Commissioner [Dec. 38,962], 78 T.C. 659, 699 (1982); Dreicer v. Commissioner [Dec. 38,948], 78 T.C. 642, 645 (1982), affd. without opinion 702 F.2d 1205 (D.C. Cir. 198......
-
Roe v. Commissioner
...of a profit may not have been reasonable does not obviate our finding. Section 1.183-2(a), Income Tax Regs. See Siegel v. Commissioner Dec. 38,962, 78 T.C. 659, 704 (1982). Consequently, we hold that petitioners had an actual and honest objective of profit under section 183 when they purcha......
-
Rose v. Comm'r of Internal Revenue
...1065, 1092 (1986); Abramson v. Commissioner, 86 T.C. 360, 374 (1986); Sheid v. Commissioner, T.C. Memo. 1985-402; and Siegel v. Commissioner, 78 T.C. 659 (1982) (Films). While the subjective test is thus well founded in section 183, a unified approach emphasizing objective factors is prefer......
-
The Profit Motive Requirement as it Relates to Tax Shelter Investments
...Inc. v. Comm'r, 781 F.2d 724 (9th Cir. 1986); Fuchs v. Comm'r, 83 T.C. 79(1984); Dean v. Comm'r, 83 T.C. 56 (1984); Siegel v. Comm'r, 78 T.C. 659 (1982); Polakof v. Comm'r, TC Memo 1985-197, 49 T.C.M. 1300 (1985); Deegan v. Comm'r, TC Memo 1985-219, 49 T.C.M. 1421 (1985); Estate of Baron v.......