Durkin v. Comm'r of Internal Revenue
| Decision Date | 22 December 1986 |
| Docket Number | 17602-84,27623-84.,22937-83,25313-82,4229-84,Docket Nos. 18885-82,17677-84 |
| Citation | 87 T.C. 1329,87 T.C. No. 79 |
| Parties | THOMAS J. DURKIN and COLETTE A. DURKIN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentJEROME A. GROSSMAN and SYBIL G. GROSSMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
D was a limited partner in B, and G was an indirect limited partner in S. PPC, a producer and distributor of major movies, sold all of its rights, except sequel rights, in 6 movies to FWC. FWC paid PPC cash and short-term recourse notes equal to 25 percent of the negative cost and long-term nonrecourse notes equal to 75 percent of the negative cost of each movie. In 1977, on the same day it purchased 2 of the 6 movies, FWC sold them to B. In 1978, on the same day it purchased the remaining 4 of the 6 movies, FWC sold them to S. B and S paid cash and short-term recourse notes in excess of 25 percent of the negative cost and long-term recourse notes equal to 75 percent of the negative cost of each movie, but the long-term notes would become nonrecourse on the occurrence of certain specified conditions. D and G guaranteed the long-term notes. On the same days that B and S purportedly purchased their motion pictures, they executed distribution agreements with PPC, wherein they transferred all of their rights, except copyright, in such motion pictures to PPC. PPC distributed the motion pictures. S borrowed money from Delta at 9- 1/2 percent interest per annum and with bonus payments based on PPC's non-theatrical gross receipts. Such money was needed because the initial payments for the movies exceeded the capitalization of S. B and S made guaranteed payments to their general partners of both a fixed dollar amount and a percentage of cash flow. B and S reported various deductions. D and G reported tax losses for every year through 1980, except 1979 for G, and claimed investment credits as a result of the activities of B and S. Numerous subpoenas duces tecum issued on behalf of the Commissioner were quashed.
HELD: (1) B and S did not acquire a depreciable interest in the motion pictures. They purchased, in substance, only a contractual right to payments contingent on the success of the motion pictures.
(2) B and S are entitled to depreciate their bases in each such contract right.
(3) B and S erred in using motion picture gross receipts when calculating depreciation under the income forecast method.
(4) B erred in not including an estimate of network television revenue when calculating depreciation under the income forecast method, where there was an agreement but no signed contract concerning network television exhibition.
(5) S could not use the double-declining balance method of depreciation because its contract rights were intangible assets. The straight line method must be used; useful life of such assets determined to be 6 years.
(6) The long-term notes from B and S to FWC were not bona fide recourse debt and, therefore, were not includable in depreciable bases.
(7) The short-term notes from B and S to FWC due prior to 1986 were bona fide recourse debt and, therefore, were includable in depreciable bases.
(8) D and G are entitled to investment credit with respect to the motion pictures because B and S acquired an ‘ownership interest‘ in each of their respective films within the meaning of sec. 48(k)(1), I.R.C. 1954.
(9) B and S are not entitled to deduct guaranteed payments made to their general partners.
(10) B and S are not entitled to current deductions for advertising payments where such payments are found to be part of the purchase price of certain motion pictures.
(11) Expenses arising from private screenings of motion pictures by S were ordinary and necessary business expenses.
(12) Certain amounts deducted by B and S were for organization costs.
(13) Bonus fees paid to Delta were not reasonable in amount.
(14) This Court properly quashed the Commissioner's subpoenas duces tecum. Alan F. Segal, for the petitioners in all dockets.
Calvin Eisenberg, for the petitioners in all dockets except docket No. 22937-83.
Bryan R. Sullivan and Thomas J. Kane, for the respondent.SIMPSON, JUDGE:
The Commissioner determined the following deficiencies in, and additions to, the petitioners' Federal income taxes:
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¦ ¦ ¦ ¦ ¦Addition to tax ¦
+----------------------+-----------+----+----------+----------------¦
¦ ¦ ¦ ¦ ¦sec. 6651(a)(1),¦
+----------------------+-----------+----+----------+----------------¦
¦Petitioners ¦Docket Nos.¦Year¦Deficiency¦I.R.C. 19541 ¦
+----------------------+-----------+----+----------+----------------¦
¦Thomas J. Durkin and ¦25313-82 ¦1977¦$18,642.56¦--- ¦
+----------------------+-----------+----+----------+----------------¦
¦Colette A. Durkin ¦18885-82 ¦1978¦35,162.50 ¦--- ¦
+----------------------+-----------+----+----------+----------------¦
¦ ¦27623-84 ¦1979¦33,376.74 ¦--- ¦
+----------------------+-----------+----+----------+----------------¦
¦ ¦4229-84 ¦1980¦17,275.58 ¦--- ¦
+----------------------+-----------+----+----------+----------------¦
¦Jerome A. Grossman and¦22937-83 ¦1978¦46,196.00 ¦$10,513 ¦
+----------------------+-----------+----+----------+----------------¦
¦Sybil G. Grossman ¦17677-84 ¦1979¦53,395.00 ¦--- ¦
+----------------------+-----------+----+----------+----------------¦
¦ ¦17602-84 ¦1980¦13,802.00 ¦3,450 ¦
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After concessions by the parties, the issues for decision are: (1) Whether the petitioner, Thomas Durkin, as a limited partner in a partnership which purportedly owned two motion pictures, and the petitioner, Jerome A. Grossman, as an indirect limited partner in a partnership which purportedly owned four motion pictures, are entitled to deductions for distributive shares of losses reported by the partnerships, and, if so, what are the appropriate partnership deductions; (2) whether the petitioners are entitled to investment credits for their investments in such motion pictures; and (3) whether this Court erred in quashing the Commissioner's subpoenas duces tecum.
Some of the facts have been stipulated, and those facts are so found.
The petitioners, Thomas J. and Colette A. Durkin, husband and wife, resided in Westchester, Illinois, at the time they filed their petitions. They filed their joint Federal income tax returns for 1977, 1978, 1979, and 1980 with the Internal Revenue Service Center at Kansas City, Missouri. The petitioners, Jerome A. and Sybil G. Grossman, husband and wife, resided in Northbrook, Illinois, at the time they filed their petitions. They filed their joint Federal income tax returns for 1978, 1979, and 1980 with the Office of the District Director of Internal Revenue, Chicago, Illinois.
During all the years at issue, Paramount Pictures Corporation (Paramount) was a subsidiary of Gulf and Western Company (G and W), a diversified holding company. During such years, Paramount was an industry leader engaged in the production, acquisition, and distribution of feature motion pictures, and in the production and distribution of television movies and series. Paramount's production facilities were located in Los Angeles, and its distribution activities were coordinated in New York. It also had approximately 40 branch offices throughout he country involved in motion picture distribution. It made substantially greater profit from distribution than it did from production. It sought to supply its large distribution network with between 15 and 20 motion pictures per year.
Since 1968, Charles J. Arney, Jr., has held various positions at Paramount and its parent company, G and W. In 1972, he was the assistant controller at Paramount. In 1975 and 1976, he took the position of director of treasury operations. In November 1977, he became the president of Gulf and Western-Canada, Limited. In January 1979, he went to the west coast as the tax department representative at Paramount. In October 1979, he started working for Arthur Barron, the executive vice-president of finance and administration for Paramount. Mr. Arney was the principal negotiator for Paramount in the transactions at issue in this case.
Calvin Eisenberg is an attorney who worked for the Internal Revenue Service for approximately 4 years. In 1966, he joined the law firm of Levenfeld & Kanter (the law firm),2 where he has worked ever since. Prior to 1977, he was involved in establishing several motion picture ‘service company‘ partnerships. Such a partnership was responsible for all aspects of bringing a motion picture into existence for a fixed price. Paramount was a partner in several of such partnerships.
John Heyman has been involved in the entertainment industry for many years. Upon graduation from Oxford University Graduate School, he began working in the commercial television industry creating, writing, and packaging shows. Packaging a show consists of organizing all the non- technical aspects of the show, such as the script, the director, and the cast. Later, he became a theatrical agent representing, among others, Elizabeth Taylor, Richard Burton, Richard Harris, Lawrence Harvey, Trevor Howard, and Burt Bacharach. As an agent of highly sought after entertainers, his primary duties were to identify the best jobs and to negotiate the contracts for such jobs. He negotiated his first ‘negative pick-up‘ deal with Paramount in 1971 or 1972. Such a deal involves the purchase of the negative of a motion picture after it has been completed; the purchaser picks up the film as a finished product. The purchase can be contracted for at...
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