Leahy v. Comm'r of Internal Revenue
| Decision Date | 03 July 1986 |
| Docket Number | Docket Nos. 9475-84,9488-84. |
| Citation | 87 T.C. No. 4,87 T.C. 56 |
| Parties | JAMES B. LEAHY AND KATHLEEN S. LEAHY, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
P is claiming depreciation and investment tax credit in connection with a movie through his interest as a limited partner. P contends that the partnership purchased the ownership interest in a motion picture photoplay and R argues that the partnership did not have any ownership interest which would enable limited partners to receive tax benefits. In a fully stipulated case where the parties agreed upon the facts and issues to be presented, R raised a new position or issue for the first time in his opening brief.
HELD, the partnership did not acquire a 100-percent ownership interest in the movie, but did become a joint venturer with the producer and the partnership held a 25-percent interest in the movie for purposes of depreciation, investment tax credit, etc. FURTHER HELD, R's attempt to raise a new position or issue was untimely under the circumstances and prejudicial to P. Lawrence A. Chez, Matthias A. Lydon and Roman L. Sukley, for the petitioners.
Lauren W. Gore, for the respondent.
Respondent determined deficiencies in petitioners' Federal income taxes for the taxable years 1978 and 1980 of $177,974 and $36,564, respectively. Respondent also determined additions to tax under section 6653(a) 1 for the taxable years 1978 and 1980 in the amounts of $11,736 and $6,906, respectively. With respect to the taxable year 1980, respondent determined an addition to tax under section 6651(a).in the amount of $5,469. The parties have filed a stipulation of settled issues which purports to resolve all but one adjustment common to both the 1978 and 1980 taxable years in these consolidated cases. 2 The issue remaining in controversy is whether a limited partner is entitled to claim a proportionate share of the partnership's claimed depreciation and investment tax credit in connection with a movie entitled ‘Overboard.‘
This case was submitted fully stipulated and the stipulation of facts and exhibits are incorporated by this reference. Petitioners, James and Kathleen Leahy, maintained their legal residence in Palos Heights, Illinois, at the time of filing both petitions in these consolidated cases. Petitioners filed their joint U.S. Individual Income Tax Return (Form 1040) for the taxable years 1978 and 1980 with the Internal Revenue Service Center at Kansas City, Missouri. The Service Center received the 1978 return on June 2, 1980, and the 1980 return on November 4, 1981. Notices of deficiency, dated January 11 and January 24, 1984, were issued to petitioners concerning their income tax liability for petitioners' 1978 and 1980 taxable years, respectively.
The remaining issue presented for our consideration concerns James B. Leahy's (petitioner's) involvement as a limited partner in Lorelei Productions, Ltd. (Lorelei), an Illinois limited partnership organized May 31, 1978. Lorelei was organized ‘to acquire, own, license, distribute, sell and otherwise exploit motion pictures, television productions and other entertainment products * * *.‘
Lorelei had one general partner, Homer J. Askounis, who contributed $100 of capital to the partnership. Petitioner was one of six limited partners who collectively contributed $195,000 of capital to Lorelei. Other than the $195,000 and $100 referenced above, neither the general partner nor the limited partners were required to make additional capital contributions. Petitioner's contribution to Lorelei was composed of a cash payment of $12,870 on August 11, 1978, and two irrevocable letters of credit, each in the amount of $7,500, which were due on June 30, 1979, and June 30, 1980, respectively. On or about May 31, 1978, Lorelei entered into a Motion Picture Purchase Agreement with Factor Newland Production Corporation (Factor), which recited that Lorelei was to acquire the motion picture photoplay ‘Overboard,‘ including the negative and color reversal internegative. Legal title and copyright to the photoplay was to be held by and registered in Factor's name until assignment was requested by Lorelei, but the assignment could not be requested until after the domestic broadcast of the movie ‘Overboard.‘ The agreement indicated that Factor held the copyright in trust for Lorelei. The agreement granted to Lorelei, among other rights, the right to all benefits of the agreements which had already been made with National Broadcasting Company (NBC) and Time-Life Films, Inc. (Time-Life).
Factor was incorporated in California on December 22, 1976. In October 1977, Factor obtained the photoplay rights to the novel Overboard, written by Hank Searls. About a month later, Factor entered into an agreement with NBC granting NBC exclusive right to broadcast an initial run and one rerun (within 3 years) of the delivery of the movie ‘Overboard.‘ Delivery was to occur on or before August 15, 1978. In exchange, NBC was to pay Factor $1,190,000, consisting of a $975,000 flat fee and $215,000 representing reimbursement for fees paid to movie stars Angie Dickinson and Cliff Robertson. The $1,190,000 was to be paid in installments with an agreed amount advanced at the time the program was ordered and one-third of the balance advanced at the time of the commencement of photography, completion of photography and 10 days after delivery of the program to NBC.
On or about June 13, 1978, Factor entered into a distribution agreement with Time-Life wherein Time-Life was granted the distribution rights to the movie for a term of 20 years, essentially from the date the NBC license expired. In exchange, Time-Life agreed to pay Factor a $300,000 advance against Factor's share of the gross receipts, payable $125,000 upon delivery of the movie to Time-Life, $58,334 when the NBC license expired, and $58,333 both 1 year after and 2 years after the NBC license ended. The Time-Life agreement required the following distribution of gross receipts. First, Time- Life was to retain its distribution charges and expenses, thereafter Time-Life was entitled to recoup all advances paid to Factor and any remaining balance of gross receipts was to be paid to Factor. At the end of the 20-year period, Time-Life had an option to renew for an additional 20 years by means of written notice to Factor. If renewed, the earliest date on which the distribution agreement would expire is the year 2019.
Pursuant to the May 31, 1978, agreement, Lorelei was to pay Factor $2,390,000 for the movie ‘Overboard.‘ The $2,390,000 was to be payable as follows:
Any ‘net profits‘ after payment of the $2,390,000 were to be divided 25 percent for Lorelei and 75 percent for Factor. 3
On or about July 9, 1979, Lorelei and Factor executed an amendment which changed the payment schedule in the following manner. Instead of $1,315,000 being payable at the time of delivery of the film to NBC, only $1,190,000 was payable upon such event and the remaining $125,000 was not payable until delivery of the film to Time-Life. The other change to the payment schedule added a $58,334 payment when the NBC license period was to expire and reduced the $87,500 payments made 1 year and 2 years after delivery to NBC to $58,333 each. None of these changes would have affected the total amount due under the agreement; only the amount and timing of payments were varied slightly.
Factor delivered the film to NBC about August 7, 1978, and the first network broadcast occurred September 25, 1978. NBC aired the film a second time on September 3, 1979.
Under the motion picture purchase agreement, Lorelei could not enter into any distribution agreements without the consultation and approval of Factor. Lorelei was not a party to either the NBC license agreement dated November 21, 1977,or the Time- Life agreement dated June 13, 1978. Further, Lorelei did not directly pay any portion of the production costs of the movie. The actual production costs were incurred by Factor in the amount of $1,487,445. All payments made by NBC and Time-Life under the respective agreements were either made directly to Factor or to Factor through the William Morris Agency.
Lorelei was organized with six limited partners, one of whom was petitioner, and one general partner named Homer J. Askounis. Unlike the six limited partners whose capital contributions ranged between $19,500 and $43,875 (for a total capital contribution of limited partners in the amount of $195,000), Mr. Askounis made a capital contribution of only $100. Even though designated as a general partner, Mr. Askounis did not play a role in the negotiation of the motion picture purchase agreement between Lorelei and Factor and his involvement with Lorelei was limited to the execution of...
To continue reading
Request your trial
-
Klavan v. Commissioner, Docket No. 3916-90.
...adjusted pursuant to sec. 1016(a) for costs incurred to acquire the property. Secs. 1011(a), 1012, 1016(a). 15. E.g., Leahy v. Commissioner [Dec. 43,153], 87 T.C. 56 (1986); Seligman v. Commissioner [Dec. 41,876], 84 T.C. 191 (1985), affd. [86-2 USTC ¶ 9605] 796 F.2d 116 (5th Cir. 1986); Sc......
-
Metrocorp, Inc. v. Comm'r of Internal Revenue
...to a theory not raised before the case was submitted, we save any comment on that theory for another day. See Leahy v. Commissioner, 87 T.C. 56, 64–65, 1986 WL 22154 (1986) (Court declined to consider a theory raised by respondent on brief where, as here, the parties submitted the case with......
-
Rose v. Comm'r of Internal Revenue
...types of activities, and the taxpayers who engage in those activities are entitled to the attendant benefits. See, e.g., Leahy v. Commissioner, 87 T.C. 56, 72 (1986); Estate of Thomas v. Commissioner, 84 T.C. 412, 433-440 (1985). Such congressional intent is readily demonstrated with respec......
-
Gmelin v. Commissioner
...unless we determine that petitioners have not been surprised or prejudiced in their ability to present their case. Leahy v. Commissioner Dec. 43,153, 87 T.C. 56, 64 (1986); Estate of Horvath v. Commissioner, supra; Nat Harrison Associates, Inc. v. Commissioner Dec. 26,858, 42 T.C. 601, 617 ......
-
Tax Court In Brief | TBL Licensing LLC Et Al v. Commissioner | Amending Pleadings In The Tax Court
...to the new position.", which is especially true "where there was no trial and the facts were fixed by agreement.". Leahy v. Commissioner, 87 T.C. 56, 65 Respondent would not bear incremental burden in this case because the credit claim by petitioner was independent from the issues addressed......