Bass v. C.I.R., 022288 FEDTAX, 16963-83

Docket Nº:16963-83
Opinion Judge:WRIGHT, JUDGE:
Party Name:MARVIN A. BASS AND ELAINE T. BASS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Barry I. Fredericks and David M. Brandes, for the petitioners. Patricia A. Donahue and Nancy M. Vinocur, for the respondent.
Case Date:February 22, 1988
Court:United States Tax Court
 
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55 T.C.M. (CCH) 126

MARVIN A. BASS AND ELAINE T. BASS, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 16963-83

United States Tax Court

February 22, 1988

Barry I. Fredericks and David M. Brandes, for the petitioners.

Patricia A. Donahue and Nancy M. Vinocur, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

WRIGHT, JUDGE:

By a notice of deficiency mailed March 31, 1983, respondent determined a deficiency in petitioners' 1979 Federal income tax in the amount of $11,499.30.

The issues for decision are (1) whether petitioners are entitled to depreciation and advertising expenses deductions for their distributive share of loss taken with respect to their investment in Darmaj Company, a partnership formed to purchase and commercially exploit the film, ‘ Safari Express,‘ (2) whether petitioners are liable for an addition to tax under section 6621(c), and (3) whether damages should be awarded to the United States and against petitioners under section 6673. [1]

FINDINGS OF FACT

Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference.

At the time of filing the petition, Marvin A. and Elaine T. Bass resided in Great Neck, New York. Petitioners jointly filed Federal income tax returns for the taxable year 1979, using the cash basis method of accounting. [2]

Sometime during 1979, one of petitioner's clients, Daniel Sandberg (Sandberg), learned that ‘ Safari Express‘ (sometimes referred to as the film) was available for purchase. Sandberg, who processed motion pictures at TVC Laboratories, was contacted by a colleague, Barry Lieberman (Lieberman), an independent film distributor. Lieberman was representing IBC Distribution Company (IBC), the purported owner of the film. Sandberg viewed the film and decided that it would be a profitable investment. He contacted petitioner, his attorney of several years, who had previously expressed an interest in investing in a film. Sandberg and petitioner invited a third acquaintance, Charles Tolep (Tolep) to view the film. [3] Tolep was the vice president and general manager of Viacom, a company which produced television feature programs and cable entertainment programs. [4] Tolep also believed that the film would be a good investment. Thereafter, Sandberg, Tolep and petitioner decided to commence negotiations for the purchase of the film.

‘ Safari Express‘ is a comical action adventure film shot in Central Africa. The director, Duccio Tessari, and the producer, Vittorio Galiano, are both Italian, as is the leading actor, Giuliano Gemma (Gemma). Gemma plays a tour guide in Africa who, along with Biba, the Wonder Chimp, meets and befriends Ursula Andress (Andress) who is suffering from amnesia. The villain, played by Jack Palance (Palance), is attempting to sell guns to rival African tribal factions to cause a war. By inciting a tribal war Palance hopes to secure control over some uranium mines. There is fighting among the African tribesmen and some tribesmen attack Gemma and Andress. Gemma and Andress are rescued by Biba, [5] and Andress subsequently regains her memory. [6] Together Gemma and Andress stop the truckload of weapons that Palance had shipped to the warring tribesmen. Gemma and Andress are recaptured by the Africans and are again rescued by Biba. Palance dies in a plane crash. The tribal war was narrowly averted. Because the original soundtrack was partially in Italian many of the voices had to be dubbed into English. The voices of Andress and Palance, although originally in English, had to be synchronized for the film's American distribution.

In December of 1979, petitioner formed a partnership, Darmaj Company (Darmaj), for the purpose of purchasing the film. [7] The other individuals invited to join Darmaj were Daniel Sandberg, Martin Karlin, Arthur Meisnere and June Jones. Martin Karlin was petitioner's brother-in-law at the time of trial. Karlin made his investment in the film on the basis of petitioner's advice. The partners never met together, and there were no offering materials prepared.

The partners made partnership subscription payments in the following amounts:

Payment by Payment by
Name 12/28/79 5/15/80
Sandberg $22,500 $18,700
Meisnere 5,000 4,400
Karlin 15,000 12,650
Bass 7,500 6,600
Jones 10,000 8,250
Tolep 5,000 4,400
Total $65,000 $55,000
Prior to purchasing the film the partners did not research the profitability of the film or the soundness of their investment in it. They did not acquire an appraisal or an income projection from an expert. They did not seek advice from someone more knowledgeable and experienced than themselves. Only Tolep was skilled at evaluating the theatrical opportunities of motion pictures. Sandberg's work was in production. They never insured the film. [8] At the time of the initial contact, petitioner believed that IBC, represented by Lieberman and his associate, Don Marino (Marino), was the owner of the film, but the Darmaj partners failed to investigate the chain of title. Marino and Lieberman were the only shareholders in IBC. IBC purported to be in the business of distributing films but never distributed a film before or after ‘ Safari Express.‘ The only distribution activity ever conducted by IBC prior to the engagement by Darmaj was an earlier distribution of a record album. Despite the fact that ‘ Safari Express‘ was produced in 1976, the Darmaj partners failed to establish the history of the film prior to purchase nor did they research the producer. The Darmaj partners neither knew nor inquired about IBC's history and experience. Similarly IBC did not ask about the financial strength of the Darmaj partners. There was evidence that petitioner was told the amount of production costs, at some time either before or after the purchase of the film. The Darmaj partners and Lieberman agreed on a total purchase price of $1,200,000, to be paid in two installments. The down payment, in the amount of $100,000, included a cash payment of $55,000 and a promissory note in the amount of $45,000 payable on or before June 1, 1980. The bulk of the purchase price was represented by a promissory note in the amount of $1,100,000 payable on or before December 31, 1989, carrying an interest charge at 6 percent per annum. Throughout the term of the note, 80 percent of all distribution proceeds were to be paid to IBC, while the partnership would retain 20 percent. In the event that distribution proceeds were insufficient to equal the payments due, the payments would be deferred to the end of the note term. Lieberman, the purported holder of the note, was unable to produce it upon respondent's request. Darmaj acquired the film on December 27, 1979. On that same day Lieberman, representing IBC, purchased the film from Amerinda Establishment (Amerinda) for $60,000. Amerinda retained a security interest in the film, securing a promissory note signed by IBC in the amount of $25,000 and payable on June 6, 1980. [9] In a modification of the Acquisition Agreement dated December 27, 1979, Darmaj and IBC agreed that upon the occurrence of certain events terms for payment of the promissory note would change. If, during the first four years of the contract term, Darmaj failed to pay principal and/or interest in the amount of $500,000, the right to distribute the film in the video cassette and video disc markets would revert to IBC. [10] If, in the three years following such a reversion, IBC earned revenue from the video cassette distribution in the amount of $50,000 and 4,000,000 video cassette and/or video disc players were sold in the United States the note would become nonrecourse. The parties agreed that at the time of trial at least 4,000,000 video cassette and video disc recorders had been sold in the United States. Once the note had become nonrecourse, the source of payment to IBC would be restricted to proceeds from the film's distribution. Pursuant to the acquisition agreement, Darmaj retained the distributor already engaged by IBC. Sometime prior to the sale to Darmaj, IBC had arranged for Joseph Green (Green) of Joseph Green Film Enterprises, Inc., to distribute the film theatrically in the United States and English-speaking Canada [11] for a term of 10 years. Green had been an independent distributor for approximately 10 years and had distributed a few reasonably successful films. The partners did not object to IBC's requirement that Green be hired nor did they investigate alternative distribution companies. The Distribution Agreement, assumed by Darmaj, provided that Green would retain 50 percent of all proceeds after subtracting costs. Costs included advertising and promotional expenses, release and trailer prints, shipping expenses, and the costs of special mailings. Green received an advance payment in the amount of $10,000 in December of 1979 for the distribution effort. The Distribution Agreement called for 20 United States play dates by December 31, 1980, [12] with at least one play date occurring before December 31, 1979. ‘ Safari Express‘ did not have 20 play dates. In fact there was only one play date in the United States, [13] a showing at the Thalia Theatre in New York City on December 29, 1979, at midnight. There were...

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