Durkin v. C.I.R., 88-1290

• Court: U.S. Court of Appeals — Seventh Circuit
• Writing for the Court: Before BAUER, Chief Judge, CUMMINGS and EASTERBROOK; CUMMINGS
• Citation: Durkin v. C.I.R., 872 F.2d 1271 (7th Cir. 1989)
• Decision Date: 05 April 1989
• Docket Number: No. 88-1290,88-1290
• Parties: -5237, 89-1 USTC P 9277 Thomas J. DURKIN, Colette A. Durkin, Jerome A. Grossman and Sybil G. Grossman, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Page 1271

872 F.2d 1271

64 A.F.T.R.2d 89-5237, 89-1 USTC P 9277

Thomas J. DURKIN, Colette A. Durkin, Jerome A. Grossman and Sybil G. Grossman, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 88-1290.

United States Court of Appeals Seventh Circuit.

Argued Dec. 2, 1988.

Decided April 5, 1989.

Sheldon I. Fink, Sonnenschein, Carlin, Nath & Rosenthal, Chicago, Ill., for petitioners-appellants.

Nancy G. Morgan, Atty. Tax Div., Dept. of Justice, Washington, D.C., for respondent-appellee.

Before BAUER, Chief Judge, CUMMINGS and EASTERBROOK, Circuit Judges.

CUMMINGS, Circuit Judge.

Thomas J. Durkin and Jerome A. Grossman and their spouses have appealed from decisions of the Tax Court favorable to the Commissioner of Internal Revenue. The facts of the case are complex and are covered in 35 pages of the Tax Court's findings of fact. 87 T.C. 1329, 1332-1366. Since those findings are so lengthy and have not been contested on appeal, only the "bare bones" facts will be discussed under each of the four issues appealed. ¹

I. Jurisdictional Issue As to Durkin Appeal

In its opinion, the Tax Court mentioned that "at least 500 petitioners have cases related to the case at hand, which concern millions of dollars * * *." 87 T.C. at 1402. The Durkin and Grossman test cases were heard in consolidation in a one-week trial running from September 17 to 26, 1986 (Petitioners' Br. 1). The Tax Court's opinion disposed of all issues pending in the Durkin case on December 22, 1986, enabling Rule 155 ² calculations to be made with respect to the various taxable years in question. Since the Tax Court had completed the factual findings necessary in the Durkin case while certain issues remained unresolved in the Grossman case, the Tax Court severed the Durkin case on May 29, 1987. Decisions in the Durkin case were entered on August 10, 1987.

Because the issues in both the Durkin and Grossman cases were ultimately to be appealed to this Court, in accordance with an agreement with the Commissioner of Internal Revenue the Durkins moved on September 9, 1987, to vacate the August 10, 1987, decisions involving them so that they could be reentered and appealed concurrently with the Grossman decisions. On November 4, 1987, the Durkin and Grossman cases were consolidated, and on the following day the Tax Court vacated the Durkin decisions and reentered them while simultaneously entering decisions in the Grossman case. A joint notice of appeal was filed by the four taxpayers on February 1, 1988.

During oral argument we noted the possibility that this Court might not have jurisdiction of the Durkin appeal since the joint notice of appeal covering both cases was filed more than 90 days following the Tax Court's original Durkin decisions, apparently in contravention of Rule 13(a) of the Federal Rules of Appellate Procedure ("FRAP"). ³ However, the joint notice of appeal was timely filed within 90 days of the reentered Durkin decisions. FRAP Rule 13(a) provides in part:

The running of the time for appeal is terminated as to all parties by a timely motion to vacate or revise a decision made pursuant to the Rules of Practice of the Tax Court. The full time for appeal commences to run and is to be computed from the entry of the order disposing of such motion, or from the entry of decision, whichever is later.

A motion to vacate or revise a decision of the Tax Court must be filed within 30 days after the decision has been entered, "unless the Court shall otherwise permit." Tax Court Rule 162. The Durkins' motion to vacate was timely filed on September 9, 1987, within 30 days of the Tax Court's August 10, 1987, decision.

Under the plain language of Rule 162 and the practice of the Tax Court, the running of the Durkins' period for appeal was terminated upon filing a motion to vacate and restarted by the Tax Court's "entry of the order disposing of such motion." Although this Court has held that a motion under Rule 59(e) of the Federal Rules of Civil Procedure to "alter or amend" a judgment which, as here, does not seek any substantive change in the judgment will not toll the period for appeal, Martinez v. Trainor, 556 F.2d 818 (7th Cir.1977), the difference in language and practice of Rule 162 justifies a different conclusion. Rule 162 addresses motions to "vacate or revise," in contrast to "alter or amend" in Rule 59(e), suggesting that such a post-trial motion need not seek to modify the substance of the judgment but may simply seek to vacate the judgment in its entirety. Policy considerations that jurisdictional rules be clear and simple, Budinich v. Becton Dickinson & Co., 486 U.S. 196, 108 S.Ct. 1717, 100 L.Ed.2d 178 (1988), militate in favor of allowing any motion to vacate or revise a Tax Court judgment to terminate and restart the appeals period independent of the motivation behind the motion. This interpretation of Rule 162 would seem to be consistent with the practice of the Tax Court which has not indicated in its treatment of such motions that an examination of the grounds for vacatur or revision of the judgment is necessary to restart the appeals period. E.g., Trohimovich v. Commissioner, 776 F.2d 873, 875 (9th Cir.1985) (Tax Court heard and denied two successive motions for post-trial relief); see also Page v. Commissioner, 823 F.2d 1263, 1269 (8th Cir.1987); Wilson v. Commissioner, 474 F.2d 600 (5th Cir.1973), certiorari denied, 412 U.S. 950, 93 S.Ct. 3014, 37 L.Ed.2d 1003. Since the Durkins' motion to vacate was disposed of by the Tax Court on November 5, 1987, the Durkins' notice of appeal was timely filed on February 1, 1988, within 90 days of the disposition of the motion.

II.

A. Ownership of the Movies for Purpose of Depreciation Deductions

The crux of this appeal centers on the ownership of motion pictures. Durkin and Grossman had claimed ownership of several films and accordingly recognized depreciation deductions on their tax returns. Taxpayers purport to have acquired ownership of the subject films as a result of a circular series of transactions between Paramount Pictures Corp. ("Paramount"), Film Writers Co. ("FWC") and the two partnerships in which taxpayers have an ownership interest. FWC, a California corporation, purchased the six films at issue from Paramount between November 2, 1977, and May 25, 1978. Balmoral Associates, Ltd. ("Balmoral"), formed on October 24, 1977, purchased "First Love" and "The One and Only" from FWC on November 2, 1977, and December 2, 1977, respectively. Shelburne Associates, Ltd. ("Shelburne") was organized on December 1, 1977, and purchased from FWC "Heaven Can Wait" on December 2, 1977, and "Grease," "Foul Play" and "The Bad News Bears Go To Japan" ("Bears 3") on May 25, 1978. The Shelburne and Balmoral partnerships immediately entered into distribution agreements of 28-year durations with Paramount under which Paramount acquired the exclusive right and privilege to distribute, exhibit, market, reissue and otherwise exploit the six films in return for a share in the gross receipts from exploitation of the films. Durkin became a limited partner in Balmoral Associates by paying $35,000 for one-half unit. Similarly, Grossman became an indirect limited partner in Shelburne Associates by purchasing one unit for $316,000. ⁴

Whether Balmoral and Shelburne became the owners of the films for tax purposes is a question of fact to be determined by the written agreements, attendant facts and circumstances. United States v. Wernentin, 354 F.2d 757, 762-763 (8th Cir.1965); Tolwinsky v. Commissioner, 86 T.C. 1009, 1041 (1986). The Tax Court's findings of fact may not be disturbed on appeal unless clearly erroneous. Anderson v. City of Bessemer City, 470 U.S. 564, 575-576, 105 S.Ct. 1504, 1512-1513, 84 L.Ed.2d 518 (1985). It is axiomatic that the substance of a transaction rather than its form controls for federal tax purposes. Commissioner v. Court Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708, 89 L.Ed. 981 (1945); Saviano v. Commissioner, 765 F.2d 643 (7th Cir.1985). To qualify under Section 167(a) of the Internal Revenue Code of 1954, taxpayers must retain the interests in the property. Frank Lyon Co. v. United States, 435 U.S. 561, 581-584, 98 S.Ct. 1291, 1302-1304, 55 L.Ed.2d 550 (1978); 1 B. Bittker, Federal Taxation of Income, Estates and Gifts, paragraphs 4.4.2 and 4.4.3. The transfer of formal legal title is disregarded for tax purposes where the transferor, here Paramount, retains the principal control over the property transferred. Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788 (1940); Helvering v. F. & R. Lazarus Co., 308 U.S. 252, 60 S.Ct. 209, 84 L.Ed. 226 (1939); Corliss v. Bowers, 281 U.S. 376, 378, 50 S.Ct. 336, 336, 74 L.Ed. 916 (1930). In this case Paramount held such interests.

Ownership of a movie includes both the negative and the copyright. 17 U.S.C. Secs. 27 and 202. The partnerships' ownership of the negative without the copyright prerequisites is without value. Goldsmith v. Commissioner, 143 F.2d 466, 467 (2d Cir.1944) (L. Hand, J., concurring). For federal tax purposes, there is no sale of a movie unless there is a transfer of both the negative and all substantial rights accompanying a movie copyright. Conde Nast Publications, Inc. v. United States, 575 F.2d 400, 405 (2d Cir.1978); Cory v. Commissioner, 23 T.C. 775 (1955), affirmed, 230 F.2d 941 (2d Cir.1956), certiorari denied, 352 U.S. 828, 77 S.Ct. 43, 1 L.Ed.2d 50 (1956); Tolwinsky, 86 T.C. at 1042-1043.

The Tax Court concluded that the rights in the six movies acquired by Balmoral and Shelburne were too insubstantial to qualify as ownership interests for purposes of depreciation deductions. This conclusion was amply supported by the record. Except for the partnerships' bare title to the copyrights, Paramount retained the rights to produce copies, prepare derivative works, distribute copies to the public, exhibit the movies to the public, and display still...