Estate of Ravetti v. Commissioner
| Citation | 67 T.C.M. 3064 |
| Decision Date | 07 June 1994 |
| Docket Number | Docket No. 2913-87.,Docket No. 2914-87. |
| Parties | Estate of Silvio Ravetti, Deceased, Donna Logan, Executrix v. Commissioner. |
| Court | United States Tax Court |
Richard H. Foster, 111 Pine St., San Francisco, Calif., for the petitioner. Paul J. Krug, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined the following deficiencies in, additions to, and increased interest on petitioner's Federal income tax:
Increased
Additions to Tax Interest
Section Section Section Section
Year Deficiency 6653(a)1 6653(a)(1) 6653(a)(2) 6621(d)
1979 .......................... $114,255.64 $5,713.00 -- -- *
1980 .......................... 178,738.60 8,937.00 -- -- *
1981 .......................... 55,242.80 -- $2,762.00 ** *
* Interest at 120 percent of the underpayment rate provided by sec. 6621 on the portion of the deficiency
constituting a substantial underpayment attributable to tax-motivated transactions. Respondent determined
that the entire underpayment was attributable to tax-motivated transactions. On brief, respondent concedes that
only a portion of the underpayment was so attributable
** 50 percent of the interest due on the portion of the underpayment attributable to negligence. Respondent
determined that the entire underpayment was attributable to negligence
The issues remaining for decision in these consolidated cases are:2
1. Are the notices of deficiency (notices) valid? We hold that they are.
2. Is the amount of the distributive share of Silvio E. Ravetti (Mr. Ravetti) of a claimed partnership loss attributable to C&M Ltd. (C&M) an allowable deduction for each of the years at issue? We hold that it is not.
3. Is the amount of the distributive share of Mr. Ravetti of a claimed partnership loss attributable to M&M Properties Ltd. (M&M) an allowable deduction for each of the years at issue? We hold that it is not.
4. Are the investment interest expenses claimed for 1979 and the Schedule C losses attributable to Mr. Ravetti's film and tape distribution activity claimed for 1979 and 1980 allowable deductions? We hold that they are not.
5. Are the travel expenses claimed by Mr. Ravetti for 1981 an allowable deduction? We hold that they are not.
6. Is the parties' stipulation of partial agreement (partial agreement) relating to Glenstall Petroleum Ltd. (Glenstall Petroleum) to be given effect? We hold that it is.
7. Is a deduction allowable for 1980 for a claimed theft loss with respect to Mr. Ravetti's investment in the Harding Company partnership (Harding)? We hold that it is not.
8. Are the additions to tax for negligence to be imposed on any underpayment for each of the years at issue? We hold that they are.
9. Is any underpayment for each of the years at issue to bear interest at the increased rate provided by section 6621(c)3 for a substantial underpayment attributable to tax-motivated transactions? We hold that it is to the extent stated herein.
The instant cases were submitted fully stipulated. All of the facts that have been stipulated are so found.4
At the time of the filing of the petitions in the instant cases, Donna Logan (Ms. Logan), the executrix of the estate, resided in California.
Mr. Ravetti married Martha Ravetti (Ms. Ravetti) on July 8, 1950. (Where appropriate, we will refer to Mr. Ravetti and Ms. Ravetti as the Ravettis.) The Ravettis were divorced on March 8, 1982. During the years at issue, Mr. Ravetti was a financial planner and tax shelter promoter. Mr. Ravetti died on June 9, 1986. On August 4, 1986, Ms. Logan, Mr. Ravetti's daughter, was appointed executrix of his estate. Ms. Ravetti also is deceased.
The Ravettis filed joint income tax returns for 1979 and 1980. Mr. Ravetti filed a separate return for 1981. Mr. Ravetti executed the 1979 return on June 15, 1980, the 1980 return on June 18, 1981, and the 1981 return on October 11, 1982. On or around May 16, 1988, respondent and Ms. Ravetti entered into a settlement agreement that allowed her innocent spouse relief for 1979 and 1980.
C&M is a limited partnership that was organized in the State of California in October 1978. Film Services Corp. (Film Services), a California corporation, acted as the general partner of C&M.
Limited partnership interests in C&M were solicited by the general partner in a private offering that called for a purchase price of $150,000 for each of the 10 units that were being offered. Mr. Ravetti purchased one of those units. The purchase price for each unit was payable as follows: $15,000 cash in 1978, a note for $15,000 due on December 31, 1979 ($15,000 note), and a note for $120,000 due on or before December 31, 1985 ($120,000 note). The $120,000 note was payable only from film rental proceeds and could be renewed indefinitely for periods of seven years.
A limited partnership interest in C&M entitled an investor to 10 percent of the profits and losses of the partnership for each unit acquired. In addition, the limited partners received a 75-percent interest in the capital of the partnership. The general partner was not required to contribute any capital to C&M and was not allowed to participate in C&M's profits and losses. The general partner was, however, entitled to a 25-percent interest in capital and a management fee equal to 3 percent of the partnership's net cash flow.
C&M was formed for the purpose of purchasing a feature length motion picture originally titled "Cruise Missile" (film or movie). The name of the film was subsequently changed to "Teheran Incident". C&M purchased the United States and Canadian (except for French Canadian) film rights from 21st Century Film Management Corporation (21st) for a total purchase price of $1,500,000, payable to 21st as follows: $150,000 in cash before December 31, 1978, a short-term note for $150,000 due on or before December 31, 1979, and a note for $1,200,000 payable on December 31, 1985 ($1,200,000 note) only out of the proceeds received from rentals of the movie. The purchase price for the film rights was not determined by arm's-length negotiations and was inflated to provide C&M's limited partners with substantial tax benefits for their relatively small cash investments.
Executed simultaneously with the purchase of the film rights were (1) an agreement under which C&M was to help in the purchase of release prints for the film by providing up to $160,000 in cash or notes and (2) an agreement under which C&M was to provide up to $200,000 in cash or notes to be applied towards advertising the movie. Pursuant to those agreements, two notes (Ora notes) were executed by Film Services, the general partner of C&M, in favor of Ora Advertising and Marketing (Ora). One note called for the payment of $155,000 on or before December 31, 1985, and related to the purchase of release prints. The other note was in the principal sum of $200,000 ($200,000 note) and related to advertising the film. The Ora notes were payable only out of film rental proceeds and were renewable indefinitely at seven-year intervals.
At the time the limited partners agreed to acquire their interests in C&M, they purportedly executed guaranty agreements (guaranty agreements) with respect to their proportionate share of the $1,200,000 note and the $200,000 note. Like the $120,000 note, the $1,200,000 note, and the Ora notes, the guaranty agreements were payable only out of film rental proceeds. Thus, the limited partners were not personally liable with respect to their obligations under those notes or the guaranty agreements. Mr. Ravetti made no payments on the $120,000 note, the Ora notes, or the guaranty agreements.
The film was originally produced by Noble Productions, Inc. (Noble) in coproduction with several foreign producers. Without taking into account contingent compensation arrangements with the actors, Noble's production costs approximated $400,000. The movie, which was filmed primarily in Iran and France, starred Peter Graves, Kurt Jurgens, Michael Dante, and John Carradine. Once completed, Noble assigned all United States and Canadian (except for French Canadian) rights in the film to 21st for a total consideration of $113,000.
The movie received its first United States booking on December 7, 1979, at the Capri Theatre in Florence, Alabama. Thereafter, only three other bookings were secured at theaters in Georgia, Iowa, and Texas. Total box office receipts for the film were $1,062. Nontheatrical showings of the movie through January 1981 grossed approximately $6,740. All distribution rights for the film were assigned by 21st to Ika Panajotovic, the film's producer and sole owner of Noble.
For 1978 and 1979, C&M filed partnership returns (Forms 1065) showing the following receipts, expenses, and net losses:
1978 1979
Gross Receipts ............... $ 0 $ 0
Interest Income .............. 0 4,216
Less: Depreciation ........... (83,332) (500,000)
_______ ________
Net Loss ..................... $83,332 $495,784
The interest income reported by C&M for 1979 represented interest paid by the limited partners on the portion of their capital investment that was deferred by their $15,000 notes payable in 1979. C&M computed the depreciation expense with respect to the movie using the straight-line method and a useful life of three years. The basis of the film claimed for purposes of depreciation was $1,500,000. For 1978, the partnership used a basis of $1,892,500 for purposes of claiming an investment tax credit. In the opinion of qualified appraisers, the fair market value of the...
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