FOX PARK CORPORATION v. Commissioner
| Decision Date | 27 August 1985 |
| Docket Number | Docket No. 20231-80. |
| Citation | 1985 TC Memo 451,50 TCM (CCH) 917 |
| Parties | Fox Park Corporation v. Commissioner. |
| Court | U.S. Tax Court |
Lowell F. Raeder, for the petitioner. Robert W. Lynch, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioner's 1975 and 1976 corporate Federal income tax of $56,863.00 and $938.88. These deficiency determinations resulted from respondent's disallowance of partnership losses and an investment credit claimed by petitioner representing its distributive share of various items of deduction and an investment credit claimed by the partnership on its returns. The partnership, H. B. Associates, was a distribution vehicle for its partners, petitioner and another corporation, who had acquired a movie for distribution in the United States. The dispositive issues are as follows:
(1) Whether the partnership recognized any income for purposes of computing its depreciation deduction under the income forecast method, as elected on its returns, and, if not, whether petitioner may now compute its distributive share of partnership depreciation using the straight line method;
(2) Whether the partnership is entitled to an investment credit for the acquisition of the movie; and
(3) Whether the partnership is entitled to a deduction for interest accrued on a purported nonrecourse debt used in the acquisition of the movie.
A few of the facts have been stipulated and are so found. The stipulation of facts and exhibits attached thereto are incorporated herein by this reference.
Petitioner Fox Park Corporation is a corporation with its legal residence at Ardmore, Pennsylvania. Petitioner filed Federal corporate tax returns (Forms 1120) for the calendar years 1975 and 1976 with the Internal Revenue Service office at Philadelphia, Pennsylvania. Petitioner was in the business of owning various pieces of real estate that it leased, operated, and managed. Herman E. Robinson (Robinson) was Fox Park's president and principal shareholder. Robinson had previously been an investor in theatrical productions. Robinson was also president and one of the principal owners of Harjefs of Delaware, Inc. (Harjefs). Harjefs is not a party to this case.
In the fall of 1975, petitioner and Harjefs acquired from Interproduction Films Company (Interproduction), as tenants in common, the United States rights to the movie "By the Blood of Others," also called "Hot Blood." The film had been produced in France at a cost of approximately $1.2 million. Before petitioner and Harjefs acquired the United States rights, the film had been distributed in Europe, generating gross box office receipts of some $3 million. Petitioner and Harjefs paid Interproduction $88,500 in cash. They also executed a non-negotiable nonrecourse note in the amount of $600,000 secured by the film and due in 1987. The note called for interest and principal to be paid from 75 percent of the buyers' (petitioner and Harjefs) shares of the net film distribution proceeds.
At the same time, petitioner and Harjefs entered into an agreement granting Joseph Green Pictures Co. (Green Pictures) the exclusive right to distribute their film. Under this agreement, Green Pictures was entitled to retain a percentage of the receipts it collected from its distribution of the film and was also entitled to recoup certain expenses from the owners' (petitioner and Harjefs) shares. Although Green Pictures obtained play dates for the film in both 1975 and 1976 and received proceeds from the film's exhibition, its recoupable expenses in both years exceeded these proceeds. Consequently, Green Pictures owed no money to and paid no money to the owners (petitioner and Harjefs) in either 1975 or 1976.
For the calendar years 1975 and 1976, petitioner and Harjefs filed Federal partnership returns (Forms 1065) in the name of H. B. ("Hot Blood") Associates. These partnership returns reported the following items regarding the film that petitioner and Harjefs had acquired:
Amount Amount
Item 1975 1976
Gross receipts ...................$ 42 $ -0-
Exhibition fees .................. 71 -0-
Gross profit ..................... (29) -0-
Salaries and other wages ......... 3,000 -0-
Interest ......................... 8,507 45,000
Legal and accounting ............. 2,550 -0-
Depreciation ..................... 98,681 219,292
_________ __________
Net Loss ........................($112,767) ($264,292)
There is no explanation in the record for the $42 of gross receipts or the exhibition fee expense item of $71 claimed for 1975, since H. B. Associates received no payment or bill from Green Pictures, the sole distributor of the film. The interest deductions represented interest accrued but unpaid on the $600,000 nonrecourse debt to Interproduction. The depreciation deduction in both years was computed under the income forecast method. In making this calculation, H. B. Associates apparently used figures supplied by the distributor, Green Pictures, stating that the film had received 15 percent of its projected gross revenues in 1975 and 33 1/3 percent in 1976.1 Green Pictures' distribution of the film generated gross box office receipts (e. g., before the theatre owners' or subdistributors' shares) in 1975 and 1976 in the respective amounts of $139.19 and $64.50.
After 1976, Green Pictures continued to try to exhibit the movie "By the Blood of Others." Green Pictures showed the film in New York in September of 1977 following a heavy and expensive advertising campaign. Although this showing generated gross box office receipts of $3,966.50, Green Pictures' advertising costs of $3,650.09 exceeded its share of the box office gross of $936.51 (25 and 20 percent of box office gross) by almost 400 percent. The film was poorly received by the New York critics.
As of December 31, 1980, Green Pictures did not owe and had not made any payment to H. B. Associates as a result of its distribution of the film "By the Blood of Others." By that date Green Pictures had recoupable expenses of $7,148.13. As of January 1983, Green Pictures was still entitled to recoup a deficit of $7,148.13 before making any payments to the owner, H. B. Associates. No payments have ever been made to the owners, and the distribution records do not indicate any payments due or owing to the owners.
In general, the more successful a film is at the box office, the higher the percentage of box office gross receipts a distributor can negotiate to receive from the theatre owners. Green Pictures generally is able to negotiate a figure of around 35 percent of the gross box office receipts as its net film rental payable by the theatre owners to it as distributor. The highest percentage Green Pictures was able to obtain from the theatre owners exhibiting "By the Blood of Others" was 25 percent. In some instances the percentage was 20 percent, and sometimes Green Pictures simply rented the film to the theatre owner for a flat $75, without receiving any part of the box office gross.
Generally, in the American market, an average quality foreign film does not compete well against a domestic American film of somewhat less than average quality. Few foreign films return large amounts of money from distribution within the United States. For a film like "By the Blood of Others" to have any commercial success in the United States, its distribution requires great care, attention, and time by the distributor. The initial release is crucial; poor reviews at this point can effectively kill a film.
The story of the movie "By the Blood of Others" involves a schizophrenic, paranoid young man who escapes from a mental institution. He steals a shotgun, breaks into a house occupied by a mother and her teenage daughter, and rapes the mother. He then takes the two women hostage, demanding that the prettiest girl in town be brought to him within the next five hours. The town authorities hire a prostitute, but when she walks towards the house a police sharpshooter fires at the terrorist, who then shoots the prostitute. An immigrant living in the town rejects an offer of citizenship in exchange for sending one of his two daughters to the crazed young man. Finally, the mayor's daughter decides to assist the young man. She enters the house and finds that, like her, he needs someone who will care for him. They plan to escape together, but after the hostages are released and the couple approaches a getaway car, the escaped mental patient is shot down.
The technical aspects of the movie "By the Blood of Others" — acting, direction, production, script, sound, music, and editing — are good to excellent. Nonetheless, the film lacks entertainment value, the key factor in the commercial success of a film. The movie is more of a grim "message" picture than an "entertainment" picture; its message is lurid and morbid and its overall mood depressing. One critic described the film as "more revolting than riveting."
For the $600,000 nonrecourse note to be paid according to its terms, United States' distribution of the film "By the Blood of Others" would have to generate $8.2 million or more in gross box office receipts.2 This estimate covers only the principal and does not include the box office gross receipts necessary to pay any interest on that "debt."
In his statutory notice of deficiency, respondent disallowed all of petitioner's claimed distributive share of H. B. Associates' loss and investment credit. His notice stated in part that petitioner had "not established the amount and character of such losses and credits" and that petition...
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