Harrington v. C.I.R., 080984 FEDTAX, 13993-82

Docket Nº:13993-82.
Opinion Judge:KORNER, Judge:
Party Name:DENNIS C. HARRINGTON AND TRESE M. HARRINGTON, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Dennis C. Harrington, pro se and Robert T. Schwer, for the petitioners. Michael A. Yost, Jr. and Frank A. Falvo, for the respondent.
Case Date:August 09, 1984
Court:United States Tax Court

48 T.C.M. (CCH) 837

DENNIS C. HARRINGTON AND TRESE M. HARRINGTON, Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

No. 13993-82.

United States Tax Court

August 9, 1984

Dennis C. Harrington, pro se and Robert T. Schwer, for the petitioners.

Michael A. Yost, Jr. and Frank A. Falvo, for the respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

KORNER, Judge:

Respondent determined the following deficiencies against petitioners for their tax years 1972, 1975, 1976, 1978, 1979 and 1980:

Tax year ended Deficiency
December 31, 1972 $ 6,834.00
December 31, 1975 14,140.22
December 31, 1976 14,671.94
December 31, 1978 25,592.88
December 31, 1979 13,195.32
December 31, 1980 1,619.64
After concessions, the following issues remain for decision herein: (1) Whether respondent's proposed assessments for petitioners' tax years 1972, 1975 and 1976 are barred by the statute of limitations; (2) whether petitioner, as a limited partner of Shhh Associates, Ltd., which owned a movie as its principal asset, is entitled to his distributive share of the claimed losses and investment credits from the partnership; and (3) whether petitioner is entitled to claim an investment credit and deductions for depreciation and other expenses relative to his acquisition and exploitation of certain rights in a lithographic plate. FINDINGS OF FACT Some of the facts have been stipulated and are found accordingly. The stipulation and the exhibits attached thereto are incorporated herein by this reference. Dennis C. Harrington (hereinafter referred to as " petitioner" ) and his wife, Trese M. Harrington (hereinafter referred to, together with petitioner, as " petitioners" ) were residents of Pittsburgh, Pennsylvania at the time they filed their petition herein. For each of the tax years in issue, petitioners timely filed joint Federal income tax returns with the Internal Revenue Service Center in Philadelphia, Pennsylvania. In 1975, petitioner, who graduated in 1951 from the University of Pittsburgh Law School, was a partner in the law firm Harrington & Schweers. Petitioner is an attorney, who has practiced solely in the area of personal injury litigation. Issue 1. Statute of limitations Petitioners filed their Federal income tax returns for their tax years 1972, 1975 and 1976 on or before April 15, 1973, April 15, 1976 and April 15, 1977, respectively. In October 1978, both petitioners executed a Form 872, " Consent to Extend the Time to Assess Tax," purporting to extend until December 31, 1979 the period of limitations applicable to petitioners' tax year 1975. Said form was received by respondent's Audit Division in Pittsburgh on October 12, 1978, and was executed by respondent's authorized representative on October 16, 1978. In October 1979, both petitioners executed a Form 872A, " Special Consent to Extend the Time to Assess Tax," purporting to extend to an indefinite date [1] the period of limitations applicable to petitioners' tax years 1975 and 1976. Said form was received by respondent's Audit Division on October 15, 1979, and was executed by respondent's authorized representative on October 23, 1979. On March 24, 1982, the statutory notice of deficiency for their tax years 1972, 1975, 1976, 1978, 1979 and 1980, was sent to petitioners by certified mail. Issue 2. Shhh Associates, Ltd. Beginning in September 1975 and up to at least the time of the trial in this matter, petitioner was a limited partner in Shhh Associates, Ltd., a limited partnership, of which Frank Carcaise and later Robert Solkovy were the general partners. Pursuant to a Confidential Descriptive Memorandum (hereinafter referred to, relative to Issue 2, as " Memorandum" ), dated August 12, 1975, which was received by petitioner prior to his investment in Shhh Associates, Ltd., the business of the partnership, which was formed pursuant to the laws of the State of Florida, was described as " [t]he acquisition and distribution of a motion picture." Specifically, as further stated in the Memorandum, the partnership was formed to acquire the theatrical, non-theatrical, public television, cable television and cassette rights to a film entitled " Shhh" (hereinafter referred to as " the film" ), which was described, in pertinent part, as follows: The full length Motion Picture will be entitled " Shhh" and will consist of seven (7) movie shorts that will relate to one another plus a new segment to be specially produced that will " bridge" the selected shorts, creating a cohesive story line. The shorts are:
Title Length Awards
1. Skater Dater 18 minutes Oscar Nominee 1964
Winner: Cannes, Edinbors (sic) Festivals
CINE Winner 1964
2. Blaze Glory 10 minutes CINE Winner 1965
3. Frank Film 9 minutes Academy Award 1974
CINE Winner 1974
Winner: Cannes Festival
4. Crunch, Crunch 8 minutes Academy Award 1971
5. One Armed Bandit 10 minutes No Theatrical Release
6. Canoe Trip 17 minutes No Theatrical Release
7. Solo 15 minutes Oscar Nominee 1972
CINE Winner 1972
National Ed. Fest. Winner 1973
As noted in the Memorandum, the producer and seller of the film was Maurice W. Gable of Pittsburgh, Pennsylvania, and the director was Paul B. Price. Prior to his involvement in " Shhh," Maurice Gable had never been involved in the production or distribution of a full length feature film. During the late 1960's Gable first became involved in the film business, marketing a film for Trans World Airlines, and producing short films in association with Ezra Baker, at least some of which were produced for distribution by United Artists Corp. (hereinafter referred to as " UA" ). From November 1969 until January 1971, Gable was involved with Gable Simulated Systems, Inc., which owned a franchise from a division of The Singer Company to conduct driving education courses in the Pittsburgh area using automobile simulators. In or around 1971, Gable established Gable Enterprises, Inc., originally for the purpose of marketing the foregoing driving school. In 1973, through Gable Enterprises, Inc., Gable produced a documentary film entitled " My Father's Business" for the Catholic Diocese of Pittsburgh, receiving $44,000 therefor. After his involvement in the production of " Shhh," Gable wrote, cast and produced, through Mary Tyler Moore Productions, a television movie entitled " Fighting Back," which aired on the ABC television network. Paul B. Price, proposed director of the film, was described in the Memorandum as having a background in theater, television and movies. As to movie experience, the Memorandum stated only that Price wrote, directed, and acted in a short film entitled " 1501 1/2 " (which was eventually included in the film) and that he remained active writing for movies. The Memorandum also addressed the distribution and marketing of the film, stating that an " agreement in principle" had been reached with UA, as follows: Pursuant to the completion of the Picture on or before August 31, 1975, it is the present intention of [UA] * * *, the proposed distributor, to test the Picture and its specially created advertising/promotion campaign in mini metro markets such as Harrisburg, Pennsylvania, Princeton, New Jersey, etc. Pursuant to the purported agreement in principle, at the end of the testing period, UA would " have the right to acquire worldwide distribution rights and all merchandising and music rights to the Picture." If UA elected to exercise such right, the Memorandum provided, it would " enter into its standard distribution agreement for the Picture * * *." If UA elected not to distribute the film, the Memorandum indicated, the partnership would have the right to distribute it upon payment to UA of $92,000. Referenced in and appended to the Memorandum were two appraisals of the film, prepared on behalf of the general partner, Frank R. Carcaise. The first appraisal, signed by Ezra Baker of Ezra Baker Productions, Inc., was a two-page document, concluding based upon the author's familiarity with UA and its " [excellent] reputation as a leader in the film industry" that " the Partnership can anticipate as their share $5,000,000 net of distribution fees and expenses * * *," in addition to certain non-theatrical revenues. Baker's analysis of the intrinsic merits of the film is limited to the following: Regarding " Shhh", I found it to be a highly professional production. The picture will probably get a " 'G" rating and should do extremely well at the box office especially since quality " family" comedies are so rarely launched by a major distributor. This appraisal was dated August 6, 1975, which was approximately one month before production of the film was completed. The appraiser, Ezra Baker, was involved with Gable on the film in the early stages of production of the film and was also associated with Gable on a number of short film projects at various times during the 1970's. Other than such preliminary involvement with the production of " Shhh," Baker had no experience in the production of feature length films, and he had no experience at all in the distribution and marketing of such films. The second appraisal, signed by Carl Workman, president of Calliope Films, Inc. was a two page document, concluding based upon the " excellent reputation and ability" of UA, and " the packaging of the film, its quality, the previous record of some of its component parts, the strength of the distributor, and present market conditions * * *," that " the distributor's proceeds could be in the area of $8,800,000.00 or more and the partnership may anticipate one half as their share over the life of the contract," in addition to certain non-theatrical revenues. Workman's analysis of the intrinsic merits of the film is limited to the following: Regarding the film itself, the acting, direction, story and production values are excellent. A family comedy distributed and promoted by [UA] should...

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