Mark IV Pictures, Inc. v. Commissioner, Docket No. 7447-87.
| Decision Date | 31 October 1990 |
| Docket Number | Docket No. 7448-87.,Docket No. 7447-87.,Docket No. 7449-87. |
| Parties | Mark IV Pictures, Inc., et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
Ronald L. Sutphin and Mark W. Beerman, 100 Court Ave., Des Moines, Iowa, for the petitioners. Alan M. Jacobson and James E. Cannon, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined that petitioners in these consolidated cases were liable for the following Federal income tax deficiencies:
Petitioners Year Ended Deficiency
Mark IV Pictures, Inc. .......... January 31, 1979 $ 5,402
January 31, 1980 114,932
January 31, 1981 170,051
January 31, 1982 51,849
Russell S. Doughten, Jr
and Gertrude S. Doughten ....... December 31, 1981 180,015
Heartland Productions, Inc ...... January 31, 1982 42,690
The threshold issue we must decide is whether petitioners (except Gertrude S. Doughten) contributed property, services, or some combination of both in exchange for general partnership interests in certain limited partnerships. If we conclude that any services were contributed, we must then decide: (1) Whether the general partnership interests received by petitioners were capital interests; (2) whether such interests had determinable market values; and (3) whether section 83 applies and operates to preclude income recognition by petitioners.
The parties stipulated certain matters, including facts and exhibits, which are treated as conclusive admissions in this case. See Rule 91(e).2 We incorporate all stipulated matters herein to the extent we do not discuss them.
Russell S. Doughten, Jr. (Doughten) and Gertrude S. Doughten resided in Carlisle, Iowa, and the businesses of Mark IV Pictures, Inc. (Mark IV) and Heartland Productions, Inc. (Heartland) were principally placed in Des Moines, Iowa, when their respective petitions were filed with the Court.
Mark IV and Heartland were incorporated under Iowa law in 1972 and 1965, respectively. Both corporations were involved in the business of producing and distributing motion pictures. During the years in issue, Doughten and Donald W. Thompson (Thompson) each owned one-half of Mark IV's stock. Doughten also owned stock in Heartland, which was a public corporation. Doughten was president of Mark IV and Heartland, and Thompson was vice-president of Mark IV.
The following limited partnerships were formed under Iowa law for the purpose of producing, distributing, and exhibiting motion pictures with religious themes:
Date Partnership Motion Picture
Partnership Formed Title
Police Co. .............. Aug. 20, 1979 Heaven's Heroes
Image of the Beast Co. .. Sept. 3, 1980 Image of the Beast
Obedience Co. ........... Aug. 3, 1981 Home Safe
Brother Enemy Co. ....... June. 1, 1981 Brother Enemy
Face in the Mirror Co. .. Oct. 10, 1981 Face in the Mirror
Mark IV was a 50-percent general partner of Police Company, Image of the Beast Company, and Obedience Company. Heartland and Doughten were general partners of Brother Enemy Company and Face in the Mirror Company. Heartland owned 24.5 percent and Doughten owned 25.5 percent of the total general partnership interests in each partnership.
Mark IV, Heartland, and Doughten (the general partners) performed similar services and functions for their respective limited partnerships, including funding and forming the partnerships, producing the motion pictures, and releasing and distributing the films. Doughten served as co-writer and executive producer for Mark IV, and as writer, producer, and director for Heartland. Thompson served as writer, producer, and director of motion pictures for Mark IV. Mark IV paid salaries to Doughten and Thompson for their services, and Heartland compensated Doughten for his services.
The general partners developed or otherwise obtained rights to the original story ideas and prepared the scripts for each motion picture before any of the limited partnerships were formed. Doughten and Thompson created the original story ideas for "Image of the Beast" and "Home Safe" on behalf of Mark IV. Doughten created, with the assistance of his employees, the original story ideas for "Brother Enemy" and "Face in the Mirror" for himself and on behalf of Heartland. On June 1, 1979, Mark IV licensed the story rights to "Heaven's Heroes" for an initial payment of $1,000, and a royalty equal to 5 percent of Mark IV's net profits as general partner of Police Company, beginning with the first quarterly report after release of the picture. Doughten and Thompson prepared, with the assistance of employees, all scripts for all three Mark IV productions. Doughten, with the assistance of employees, prepared the scripts for the two Heartland/Doughten productions.
Each partnership raised funds to pay for the anticipated costs of making their motion pictures by issuing limited partnership units to investors for cash. Total contributions from limited and general partners3 were as follows:
Total
Partnership Contributions
Police Co. ..................... $200,000
Image of the Beast Co. ......... 360,000
Obedience Co. .................. 285,000
Brother Enemy Co. .............. 266,500
Face in the Mirror Co. ......... 325,000
A number of transactions took place between the general partners and each of their limited partnerships. The terms of each of the transactions were not arrived at through arm's-length negotiating, but simply represented what the general partners believed was fair and reasonable.
First, the general partners assigned their film rights to their respective limited partnerships. The value of each original story idea and script was never expressed or determined by the general partners in a specific dollar amount. However, the offering circulars of the partnerships state that general partnership interests (50 percent) were issued to the general partners in exchange for the assignment of film rights.
Second, the limited partnerships paid the general partners for producing the motion pictures. However, there was no written contract between the general partners and their limited partnerships governing the production of the motion pictures. The amounts paid by the limited partnerships were based upon what the general partners believed was a reasonable charge for the productions. The amounts paid included reimbursement for costs incurred by the general partners in making the films (referred to as pre-production, and post-production expenses), and also additional production fees, as follows:
Reimbursement
----------------------------------------------
Partnership Pre-production Production Post-production Production Fee
Police Co. ...................... $11,099.84 $123,654.14 $39,054.51 $45,000.00
Image of the Beast Co. .......... 19,779.80 301,469.12 64,916.66 45,000.00
Obedience Co. ................... 22,480.44 193,246.11 22,870.96 50,000.00
Brother Enemy Co. ............... 31,832.46 158,995.46 19,505.90 52,000.00
Face in the Mirror Co. .......... 35,849.44 152,245.39 24,871.12 52,000.00
Third, the limited partnerships paid their general partners for exhibiting and distributing the motion pictures. Each limited partnership agreed to pay the general partners 25 percent of any amounts received by the limited partnership from the distribution or exhibition of their motion picture through film libraries. Film libraries are privately-owned businesses that exhibit and distribute spiritual motion pictures. In distributing a motion picture, a film library would rent it to a customer for an agreed amount. In exhibiting a motion picture, a film library would actually show the picture generally for an admission price per viewer.
Finally, the offering circulars for Obedience Company, Brother Enemy Company, and Face in the Mirror Company state that their general partners would be paid one percent of gross income of the partnership in return for administrative and related services. It is unclear why the offering circulars for Police Company and Image of the Beast Company do not also provide for the one-percent payment, since the general partners were also to provide administrative and related services for those entities.
The general partners contributed no goodwill to their respective partnerships, and were allowed to compete with the partnerships by producing, distributing, and exhibiting motion pictures with religious themes.
The Articles of Limited Partnership (Articles) for each of the limited partnerships describe the nature of their general partnership interests (with variation only as plural and singular use of the term general partner and the number of limited partnership units sold in each) as follows:
2.3 Capital Units. The Partnership capital shall consist of (1) * * * units, and (2) the General Partner's interest. * * * The Partnership shall be allocated between the capital units and the General Partner's interest according to the definition of the General Partner's Interest as set forth in Article 2.4; that portion of the Partnership capital allocated to the capital units shall be further allocated among the capital units on a pro rata basis.
* * *
2.4 General Partner's Interest. * * * [In general,] the General Partner's interest shall participate in profits and losses to the extent of Fifty Percent (50%) thereof. The General Partner's Interest shall be entitled to receive Fifty Percent (50%) of the liquidation proceeds of the Partnership in the event of its liquidation.
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9.2 Liquidation and...
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