Markin v. C.I.R., 122189 FEDTAX, 18245-86

Docket Nº:18245-86, 19805-86, 27384-86.
Opinion Judge:NIMS, CHIEF JUDGE:
Party Name:DAVID MARKIN AND BARBARA C. MARKIN, ET AL., [1] Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:David A. Schmudde, Eugene D. Silverman, Alan J. Epstein, Hilton Chodorow and Michael C. Cohen, for the petitioners. Frank Agostino and Carroll D. Lansdell, for the respondent.
Case Date:December 21, 1989
Court:United States Tax Court
 
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58 T.C.M. (CCH) 994

DAVID MARKIN AND BARBARA C. MARKIN, ET AL., [1] Petitioners

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 18245-86, 19805-86, 27384-86.

United States Tax Court

December 21, 1989

Ps claimed deductions and investment tax credits in connection with a motion picture through their interests as limited partners in a partnership. Ps move the Court to vacate a stipulation of fact pursuant to Rule 91(e), Tax Court Rules of Practice and Procedure, on the ground of mutual mistake of fact.

HELD, Ps' motion for relief under Rule 91(e), Tax Court Rules of Practice and Procedure, is denied.

HELD FURTHER, the partnership did not acquire a depreciable interest in the motion picture but purchased an intangible contract right to payments contingent on the success of the motion picture. Bailey v. Commissioner, 90 T.C. 558 (1988), followed.

HELD FURTHER, the partnership is entitled to depreciate its basis in the contract right and its basis is determined.

HELD FURTHER, the partnership's recourse purchase note is disregarded for tax purposes because the note had no substance and thus is not includable in the contract right's depreciable basis.

HELD FURTHER, Ps are not entitled to an investment tax credit with respect to the film because the partnership did not acquire an ‘ ownership interest‘ in the film within the meaning of section 48(k)(1), I.R.C.

HELD FURTHER, Ps are liable for additions to tax under section 6659, I.R.C.

HELD FURTHER, Ps are liable for additions to tax under section 6621(c), I.R.C.

HELD FURTHER, Ps are not liable for additions to tax under section 6661, I.R.C.

David A. Schmudde, Eugene D. Silverman, Alan J. Epstein, Hilton Chodorow and Michael C. Cohen, for the petitioners.

Frank Agostino and Carroll D. Lansdell, for the respondent.

MEMORANDUM OPINION

NIMS, CHIEF JUDGE:

Respondent determined the following deficiencies in and additions to petitioners' Federal income taxes:

Additions to Tax--Sections
Petitioners Year Deficiency 6653(a) 6653(a)(1) 6653(a)(2) 6659 6661
David and Barbara 1979 $24,951.00 $1,247.55 -- -- $7,485.30 --
C. Markin 1980 19,055.00 952.75 -- -- 5,716.50 --
1982 53,264.64 -- $2,663.23 50% of interest due on $53,264.64 8,244.30 $2,578.36
Estate of Albert Goldberg, etc 1982 74,562.00 -- -- -- -- --
Philip J. Kleiner 1982 29,188.00 -- -- -- -- --
(Unless otherwise indicated, all section references are to section s of the Internal Revenue Code in effect for the years in issue. All Rule references are to the Tax Court Rules of Practice and Procedure.) As stipulated by the parties, the issues for decision are whether: (1) Author Associates (the partnership) acquired a depreciable interest with respect to its investment in the motion picture ‘ Author! Author!‘ (the picture); (2) the partnership may include certain amounts, if any, in the picture's basis; (3) the partnership's basis in the picture is subject to discounting pursuant to section 483; (4) petitioners, as limited partners, are entitled to claim an investment tax credit with respect to their interest in the picture and, if so, in what amount; (5) the partnership's failure to include the statement described by section 1.48-8(g)(3), Income Tax Regs., on its 1982 partnership return precludes petitioners from claiming any investment tax credit with respect to the picture; and (6) petitioners are liable for additions to tax under sections 6659, 6661 and 6621(c), formerly section 6621(d). With respect to certain other issues, the parties have agreed to be bound by final determinations in Madden v. Commissioner, T.C. Memo. 1989-162. This case was submitted fully stipulated. The stipulation of facts and attached exhibits are incorporated herein by this reference. The Markins resided in Kalamazoo, Michigan, at the time their petition was filed. The will of Albert Goldberg, deceased (whose estate is one of the petitioners in this case), was duly admitted to probate in New Jersey. Rose Goldberg, Arthur Goldberg and Gary Goldberg, the duly appointed and acting executors of the Estate of Albert Goldberg, and Rose Goldberg (also a petitioner herein) all had their legal residences in Metuchen, New Jersey, at the time their petition was filed. Petitioner Philip J. Kleiner resided in New York, New York, at the time his petition was filed. MOTION FOR RELIEF UNDER RULE 91(E) Petitioners filed a motion for relief under Rule 91(e) (motion) on September 1, 1989. On October 2, 1989, respondent filed an objection to petitioners' motion, and on November 17, 1989, petitioners filed a reply to respondent's objection. Petitioners move the Court to vacate paragraph 14 of the stipulation of facts (stipulation 14) which states: Prior to the release of the Picture, Fox had entered into licensing agreements with exhibitors which, provided all amounts were paid when due, would have provided the partnership with sufficient funds to satisfy the principal but not interest on the Recourse Purchase Note. Rule 91(e) provides in part as follows: The Court will not permit a party to a stipulation to qualify, change, or contradict a stipulation in whole or in part, except that it may do so where justice requires. * * * Petitioners assert that stipulation 14 resulted from a mutual mistake of fact and is thus voidable in the interests of justice. Respondent contends that there was no mutual mistake of fact and that any such mistake was unilateral on petitioners' behalf. See Stamm International Corp. v. Commissioner, 90 T.C. 315 (1988). We agree with respondent. Mutual mistake of fact generally occurs when there is a misapprehension as to a basic assumption upon which a stipulation rests. Spector v. Commissioner, 42 T.C. 110, 112 (1964). Petitioners contend that the parties entered into stipulation 14 based upon erroneous information provided by an attorney in Twentieth-Century Fox Film Corporation's (Fox) litigation department (Fox litigator). Petitioners have submitted a declaration of Gerald L'Esperance (L'Esperance), a former Fox analyst, and a handwritten schedule. The declaration and schedule purport to show that, contrary to stipulation 14, Fox had not entered into licensing agreements prior to the release of the picture which would have provided the partnership with sufficient funds to satisfy the principal amount of the recourse purchase note (recourse note). Respondent asserts that Frank Agostino (Agostino), respondent's former counsel, was not mistaken when he entered into stipulation 14 on respondent's behalf. Respondent has submitted Agostino's declaration which states that he was lead counsel for respondent in a group of motion picture tax shelter cases classified by respondent as the DeLaurentiis tax shelter project (the DeLaurentiis project). The DeLaurentiis project involved approximately 10 limited partnership investments promoted by Ira N. Smith (Smith) and Stephen R. Greenwald (Greenwald). At the time stipulation 14 was entered into, David Schmudde (Schmudde) served as lead counsel for the investors in all of the DeLaurentiis project cases. Agostino and Schmudde negotiated extensively over the stipulations for each of the DeLaurentiis project cases. As a result of these negotiations, Agostino conceded a potential section 183 issue in several of the cases, including this case. Agostino's concessions were based in part on Schmudde's assertions that the limited partners had little or no risk with respect to the recourse notes. In this case, Schmudde's assertions were supported by the information provided by the Fox litigator. Agostino, an experienced tax litigator, was not led into a mistake by the information. To the contrary, Agostino was fully aware that the information and stipulation 14 were consistent with similar stipulations that he and Schmudde had entered into in other DeLaurentiis project cases. We do not find that stipulation 14 resulted from a mutual mistake of fact. Accordingly, petitioners' motion will be denied. THE PARTNERSHIP In June, 1982, David Markin, Albert Goldberg and Philip J. Kleiner (Kleiner) became limited partners in the partnership, a New York limited partnership. The stated purpose of the partnership was to acquire rights in the motion picture ‘ Author! Author!‘ from Fox and to exploit the rights by engaging Fox to distribute the picture. The partnership's general partners were Smith and Greenwald. The picture is a feature length motion picture about a New York playwright at a crisis in both his personal and professional life. His second wife decides to leave home, he has five children to support and the producers of his play are threatening to abandon the production. The cast includes Al Pacino, Dyan Cannon and Tuesday Weld. The picture was directed by Arthur Hiller and produced by Irwin Winkler, and its screenplay was done by Israel Horovitz. OFFERING DOCUMENTS The private placement memorandum (placement memorandum) dated May 24, 1982, stated that the limited partners would be investing an aggregate of $3,350,000 in the partnership in exchange for a 99- percent interest in the picture. The $4,350,000 would be divided into 25 units offered at $174,000 per unit. Partnership units were offered through LPS Securities, Inc. (LPS), an entity wholly owned by Greenwald. The general partners contributed $10,000 and received a 1- percent interest. The capital contributions of the limited partners were to be made as follows:
Per Unit For 25 Units
On the date of executing their subscriptions (together with promissory notes evidencing the subsequent
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