Rose v. Comm'r of Internal Revenue
| Citation | 88 T.C. 386,88 T.C. No. 18 |
| Decision Date | 05 February 1987 |
| Docket Number | Docket No. 25635-83 |
| Parties | JAMES L. ROSE AND JUDY S. ROSE, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Ps purchased ‘Reproduction Masters‘ of Picasso originals from Jackie Fine Arts, in transactions that can be characterized as ‘generic tax shelters.‘ HELD: (1) Applying an objective analysis, the transactions lacked economic substance apart from anticipated tax benefits, and Ps are not entitled to depreciation or miscellaneous deductions or investment tax credits on the property acquired. (2) Ps are entitled to deduct under sec. 163, I.R.C. 1954, as amended, interest actually paid on recourse debt incurred. Rice's Toyota World, Inc. v. Commissioner, 752 F.2d 89 (4th Cir. 1985), revg. on this issue 81 T.C. 184 (1983), followed. (3) Ps are liable for additional interest under sec. 6621(d). Robert L. Ackerson and Steven A. Goodman, for the petitioners.
Albert Russo, William S. Garofalo, and Matthew Magnone, for the respondent.
Respondent determined deficiencies of $191,335.00 and $302,451.12 in petitioners' Federal income taxes for 1979 and 1980, respectively. The issues for determination are (1) whether petitioners are entitled to depreciation and miscellaneous deductions and investment tax credit in relation to their purchase from Jackie Fine Arts of photographic transparencies of Picasso paintings and related production rights; (2) whether petitioners are entitled to deduct interest (a) accrued or (b) paid on partial recourse notes used in such purchase; and (3) whether petitioners are liable for additional interest under section 6621(d). 1
Some of the facts have been stipulated, and the stipulated facts are incorporated in our findings by this reference.
Petitioners James L. Rose (Mr. Rose) and Judy S. Rose (Mrs. Rose) were residents of Kentucky at the time they filed their petition herein.
Mr. Rose was for many years president of coal mining and sales companies headquartered in London, Kentucky. Certain of the companies were originally started by Mr. Rose and his mother in the early l960's. The companies enjoyed increasing sales until they were sold in 1973. Under Mr. Rose's guidance, annual revenues of the coal mining companies increased from several hundred thousand dollars to approximately $5 million. Mrs. Rose also worked with the coal mining companies prior to 1973. After 1973, petitioners invested in various business activities, including oil drilling programs, with varying degrees of success. In 1978, Mr. Rose became involved in the banking business, and at the time of trial he was president of a multi-bank holding company. None of the businesses in which petitioners had an interest prior to 1979 involved art or were otherwise similar to the art business. Petitioners had no particular training in art prior to the years in issue.
During 1979, petitioners considered alternative investment opportunities, including real property and railroad cars. Mrs. Rose found that she needed less time to devote to petitioners' children, and she became interested in finding an activity that she could pursue as a business.
In late 1979, a securities broker mentioned Jackie Fine Arts (Jackie) to Mr. Rose. Jackie was a corporation that had been involved in the marketing of lithograph tax shelters beginning in 1977. In 1979, Herman Finesod (Finesod), on behalf of Jackie and its affiliate, Art Masters International, Inc. (Art Masters), as ‘Buyer‘ entered into an agreement with Paraselenes S.A., as ‘Seller,‘ a company controlled by Marina Picasso (Marina), the granddaughter of Pablo Picasso (Picasso). In a contract dated December 6, 1979, Paraselenes S.A. represented that it was—
the owner of the reproduction rights to in excess of 1,000 paintings, charcoal drawings and other works of art created (excluding ceramics and sculptures) by Pablo Picasso (hereinafter collectively referred to as the ‘Marina Picasso Reproduction Collection‘). Buyer desires to obtain from the Seller the exclusive rights throughout the world to reproduce the Images contained in the 1,000 works of the Marina Picasso Collection (the material used to reproduce such Images hereinafter called ‘Reproduction Masters ‘). Seller is willing to sell to Buyer up to 1,000 Reproduction Masters, and to grant buyer the exclusive rights to exploit the Reproduction Masters and Images contained therein throughout the world * * *
Under the heading ‘Definitions,‘ the contract provided:
(b) ‘Reproduction Master‘ means a photoscreen negative or other material, such as metal plates or stones, used to produce an Image; but does not include the original work of art created by Pablo Picasso containing such Image. The Reproduction Masters shall be produced by the Seller under the supervision of Marina Picasso.
(c) ‘Image‘ means the visual result of works in the Marina Picasso Collection.
(d) ‘Print‘ means a lithographic reproduction of the original work, serigraph or similar impression created from a Reproduction Master. The term ‘lithograph‘ does not include any original production created by Pablo Picasso.
(e) ‘Limited Edition‘ means Prints produced through fine art reproductive techniques or by or under the supervision of Marina Picasso. The size of a Limited Edition shall not exceed 500 in number, which Marina Picasso will number and write in handwriting ‘Collection Marina Picasso,‘ plus 34 more, which she will number in Roman numerals and write in handwriting ‘Marina Picasso Collection.‘ The Limited Edition cannot itself be reproduced with the handwritten ‘Collection Marina Picasso‘.
(f) ‘Stamped Poster Edition‘ means an edition of 1,000 posters using an Image, whether Print of a reproduction on which the stamped name of Marina Picasso appears.
(g) ‘Poster Edition‘ means an unstamped edition using an Image, whether Print or a Reproduction.
(h) ‘Products‘ means all other items on which the Image is reproduced other than Limited Editions, Prints, Stamped Poster Editions and Poster Editions (excluding however, works reproduced in bibliographic editions).
Payment to the seller under the contract for the acquisition of each Reproduction Master was $10,000 plus a nonrecourse promissory note in the amount of 60 percent of the principal amount received by Jackie from any ultimate purchaser of the Reproduction Master and related rights (the Picasso packages). The contract was for a period of 15 years and contained certain minimum guaranteed payments, including $1 million per year for the first 5 years of its term. The following pertinent additional terms were set forth in the contract:
(a) The Reproduction Master;
(b) The copyrights referred to in Section 4.
(c) The exclusive right to use, control, control the use, manufacture, sell and distribute, promote, advertise and license the Reproduction Master and any Image therein in any and all fields of use whether now known or hereafter developed for any and all purposes subject, however (1) to the limitation provided in Section 12 and (2) the exclusive license granted to Seller hereunder to reproduce the Images in bibliographic editions, and subject also to the ‘Droit Moral‘ as that term is defined by French law.
(d) The exclusive right to copy, produce, reproduce and duplicate the Reproduction Master and any Image therein by any means and in any medium whether now known or hereinafter developed; subject to the exclusive license granted by the Buyer to the Seller hereunder to reproduce the Images in bibliographic editions.
(e) The right to receive and hold statutory copyrights to the Images therein in the entire world and any extension or renewal thereof in the name or for the benefit of the Buyer, its assigns or nominees;
(f) The right to authorize others, directly or indirectly, to exercise all and any of the foregoing rights subject to the obligations contained herein.
* * *
(8) ROYALTY-FREE LICENSE: Simultaneously herewith Buyer hereby grants the Seller a royalty-free exclusive license to reproduce the Image contained in the Reproduction Masters which are the object of this Contract in all bibliographic editions until the reproduction rights fall into the public domain. Notwithstanding the foregoing, the Buyer or its assigns shall have the right to reproduce the Images in pamphlets, brochures and catalogues used as publicity or promotional material in connection with the sale or exploitation of the Reproduction Master, Limited Editions, Prints, Posters and Products, etc. produced therefrom.
* * *
(12) RESPECT FOR PICASSO IMAGES: The Buyer agrees that in no event will the Reproduction Master or the Images be used on any item or in any way which would denigrate the name, honor, reputation or memory of Pablo Picasso, as provided in the Droit Moral.
In 1979, Jackie sold 109 Picasso packages to investors. A total of 223 packages were sold over the life of the program.
In marketing the Picasso packages, Jackie provided to prospective purchasers a series of materials, including ‘Information Memoranda,‘ tax opinions, ‘Fact Sheets,‘ and letters. Each emphasized at great length the purported tax benefits of the acquisition of art masters. Typical of the marketing materials was an October 1979 Information Memorandum for the Sale of Art Masters, which summarized the program as follows:
The Product
Jackie Fine Arts markets art masters, each consisting generally of silkscreen mylars, lithographic plates and mylars, or photoscreen negatives of an original work of art, together with related copyrights. The artist has agreed to...
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