COLVIN, Judge:
Respondent determined deficiencies in and additions to petitioners' income tax and gift tax as follows:
Additions to Tax and Additional Interest
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Sec. Sec. Sec. Sec
Year Deficiency 6653(a)(1)(A)1 6653(a)(1)(B) 6661 6662
Eric and Victoria Saltzman, Docket No. 16723-91 (income tax)
1986 ......................... $ 1,789,305 $ 89,465 2 $447,326
Marian B. Pictures, Inc., & Eric Saltzman as Transferee
Docket Nos. 19402-91, 19403-91 (income tax)
1986 ......................... 694,555 34,728 2 173,638
Eric and Victoria Saltzman, Docket No. 27653-91 (income tax)
1987 ......................... 60,764 3,038 2 16,191
1988 70,884 3,544
Windsor Production Corp
Docket No. 27654-91 (income tax and accumulated earnings tax)
1987 ......................... 19,623 5,126 2 13,349
1988 ......................... 9,630 1,530 7,650
1989 ......................... 9,889 10,037
Respondent also determined deficiencies in accumulated earning tax of $33,772 for 1987, $20,976
for 1988, and $40,297 for 1989, and an addition to tax of $5,340 for failure to timely file for 1987
under section 6651(a)(1)
Arnold and Joan Saltzman, Docket No. 8930-92 (gift tax)
1986 ......................... 4,145,193.97 207,259.70 2
1 Respondent determined this addition for 1988 under sec. 6653(a)(1)
2 Fifty percent of the interest due on the underpayment due to negligence
After concessions, the following issues remain to be decided:
1. Whether parts of the record relating to the quality of Marian B., Inc.'s (MBI), title in the Radio Keith Orpheum (RKO) film library should be sealed. We hold that it should not except for certain documents protected under the attorney-client privilege.
2. The fair market value of the family trusts' MBI stock at the time of the recapitalization. Petitioners contend that the fair market value was $987,000. Respondent contends it was $4,633,922. We hold that the fair market value of the family trusts' MBI stock was $3,784,658.76 on May 31, 1986.
3. Whether the recapitalization of MBI in 1986 was a gift from Arnold Saltzman to his son, Eric Saltzman. We hold that it was.
4. The value of contract rights and liabilities assumed by Eric Saltzman when he liquidated Marian B. Pictures, Inc. (MBP), in 1986, and whether he may adjust his basis for 1976 gift tax paid. We hold: (a) The value of the contract rights is $835,000; (b) Eric Saltzman assumed liabilities of $262,958 plus MBP's taxes to be computed under Rule 155; and (c) he may not adjust his basis for 1976 gift tax paid but he may adjust his basis to the extent gift tax is paid for the 1986 recapitalization.
5. The value of Arnold and Joan Saltzman's gift to a grantor retained income trust (GRIT). We hold that it is $960,000, less the value of Arnold Saltzman's contingent reversion calculated as if the GRIT were income-producing property.
6. Whether MBP may deduct expenses of litigation with the Turner Broadcasting Co. (Turner) and Eric Saltzman's salary. We hold that the Turner litigation expenses and Eric Saltzman's salary are capitalizable in part and deductible in part, as discussed below.
7. Whether Eric and Victoria Saltzman properly used the income-forecast method of depreciation for 1987 and 1988. We hold that they did for 1987, but they must revise it in part for 1988.
8. Whether Arnold and Joan Saltzman are liable for additions to gift tax for negligence for 1986. We hold that they are.
9. Whether Eric and Victoria Saltzman are liable for additions to income tax for negligence for 1986, 1987, and 1988, and for substantial understatement for 1986 and 1987. We hold that they are: (a) Liable for the addition to tax for substantial understatement of tax for 1986 and 1987 if there is a substantial understatement, (b) not liable for negligence for 1986 and 1987, and (c) liable for negligence for 1988.
10. Whether Windsor Production Corp. (Windsor) is liable for additions to tax for negligence for 1987, 1988, and 1989. We hold that it is.
11. Whether Windsor is liable for the addition to tax for substantial understatement in 1987. We hold that it is if there is a substantial understatement.
12. Whether MBP is liable for additions to tax for negligence for 1986. We hold that it is not.
Section references are to the Internal Revenue Code in effect during the years in issue. Rule references are to the Tax Court Rules of Practice and Procedure.
TABLE OF CONTENTS
Issue CCH Page
FINDINGS OF FACT 1548
A. The Saltzman family and family trusts ............................................ 1548
1. Petitioners .................................................................. 1548
2. The Saltzman family .......................................................... 1548
3. Stanley Haber and Kraditor & Haber ........................................... 1548
B. The Saltzman family corporations: MBI, MBP, and Windsor .......................... 1549
1. MBI and MBP .................................................................. 1549
2. June 1, 1983, agreement for Arnold Saltzman to sell MBI stock to Eric
Saltzman ..................................................................... 1549
3. Recapitalization of MBI ...................................................... 1550
4. June 18, 1986, acceleration of the 1983 agreement ............................ 1550
5. Redemption of MBI preferred stock ............................................ 1550
6. Windsor ...................................................................... 1551
C. Saltzman family corporations and the RKO film library ............................ 1551
1. Beginning of the film business for MBI and MBP .............................. 1551
2. MBI's 1982 law suit against RKO ............................................. 1551
3. MBI license agreement with RKO .............................................. 1551
4. Access to the physical materials for the pre-1956 RKO library films ......... 1551
5. MBI's 1983 settlement with RKO .............................................. 1552
6. The 1984 distribution agreement between MBP and RKO ......................... 1552
7. American Movie Classics ..................................................... 1552
8. RKO-AMC film license and MBI/RKO-UA settlement .............................. 1552
9. Multi-point distribution service ............................................ 1553
10. 1986 film licenses with parties other than AMC .............................. 1553
11. Film income of MBI and MBP .................................................. 1553
12. Licensing and exposure of films ............................................. 1553
13. Turner Broadcasting Co. litigation .......................................... 1554
14. Expiration of the RKO-MBP distribution agreement ............................ 1554
15. Sales of MBI's and MBP's interest in the pre-1956 RKO library to RKO ........ 1554
16. Liquidating distributions by MBP and sale to Windsor ........................ 1555
17. Events after the RKO sale and MBP liquidation ............................... 1555
D. MBP's deductions for professional expenses and Eric Saltzman's salary ............. 1556
E. Grantor retained income trust(GRIT) .............................................. 1556
1. The Montauk property ......................................................... 1556
2. Arnold Saltzman's gift to the GRIT ........................................... 1556
OPINION 1557
A. Sealing the record ............................................................... 1557
1. Petitioners' contentions .................................................... 1557
2. Background .................................................................. 1557
3. Disclosure of title matters ................................................. 1557
4. Attorney-client privilege ................................................... 1558
5. Confidential financial information .......................................... 1558
6. Conclusion .................................................................. 1558
B. Fair market value of MBI common stock on May 31, 1986 ............................ 1558
1. Background...
