54 T.C.M. (CCH) 962
ROBERT S. TAFT AND MARLENE R. TAFT, Petitioners
COMMISSIONER OF INTERNAL REVENUE, Respondent
United States Tax Court
October 26, 1987
Barry I. Fredericks and David M. Brandes, for the petitioners.
Patricia A. Donahue and Nancy M. Vinocur, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in petitioners' Federal income tax returns as follows:
The issues to be decided are: (1) Whether petitioners are entitled to an investment tax credit and miscellaneous deductions in relation to their investment in Chase Expedition Partners, a limited partnership formed to purchase and commercially exploit a motion picture; (2) whether petitioners are liable for additional interest under section 6621(c); 
and (3) whether petitioners are liable for damages under section 6673. FINDINGS OF FACT Some of the facts were stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by reference. Petitioners resided in Great Neck, New York, at the time of filing the petition in this case. Robert Taft (‘ petitioner‘ ) is an attorney with a primary field of specialization in tax. He is a member of the bars of the States of New York and Florida, as well as the District of Columbia. Some time during 1975, petitioner was approached by E. Donald Shapiro, a client and social acquaintance, about an opportunity to invest in a motion picture. Petitioner had no prior experience in the film industry. E. Donald Shapiro was an attorney who owned two movie theatres. The investment opportunity had been brought to his attention by his uncle, Erwin Shapiro. Petitioner was told that a young producer, Richard Martin (‘ Martin‘ ) had run out of funds while trying to finish two movies and was unable to get the films out of the lab. Erwin Shapiro suggested that because of Martin's financial difficulties, there was ‘ a chance to grab the movies at a small price.‘ Petitioner was not told of the nature of Martin's financial difficulties. Erwin Shapiro told petitioner that he personally knew Martin and felt that his movies would ‘ make it.‘ He also told petitioner the film was a G- rated children's movie. Petitioner described Erwin Shapiro as a ‘ movie entrepreneur.‘ However, there is no evidence in the record reflecting his background, experience or qualifications in the entertainment industry. Petitioner did not conduct any sort of investigation of Martin or the statements made by Erwin Shapiro as to the likelihood of success of Martin's films. Petitioner discussed the opportunity to invest in the film with Edgar Hatfield, another partner in his law firm. Subsequently, petitioner and Hatfield met with an attorney for Berkshire Pictures Corp., an entity owned by Martin and to which Martin had sold the movie, to discuss purchasing the film. The parties entered into an agreement whereby a partnership would be formed specifically to purchase and commercially exploit the film ‘ The Chase Expedition.‘ The parties agreed on a purchase price of one million dollars. The partnership was to provide cash in an amount sufficient to get the film released from the lab, and the balance in the form of a promissory note in an amount approximating the cost of making the movie. Cost was determined by reference to a budget prepared by Martin, the producer, director, and seller, and certified as correct by him. Petitioner was told by Erwin Shapiro that he could trust the certified budget. The total cost of making the film as shown on the budget was $950,013. Petitioner did not view the film, nor did he make any attempt to ascertain the veracity of the figures used in Martin's budget. On November 20, 1985, petitioner and his law partners, as well as a few clients and friends, formed a limited partnership known as The Chase Expedition Partners (‘ the partnership‘ ). Hatfield served as the general partner. Petitioner prepared the partnership agreement and some related documents. The partnership acquired the film ‘ The Chase Expedition‘ for $90,000 cash and a promissory note in the amount of $910,000 at 8- percent interest. The note was payable only out of net receipts derived from the exploitation of the film as follows: (i) 50 percent of net receipts derived from non-television exhibition in the United States and Canada; (ii) 75 percent of net receipts derived from television exhibition in the United States and Canada; (iii) 75 percent from exhibition in other territories. ‘ Net receipts‘ was defined as ‘ all gross sums actually paid to » the partnership by any distributor * * * from the exploitation of the photoplay, after the deduction therefrom * * * of all fees and expenses of such distribution and exploitation which such distributor is entitled to deduct.‘ Payments on the note were to be applied first to interest and then to principal. The note was secured by the film. The note provided that in the event of default, the partnership and its successors, licensees and assigns would have no personal liability on the note, except by reason of tortious or willful misconduct. Since the number and identity of the partners was known prior to formation of the partnership, there was no private placement memorandum or offering materials. However, the partnership did obtain a tax opinion letter from the law firm of Hatfield, Brady & Taft. The opinion letter discussed certain income tax considerations with respect to an investment in the partnership. The opinion noted that the entity would be taxed as a partnership and that each partner's basis would include the amount of cash contributed plus his proportionate share of the partnership's liability on the note. The letter also reviewed the depreciation of the film using the income forecast method, availability of a 10-percent investment tax credit and the potential for recapture. A Confidential Investment Memorandum attached to the partnership agreement highlighted the tax considerations discussed in the opinion letter. Additionally, in a discussion of the economic risks involved, the Memorandum noted that the motion picture business is highly speculative and competitive, that the industry was undergoing significant changes in consumer preferences, and that any single film represented a high risk to its investors. In a later section discussing transferability of the limited partnership interests, the Memorandum emphasized the fact that the interests were not transferable without the consent of the general partner. Therefore, it suggested that persons who anticipated a need for immediate liquidity should not subscribe. It noted, however, that liquidity would be created through after-tax cash-flow, and stated ‘ the potential high tax bracket limited partner may reasonably expect an amount in excess of his invested funds to be generated by after-tax cash-flow at the end of 1975.‘ The Memorandum noted that a distribution contract had been arranged, but it did not contain any projections of income. Petitioner contributed $5,000 for a 5-percent interest in Chase Expedition Partners. Neither the general partner nor any of the limited partners ever viewed the film prior to investing, either as individuals or on behalf of the partnership. None of the investors had any background or previous experience in the movie business. The movie is about the search for the son of a U.S. Senator who has disappeared in the wilds of Indonesia. Overall, the film is of low quality. The cast consists of actors unknown to the general public and their performances are substandard. The movie is almost entirely narrated with the exception of approximately three minutes of dialogue which is poorly dubbed. Much of the footage appears to be stock footage. One scene in which a giant lizard eats a goat is repeated three times. The film was produced and directed by Richard Martin, who has produced and directed two other low-budget films. The partnership did not obtain an independent appraisal of the value of the film. In a letter to the partnership dated November 20, 1975, Richard Martin estimated that the film would realize gross receipts of between $1,200,000 and $1,500,000. In a letter to the accountant for the partnership dated February 18, 1976, Martin revised his estimate of the total income to be generated by the movie to approximately $20,500. Chase Expedition Partners licensed the right to distribute and exploit the film to Trans...