Weimer v. Commissioner

• Decision Date: 10 August 1987
• Docket Number: Docket No. 19633-81,19634-81.
• Citation: 1987 TC Memo 390,54 TCM(CCH) 83
• Parties: Walter B. Weimer and Donna S. Weimer v. Commissioner. William M. Morris and Laurene S. Morris v. Commissioner.
• Court: U.S. Tax Court

54 TCM 83

1987 TC Memo 390

T.C. Memo. 1987-390

Walter B. Weimer and Donna S. Weimer v. Commissioner.

William M. Morris and Laurene S. Morris v. Commissioner.

Docket Nos. 19633-81, 19634-81.

United States Tax Court.

Filed August 10, 1987.

Harry F. Klodowski, Jr. (appeared specially), One Oxford Centre, Pittsburgh, Pa., for the petitioners. Francis J. Emmons, for the respondent.

Memorandum Opinion

CANTREL, Special Trial Judge:

This matter is before the Court on respondent's Motion for Partial Summary Judgment pursuant to Rule 121, Tax Court Rules of Practice and Procedure.¹ The issues raised by the motion are: (1) whether an agreement executed by the Red Falcons Company, L.P. (Red Falcons) effected a sale of a portion of Red Falcons' rights in a copyright, (2) if not a sale, whether the agreement constitutes "leasing any section 1245 property," within the meaning of section 465(c)(1)(C) of the Internal Revenue Code of 1954, as amended,² and (3) whether Red Falcons is entitled to a depreciation deduction in 1977 based on the income forecast method.³

The following material facts are established by the pleadings, admissions and other acceptable materials.

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

                Docket No.      Petitioners                                                    Year     Deficiency
                19633-81    Walter B. Weimer and Donna S. Weimer........................  1976     $5,612.59
                                                                                          1977     3,855.55
                19634-81    William M. Morris and Laurene S. Morris.......................  1976     9,321.31
                                                                                         1977     3,833.28
                

When they filed their petitions in these cases, petitioners Walter B. and Donna S. Weimer, husband and wife, resided at Washington, Pennsylvania, and petitioners William M. and Laurene S. Morris, husband and wife, resided at Pittsburgh, Pennsylvania. Mr. and Mrs. Weimer and Mr. and Mrs. Morris filed their Federal income tax returns for tax years 1976 and 1977 with the Internal Revenue Service Center at Philadelphia, Pennsylvania.

Petitioners, Walter B. Weimer and William M. Morris, are limited partners in Red Falcons, a Delaware limited partnership formed in 1976. Red Falcons was organized for the stated purpose of acquiring and exploiting the manuscript and copyright to The Red Falcons by Al Dempsey and Robin Moore. The operations of Red Falcons were conducted by its general partner, James C. Blackman. Mr. Blackman is an attorney in Warren, Pennsylvania and has practiced law since 1972.

As organized, Red Falcons had 25 limited partnership interests of $8,000 each. The minimum subscription was one limited partnership interest requiring a $3,200 cash payment at the time of subscription and the execution of a negotiable promissory note of $4,800 payable on January 15, 1977. The general partner was to be paid a guaranteed initial management fee of $2,000 and was to contribute $2,000 to the capital of Red Falcons. Profits and losses were allocated 99 percent to the limited partners and 1 percent to the general partner. On August 15, 1976, petitioner Walter B. Weimer subscribed to two limited partnership interests and petitioner William M. Morris subscribed to one limited partnership interest.

On October 1, 1976, Red Falcons entered into an agreement with Robin Moore and The Moorings of Nassau, Ltd., Inc. for the purchase of the original manuscript entitled The Red Falcons.⁴ The purchase agreement by its terms purported to convey to Red Falcons all the rights inhering in the manuscript including "the common law copyright together with all other property, rights, title and interest of whatsoever nature, whether now or hereafter known * * *." The stated purchase price was $812,500 payable as follows:

1) $25,000 cash downpayment at closing,

2) $100,000 nonrecourse partnership note bearing 6 percent interest per annum, payable on or before January 31, 1977, and

3) $687,500 nonrecourse partnership note bearing 8 percent interest per annum, payable seven years from the closing date.

The $100,000 nonrecourse partnership note was secured by the manuscript itself (including copyright rights) and the limited partners' recourse notes payable on January 15, 1977. The $687,500 nonrecourse partnership note was secured by the manuscript and payable solely from 50 percent of the gross receipts realized by Red Falcons from exploitation of the manuscript. The agreement specified that in the event of nonpayment and foreclosure against the property, any agreements executed by Red Falcons for the purpose of exploiting the property would remain in full force and effect.

As a condition to the closing of title under the purchase agreement, it is specified that Red Falcons must have entered into an agreement with a publisher for the national distribution of the book. In accord with the condition, a publishing agreement between Red Falcons and Pinnacle Books, Inc. (Pinnacle) was executed on October 1, 1976, the same day the purchase agreement was executed. The agreement was executed using Pinnacle's standard form contract and was modified by the parties.

Pertinent provisions of the agreement with Pinnacle read as follows:

In consideration of the mutual covenants herein contained, the parties agree as follows:

1A. The Author Red Falcons hereby grants and assigns to the Publisher Pinnacle (its successors and assigns) with respect to the Author's literary work now entitled, THE RED FALCONS by Robin Moore and Al Dempsey (hereinafter called the Work), which title may be changed by mutual consent, the following exclusive rights: to publish and sell or authorize others to sell the Work in the English language in book form under its own name and under its various trade names and imprints, and the rights listed in Articles 9A and 9B, in the following territory: throughout the World.

1B. Subject to the provisions herein with respect to earlier termination, all rights granted under this Agreement shall remain in effect during the full term that copyright to the Work subsists (including any renewal period) in any country in the world.

The Author shall, when requested by the Publisher, execute all documents which may be necessary or appropriate to enable the Publisher to exercise or deal with any rights granted hereunder.

* * *

9A. All revenue derived from the sale of the following rights-book club, hardcover book selection, second serial, syndication, excerpt, abridgement, condensation, digest, textbook, British Empire editions, foreign translations, low-priced editions and premium editions (other than low-priced and premium editions published by Publisher) — shall be shared equally between the Author and the Publisher, provided that a deduction shall be made from the gross receipts under such rights for any direct expenses (other than the normal general overhead expenses) incurred by the Publisher in exercising or disposing of such rights before such division is made.

9B. All revenue derived from the sale of the following rights shall be divided as follows:

                All Dramatic Rights...............90% to Author     10% to Publisher
                All Motion Picture Rights ..........90% to Author     10% to Publisher
                Radio Rights  ....................90% to Author     10% to Publisher
                Television Rights.................90% to Author     10% to Publisher
                First Serial Rights ................70% to Author     30% to Publisher
                Commercial Rights................90% to Author     10% to Publisher
                Recording Rights.................90% to Author     10% to Publisher
                

9C. The Publisher shall have the sole and exclusive right to dispose of or exercise any or all of the rights specified in Article 9A.* The Author shall have the sole and exclusive right to dispose of any or all of the rights specified in Article 9B.**

* 9A./at any time without restriction.

** 9B./at any time without restriction.

* * * Reproduced literally.

In addition, the publishing agreement specifies, inter alia, that Pinnacle 1 — copyright the book in the name of Red Falcons, 2 — imprint all copies with copyright notice as required by law, 3 — furnish to Red Falcons galley proof and, if requested, page proof, 4 — make available corrected proofs for Red Falcons' inspection, 5 — determine the catalogue retail price, and 6 — commence distribution by September 1976.⁵ Pinnacle is also obligated under the agreement to provide various statements to Red Falcons regarding costs of proof corrections, license receipts and royalties and to make its books and records pertaining to the manuscript available for Red Falcons' inspection. Payments by Pinnacle to Red Falcons are generally required at the time the statements are rendered.

The following termination provisions are set forth in the publishing agreement:

* * *

16A. If the Publisher shall fail to comply with or fulfill the materials terms and conditions hereof, or in the event of bankruptcy, etc., as in Article 16D hereof provided, this Agreement shall terminate upon receipt by the Publisher of written notice to that effect from the Author and the rights herein granted to the Publisher shall revert to the Author. In such event all payments theretofore made to the Author shall belong to the Author without prejudice to any other remedies which the Author may have.

16B. If the Publisher shall, during existence of this Agreement, default in the delivery of semi-annual statements or in the making of payments as herein provided and shall neglect or refuse to deliver such statements or make such payments, or any of them, within thirty (30) days after written notice of such default, this Agreement shall terminate at the expiration of such thirty (30) days without prejudice to the Author's claim for any monies which may have accrued under this Agreement or to any other rights and remedies to which the Author may be entitled.

16C. In the event that after one or more

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