Zaentz v. Comm'r of Internal Revenue

Decision Date21 April 1988
Docket NumberDocket No. 3273-86
Citation90 T.C. 753,90 T.C. No. 49
CourtU.S. Tax Court


Ps entered into Form 906 closing agreements with R settling disputes in earlier years relating to matters other than the matters at issue in this case. HELD,, the closing agreements are final only as to the matters agreed upon. I.R.C. section 7121. HELD FURTHER, the premises underlying a closing agreement are useful in interpreting the matters agreed upon in that closing agreement; however, the parties are not bound by the premises underlying the agreement in respect to a matter other than the matter that was agreed upon in the closing agreement. Randall G. Dick and Jeffrey I. Margolis, for the petitioners.

Eugene H. Ciranni and Margaret S. Rigg, for the respondent.



This matter is before the Court on petitioners' Motion for Partial Summary Judgment pursuant to Rule 121. 1 The requirements of Rule 121 have been satisfied, and we find that a partial summary judgment is appropriate in this case. The issue raised by petitioners' motion is whether statutory closing agreements that settled earlier controversies between petitioners and respondent involving matters other than those in dispute in this case bar respondent from arguing now that certain entities are shams and certain trusts are grantor trusts.

Summary judgment is appropriate when there is a showing that there is no genuine issue as to any material fact and that a decision may be rendered as a matter of law. Rule 121(b). Respondent maintains that summary judgment is not appropriate in this case because there are genuine issues as to whether the entities in question are sham and whether the trusts in question are grantor trusts. Respondent also disagrees with petitioners' interpretation of the closing agreements. Respondent has failed to understand the nature of the issue in this case. Petitioners' motion does not ask us to find as a matter of fact that the entities in question are not sham entities or that the trusts in question are grantor trusts. The issue is whether the closing agreements preclude respondent from making arguments in this case concerning the character of the entities in question. Because there is no genuine issue of material fact necessary for determining the preclusive effect of the closing agreements, summary judgment is appropriate in this case, and a decision can be rendered as a matter of law.


Petitioners' and respondent's statements of the facts are sufficiently similar to preclude a finding that there is a genuine issue of material fact with regard to this Motion for Partial Summary Judgment. Solely for purposes of this Motion, we rely upon the pleadings, affidavits, exhibits attached to the affidavits and other acceptable materials offered by the parties. None of the parties have objected to the material facts set forth in any of the memoranda, the pleadings, the affidavits or the documents offered in support of the positions taken herein.

Petitioners were residents of California at the time the petition in this case was filed. Respondent determined deficiencies in petitioners' income tax for the taxable years 1976 through 1982 on the basis of several theories. In his statutory notices of deficiency, respondent included the following explanation of adjustments:


(1) It is determined that the corporations Skylark Filmmaatschappij, B.V. (‘Skylark‘) and N.V. Zwaluw (‘Zwaluw‘), the partnership, Argosy Venture (‘Argosy‘), and trusts, the trustees of which were at various times Castle Trust Company Limited (or its successors) and Canadian Imperial Bank of Commerce Trust Company (Bahamas) Limited, are shams, and that you are the true earner of the income from the motion picture, ‘One Flew Over the Cuckoo's Nest‘, and of the interest income from loans by those companies, partnerships, and trusts. To the extent any of the income was earned by the foregoing trusts you are taxable on the trust's [sic] income pursuant to sections 671-679 of the Code.

Petitioners maintain that certain closing agreements between respondent and petitioners entered into during prior tax controversies bar respondent from asserting that Argosy Venture and its constituent trust partners are sham entities and that the trusts in question were grantor trusts under sections 671 through 679. A review of the prior tax controversies is necessary for an understanding of the issue in this case.

In the late 1960s petitioner Saul Zaentz (hereinafter referred to as petitioner) was associated with Fantasy Records Company, a United States partnership that manufactured and distributed phonograph records and tapes. The partnership's profits increased in 1968 as a result of a recording contract with Creedence Clearwater Revival, and in June, 1968, the partnership was incorporated into Fantasy/Galaxy Record Company Inc. (hereinafter referred to as Fantasy, Inc.).

On or about July 1, 1969, petitioner transferred his shares in Fantasy, Inc., to Jeffrey Investment Company, a Delaware corporation. In December, 1969, Ted Ponseti, Albert Bendich and Frank Noonan transferred their shares in Fantasy, Inc., to separate Delaware corporations, Rosewell Commercial, Inc., Van Arvey, Inc., and Fernway Commercial, Inc., respectively. Each of the foregoing transfers was made in exchange for shares of preferred stock of the Delaware corporation to which the Fantasy, Inc., shares were transferred.

On June 30, 1970, Argosy Venture (hereinafter referred to as Argosy), a purported Bahamian partnership, purchased all of the outstanding stock of Fantasy, Inc., that was held by individuals. Argosy also purchased for $3.57 million all of the preferred stock of the four Delaware corporations that held stock of Fantasy, Inc. On or about June 30, 1970, Argosy liquidated the four corporations into itself thereby obtaining possession of the corporate assets including the Fantasy, Inc., shares and the corporate books and records.

The partners in Argosy are five Bahamian trusts, the trustee of which was, in 1970, Castle Trust Company, Ltd. Trust T-8000, which held a 75 percent interest in Argosy, was created for the benefit of Celia Zaentz, but in 1970 the descendants of petitioner became the beneficiaries.

On or about June 29, 1970, the principal shareholders of Fantasy, Inc., petitioner and certain other individuals formed a limited partnership, Fantasy/Galaxy Record Company (hereinafter referred to as FGRC), to manufacture and distribute phonograph records and tapes. Seven of the shareholders of Fantasy, Inc., and one new partner of FGRC established a total of 102 family trusts which became limited partners in FGRC.

Petitioner established 14 of these family trusts. The 14 family trusts established by petitioner hereinafter will be referred to as the Joshua domestic trusts. The Joshua domestic trusts were created on June 26, 1970, and were executed by petitioner as grantor and Burton Kanter as trustee.

By an ‘Exercise of Power‘ dated February 3, 1972, each of the Joshua domestic trusts, except one, was divided into two separate trusts. In the FGRC Royalty Closing Agreement petitioners and respondent agreed that the documents entitled ‘Exercise of Power‘ were void.

On June 30, 1970, Argosy entered into an agreement under which the domestic (United States and Canadian) rights to the Fantasy Galaxy record catalog were licensed to a Netherlands Antilles company known as Gesternte N.V. (hereinafter Gesternte). Gesternte then sublicensed the domestic rights to the record catalog to FGRC under an agreement that gave Gesternte royalties of up to 50 percent.

On May 30, 1971, Prestige Records, Inc., sold all of its assets to Regency (Cayman Islands). Regency licensed its catalog to Basalt Finance Company N.V. (hereinafter Basalt), a Netherlands Antilles company. Basalt sublicensed the Prestige catalog to FGRC under a sublicensing agreement that was substantially similar to the sublicensing agreement between Gesternte and FGRC.

In deficiency notices for the taxable years 1970 through 1973 respondent determined that petitioner was taxable on the income to FGRC and that the deductions for royalties paid by FGRC to Gesternte and Basalt were excessive. Included with the deficiency notices for the taxable years 1970 through 1973 was the following explanation:

It is held that royalties which are claimed to have been paid to Gesternte, N.V., and to Basalt Finance Company, N.V., two entities which you own or control * * * are not allowable in the amounts shown below. The deduction claimed for royalties paid to these entities is not allowable to the extent shown because: (1) it is held that these amounts do not represent ordinary and necessary business expense; (2) your income and the income of the related entities would not be clearly reflected if these amounts were to be allowed; therefore adjustment is made in accordance with the provisions of section 482 of the Internal Revenue Code; and (3) you have failed to establish that the transactions giving rise to the increased royalties should be recognized as bona fide for tax purposes.

In response to the deficiency notices, petitioners filed a petition in this Court. The litigation resulted in the entry of decision documents in this Court and in the FGRC Royalty Closing Agreement. In the FGRC Royalty Closing Agreement, petitioners and respondent agreed that:

a. From June 29, 1970 through December 31, 1974 the interest in and the share of the profits and burden of the losses of each of the above stated partners in Fantasy/Galaxy Record Company was as follows:

                ¦Partner           ¦Interest¦
                ¦Saul Zaentz       ¦12.30%  ¦
                ¦Dorian Trust      ¦.18     ¦
                ¦Joshua Trust      ¦.18     ¦

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