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Ownership Of Film Rights/Burdens And Benefits Of Ownership

Bailey vs. Comm. 90 TC 558, Dec. 44,676

Taxpayers claimed deductions and investment credit in connection with motion pictures through their interest as limited partners in either of two partnerships. Court held:

  1. Taxpayer did not acquire a depreciable interest but purchased a contractual right to payment based on the success of the respective pictures
  2. The basis in the contractual right was depreciable
  3. The partnership was engaged in for profit
  4. Notes signed were not included in the depreciable basis
  5. Interest deduction disallowed on the notes used to purchase contractual rights to films
  6. Income forecast method had to be used to depreciate the contractual right
  7. Investment credit was allowed to taxpayer on the cash he put up to purchase the contractual right

Brown, H. vs. Comm. 56 TCM 638, Dec. 45,167 (m), TC Memo 1988-527, aff'd, 1990 U.S. App. LEXIS 20426 (9th Cir. 1990)

Taxpayer was limited partner in partnership which purchased film for cash and non recourse note.

Court Held:

  1. Partnership was engaged in for profit because at the time of purchase the projections were favorable
  2. A depreciable interest was not purchased, only a contractual right to future income based on the success of the film
  3. Non recourse note was not includible in basis of the right because taxpayers could not prove that note was expected to be paid
  4. Interest on the note was not deductible
  5. Investment credit was allowed on the cash invested
  6. Syndication costs of the partnership including legal tax opinion was held to be capital in nature and not deductible.

Carnegie Productions Inc. vs. Comm. 59 TC 642, Dec. 31,836 (1973)

Taxpayer produced a picture with funds supplied by another company. The agreement stated that on completion of the film all rights thereto, except taxpayers share in any income from its distribution, vested in the company supplying the funds. Court held that the taxpayer did not acquire a basis or interest in the motion picture on which to claim depreciation or investment credit. No liability for interest had accrued and no indebtedness had been established. Court found that taxpayer in this situation was contracted to make the film. The burdens and benefits of ownership had not been shown to have passed to the taxpayer.

Durkin vs. Comm. 87 TC 1329 Dec. 43,548, aff'd, 872 F. 2d 1271 (7th Cir.), cert. den., 493 US 824 (1989)

See summary for Grossman below.

Grossman vs. Comm. 87 TC 1329 Dec. 43,548, aff'd, 872 F. 2d 1271 (7th Cir.), Cert. den., 493 US 824 (1989)

Taxpayer claimed deductions and investment credit from two limited partnerships which had purchased motion pictures. Court held:

  1. The partnerships did not acquire a depreciable interest in the films. It acquired a contractual right to income based on the future success of the film because although title was transferred, control of films was not transferred
  2. The basis of the contractual rights are depreciable
  3. The partnership should not have used gross receipts when depreciating under the income forecast method. Net receipts (net of distribution and advertising costs) should have been used
  4. Partnership should have included an estimate for television network revenue under the income forecast method where an agreement had been reached but no contract signed
  5. Partnership S could not use the double-declining balance method to depreciate its contractual right since it was intangible. Straight-line method was allowed over six (6) year life
  6. Long term notes signed were not bona fide and not includible in depreciable basis of the right
  7. Short term notes were bona fide and therefore were includible in the depreciable basis of the right
  8. Taxpayers were allowed investment credit on the cash invested and the bona fide notes. They were determined to have an ownership interest in a part of the film

Gregory vs. Helvering 293 US 465 (1935)

Substance of a transaction rather than its form controls for Federal tax purposes.

Grodt & McKay Inc. vs. Comm. 77 TC 1221,1237 (1981)

Taxpayer entered into sales agreement to purchase cows at $30,000 per unit, using $1000 to $1500 cash and the remainder secured with a promissory note. The FMV of the cows was approximately $600. Taxpayer did not acquire dominion and control over the cows. Court found transaction not recognized as a sale for tax purposes because only expectation of profit was from tax benefits. Case discusses factors to be considered when determining whether or not the transfer of title (ownership) is to be recognized for tax purposes.

Isenberg vs. Comm., 53 TCM 946 Dec. 43,949(m), TC Memo 1987-269

Taxpayer acquired an interest in a limited partnership that had invested in a motion picture. The partnership was allowed an investment credit on the film to the extent of cash invested. Investment credit was allowed in the year the film was placed in general release. Advertising service agreement was disallowed.

Law vs. Comm., 86 TC 1065 , Dec. 43,076 (1986), petition dismissed by Lasky v. Commissioner, 235 F. 2d 97 (9th Cir. 1956)

Taxpayer claimed deductions and investment credit from an investment in a limited partnership that purchased a motion picture. The court held:

  1. The partnership did not acquire a depreciable interest in the film
  2. The partnership instead acquired a contractual right to future income based on the success of the film. This right was depreciable under the straight line method
  3. Note signed by the partnership was not includible in the basis of the contractual agreement and interest on the note was not deductible
  4. License payments made by the distributor to the partnership were not includible in partnership's income
  5. The taxpayer was allowed investment credit on the amount of cash and personal unconditional payments for which he was liable

Meister vs. Comm. 56 TCM 440, Dec. 45,120 (m), TC Memo 1988-487

Taxpayer claimed losses and investment credit from investment in a limited partnership that purchased a motion picture. Court held:

  1. Partnership did not own a depreciable interest in the film, therefore no depreciation was allowed
  2. Taxpayer purchased an intangible contractual right which could be depreciated by the income forecast method or by using the straight line method over a five (5) year period
  3. The recourse note signed was declared to be illusory and not includible in basis
  4. No investment credit was allowed since the partnership was deemed not to possess an ownership interest sufficient for investment credit purposes
  5. Overvaluation and tax motivated transaction penalties applied

Schwartz vs. Comm. TC Memo. 1987-381, aff'd in an unpublished opinion, 930 F. 2d 920 (9th Cir. Apr. 4, 1991)

  1. Investment credit was allowed to partnership on its investment in a motion picture. It was limited to the cash invested plus recourse note and was limited to the Qualified U.S. Production Costs
  2. Partnership was deemed not to have an ownership interest for depreciation purposes
  3. Partnership was deemed to have purchased a contractual right to future income based on the success of the film. Depreciation was allowed under the income forecast method
  4. Activity was engaged in for profit
  5. Partners salaries had to be capitalized as a syndication cost of the partnership

Taube vs. Comm. 88 TC 464, Dec. 43,737

Taxpayer was a limited partner in a partnership which purchased a training film in exchange for cash and recourse note. Each partner executed an assumption agreement making himself personally liable on his proportionate share of the note. Court held:

  1. The partnership purchased an ownership interest
  2. The partnership was engaged in for profit
  3. The debt was held to be genuine and includible in depreciable basis
  4. Interest accrued on the debt was deductible
  5. Production expenses accrued but not paid were includible in the Qualified U.S. Production Costs for investment credit in the year placed in service

Tolwinsky vs. Comm. 86 TC 1009 Dec. 43,075. (1986)

Limited partnership purchase of film negative and copyrights was voided by court. Rights were found to have remain with the major motion picture company who sold film to partnership. Partnership purchased a contractual right to income based on future success of the film. Deductions for depreciation and interest denied. Investment Investment tax credit was disallowed.

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Page Last Reviewed or Updated: 01-Apr-2014