Opinion ID: 606664
Heading Depth: 2
Heading Rank: 2

Heading: The Incentive To Repay the Debt

Text: 33 We also see no clear error in the tax court's finding that the Partnerships lacked incentives to pay off the nonrecourse notes out of personal assets. Given the fact that the nonrecourse debts for the films in question ranged from 89% to 104% of the cost of production, together with the evidence that only one out of every six films was normally expected to earn its production costs, and the fact that only 75% of each film's earnings was dedicated to payment on that debt, the court's finding that taxpayers anticipated that the earnings generated by the films themselves would fail by a significant margin to cover the nonrecourse notes was unimpeachable. 34 Further, the court's findings as to the extent and profile of the useful life of the films were supported by the testimony of one of taxpayers' witnesses that in 1973-1975 a film would be expected to earn the bulk of its theatrical exhibition revenue within the first two years of release and would be expected to earn most of its revenue, including revenue from television network sales and syndication, within 10 years of release. The court's decision to credit this testimony was well within its province as factfinder, and its finding that taxpayers expected a given film to have an economically useful life of approximately 10 years was not clearly erroneous. In light of this 10-year-life expectation, along with the lack of cross-collateralization, the court was entitled to infer that taxpayers did not anticipate that the nonrecourse notes would be paid in order to obtain rights beyond the initial 10-year period: each film would either earn an amount equivalent to the face amount of its note within 10 years or it wouldn't; in the unlikely event that it did earn that amount, the note would be canceled; if it did not earn that amount, the film would not be expected to have any further value, and hence taxpayers would be unlikely to use personal assets to pay off the note. 35 Though there were some countervailing considerations, the tax court weighed them and found that the preponderance of the evidence required the finding that taxpayers did not have the requisite incentive. Given the record as a whole, we cannot say that that finding is clearly erroneous. Thus, the tax court's finding that the transactions were so structured that there was no economic incentive for the partners to pay off the purchase notes, 63 T.C.M. (CCH) at 2006, was not clearly erroneous, and this finding supported the court's determination that the nonrecourse debt should be disregarded for tax purposes.