Opinion ID: 554937
Heading Depth: 2
Heading Rank: 1

Heading: Characterization of Property Purchased

Text: 21 The crux of this appeal centers on the ownership of the film. Taxpayer claimed an ownership interest in the film, via the partnership, and accordingly recognized a depreciation deduction for the exhaustion, wear and tear of the film pursuant to 26 U.S.C. Sec. 167 (1976 & Supp. V 1981). 10 However, [t]he determination of ownership of an asset for tax purposes is to be based on an analysis of many different factors indicative of ownership, not always on the bare legal title. Bailey v. C.I.R., 912 F.2d 44, 47 (2d Cir.1990). Thus, where the transferor continues to retain significant control over the property transferred, the transfer of formal legal title will not operate to shift the incidence of taxation attributable to ownership of the property. Bailey, 912 F.2d at 47; Durkin v. Commissioner, 872 F.2d 1271, 1275 (7th Cir.), cert. denied, --- U.S. ----, 110 S.Ct. 84, 107 L.Ed.2d 50 (1989); Tolwinsky v. Commissioner, 86 T.C. 1009, 1041 (1986); Law v. Commissioner, 86 T.C. 1065, 1094 (1986); see also Helvering v. Clifford, 309 U.S. 331, 60 S.Ct. 554, 84 L.Ed. 788 (1940); Helvering v. F. & R. Lazarus Co., 308 U.S. 252, 60 S.Ct. 209, 84 L.Ed. 226 (1939). 22 Whether the partnership became the owner of the film for tax purposes as a result of the transactions with Orion is a question of fact to be determined by reference to the written agreements and the attendant facts and circumstances. Durkin, 872 F.2d at 1275. Factors pertinent to such a determination include: 23 (1) Whether legal title passes; (2) the manner in which the parties treat the transaction; (3) whether the purchaser acquired any equity in the property; (4) whether the purchaser has any control over the property and, if so, the extent of such control; (5) whether the purchaser bears the risk of loss or damage to the property; and (6) whether the purchaser will receive any benefit from the operation or disposition of the property. 24 Houchins v. Commissioner, 79 T.C. 570, 591 (1982) (citations omitted). 25 Furthermore, in the specific context of the sale of a movie, no sale occurs for federal tax purposes, unless the parties transfer both the negative and all substantial rights accompanying a movie copyright. Durkin, 872 F.2d at 1275. This is so because ownership of the negative without the copyright prerequisites lacks any value. Id. 26 Employing the above analysis, the tax court concluded that, upon a complete analysis of the purchase and distribution agreements, Orion retained ownership of the film, while the partnership merely purchased a contractual right to share in the proceeds of the film. We agree. 27 The tax court found that the integrated transfers between the partnership and Orion resulted in Orion retaining the rights to make copies of the film, to exhibit the film, and to otherwise exploit any dramatic material or literary material upon which the film was based. Furthermore, the tax court found that the film was promoted as an Orion Pictures Release, and that Orion held the film rights to theatrical exploitation, pay television, video cassettes and commercial television throughout the world. The tax court concluded that [s]uch enumerated rights combined with the sequel rights retained by Orion provided Orion with the entire bundle of rights that is a copyright. T.C. Memo. at 18. Additionally, the tax court found that through the complex terms of the distribution agreement, Orion, rather than the partnership, would receive the principal benefits from the film's financial success. 28 The record clearly supports these findings and the tax court's ultimate conclusion that, for the purpose of allocating deductions, Orion remained the owner of the film. 29 Taxpayer argues that we should engage in de novo review of the tax court's conclusions because it misapplied the law by failing to follow the caselaw in the sale-leaseback context. See, e.g., Frank Lyon Co. v. United States, 435 U.S. 561, 98 S.Ct. 1291, 55 L.Ed.2d 550 (1978). According to taxpayer, those cases required the tax court to give each agreement independent legal significance. However, even under the sale-leaseback caselaw, the analysis remains the same: the court must determine, after the dust settles, in which party the benefits and risks of ownership rest. Durkin, 872 F.2d at 1276. 30 Ultimately, under any analysis, the incidence of taxation depends upon the substance of a transaction.... To permit the true nature of a transaction to be disguised by mere formalisms, which exist solely to alter tax liabilities, would seriously impair the effective administration of the tax policies of Congress. Commissioner v. Court Holding Co., 324 U.S. 331, 334, 65 S.Ct. 707, 708, 89 L.Ed. 981 (1945). Thus, contrary to the taxpayer's assertions, the tax court neither misapplied the law nor made erroneous findings of fact.