Opinion ID: 606664
Heading Depth: 2
Heading Rank: 1

Heading: The Value of the Contract Rights

Text: 28 In challenging the tax court's finding that the fair market value of their contract rights was less than the fair market value of the films, taxpayers contend that the tax court's finding that the fair market value of the films was their production costs should have been the end of the matter since [, inter alia,] as a matter of economics and common sense, the fair market value of the contract rights the Partnerships purchased--the right to receive all of the films' net income--was at least equal to the values of the films.... (Petitioners' brief on appeal at 23.) We disagree, because the tax court permissibly found that taxpayers' factual premise was flawed. 29 As taxpayers concede, the tax court did not err in finding that the fair market of the films themselves was equal to the cost of their production. But as the court found in its initial decision, and as we affirmed in Bailey I, the Partnerships did not own the films themselves. Taxpayers' suggestion that the market value of the contract rights acquired by the Partnerships was identical to the market value of the films is premised on their proposition that the Partnerships purchased the right to receive 100% of the net income of the films in perpetuity. This premise suffers two major flaws. 30 First, as to the films at issue here, the value of the net income paid to the Partnerships would not be an adequate measure of the fair market value of the films themselves, because Columbia retained the right to receive a large percentage of the films' gross receipts, over and above unreimbursed distribution costs, as distribution fees. Because Columbia retained this significant economic interest in the films, the Partnerships' right to receive the films' remaining net income was necessarily worth less than the films themselves. 31 Further, the Partnerships' rights at the conclusion of the initial 10-year period were circumscribed. As the tax court found, Columbia's rights under the distribution agreements were to be held in perpetuity. 63 T.C.M. (CCH) at 2003. If the Partnerships were to fail to pay off a film's note in ten years, Columbia would have the right to terminate the Partnerships' interest in the film. Even if a film's note were to be fully paid, Columbia would still have the option to retain its distribution rights by paying the Partnerships an advance, which would be recouped out of the net income payable to the Partnerships. See id. Hence, the Partnerships did not have the right to sell the films' perpetual distribution rights; instead, they had the right only to receive an advance from Columbia for those rights. 32 We conclude that the evidence easily supported the tax court's finding that the fair market value of the Partnerships' contract rights was significantly less than the fair market value of the films themselves.