Court Opinion

ID: 9484564
Source: CourtListenerOpinion
Date Created: 2023-08-05 09:57:16.815254+00
Date Added: 2024-06-11T17:50:19.189933
License: Public Domain

CYNTHIA HOLCOMB HALL, Circuit Judge,
dissenting:
This appeal involves the proper interpretation of the IRS’s formula for calculating the *1373depreciation of the cost of production of a motion picture film. The majority holds that a taxpayer can include participations and residuals that have yet to be incurred in the cost basis of a film when calculating the amount of depreciation that can be deducted in a given year. Because I disagree with this conclusion, I respectfully dissent.
It is well established that liabilities which can only be calculated on the basis of future events are contingent and cannot be included in a cost basis. See, e.g., Columbus & Greenville Ry. v. Commissioner, 42 T.C. 834, 846, 1964 WL 1354 (1964), aff'd, 368 F.2d 294 (5th Cir.), cert. denied, 385 U.S. 827, 87 S.Ct. 61, 17 L.Ed.2d 64 (1966); Lemery v. Commissioner, 52 T.C. 367, 377-78, 1969 WL 1536 (1969), aff'd, 451 F.2d 173 (9th Cir.1971). I see no reason why this principle should not control in the instant case. Under the terms of the relevant agreements, Transamerica was only required to pay participations and residuals if the films in question made a profit. In this sense, the participations and residuals are contingent liabilities and therefore cannot be included in the cost basis component of the formula used to calculate the depreciation of a motion picture film.
In reaching the opposite conclusion; the majority attempts to distinguish the line of cases cited above. According to the majority, the rule that basis cannot include capitalized expenses that are contingent on future events is designed to ensure that taxpayers are unable to deduct costs which are never incurred. The majority contends that this concern is not relevant in the instant case and offers mathematical formulas to prove that UA would not be able to deduct eosts it did not incur if it were allowed to include participations and residuals in the cost basis figure. As a result, the majority contends that the line of cases cited above does not apply.
I express no opinion concerning the accuracy of the majority’s mathematical formulas (Appendix A), although I question whether anyone other than a mathematician could be completely comfortable with them. Instead, I disagree with the majority’s assumption that the rule established in -Lemery and other related cases was designed solely to prevent taxpayers from deducting costs they may never incur. The taxpayers, the IRS, and these courts were equally concerned with the timing of the deduction, i.e., the time value of money.
This concern has just as much force in the instant case. I am not aware of any- other situation where a taxpayer is allowed to take a deduction before he actually incurs it absent express statutory authorization. I do not think it is appropriate to create an exception to this rule at this time.
Thus, I would affirm the district court’s decision by holding that Transamerica was not entitled to include participations and residuals in the cost basis figure for the purpose of calculating the depreciation deductions of its motion picture films. I am convinced that this would not impose an undue hardship on Transamerica. The Government concedes that Transamerica can take deductions for the payment of participations and residuals when it actually incurs these costs.
Instead, it is the majority’s approach that is inequitable. It gives rise to a double-deduction problem. Transamerica paid taxes using the Government’s method of depreciation and here seeks a refund using a method which allows it to deduct the payment of participations and residuals that are still contingent. Transamerica, however, sold UA before it was required to pay the partic-ipations and residuals at issue. Because UA’s purchaser was required to follow the Government’s method of depreciation as well, it undoubtedly claimed the lion’s share of the deductions now in dispute. The statute of limitations has almost certainly run against UA’s purchaser. Therefore, by holding that Transamerica is entitled to a refund, - the majority makes it possible for two parties to deduct the same costs and effectively causes the IRS to lose millions of tax dollars because the Government is unable to pursue UA’s purchaser.