Petitioner, in connection with his investment in Lorelei, of $12,870 in cash and $15,000 in irrevocable letters of credit (for a total of $27,870 which represented a 14.85-percent interest in Lorelei), reported the following income (loss) and investment tax credits for the taxable years 1978, 1979, and 1980:

The sole question remaining for our consideration is respondent's disallowance of depreciation and investment tax credit in connection with petitioner's investment, as one of six limited partners, in a partnership (Lorelei). Lorelei was organized to exploit motion pictures. Lorelei entered into an agreement with Factor, a motion picture producer, to exploit the movie "Overboard." In the statutory notices,7 respondent provided the following reasons for disallowance: (1) Lack of "actual" ownership interest in the movie; (2) loans are too contingent and lack economic substance to be considered part of the depreciable basis in the movie; (3) the fair market value of the movie has not been established in an amount which would support the amount of the "loans" for purposes of limited partner's basis; (4) "the partnership's method of depreciation does not bear a proper relationship to the decline in the usefulness of the movie"; and (5) claimed amortization is not allowable because (a) amount used as basis was not paid, or if paid not amortizable, and (b) the obligation underlying the claimed amortizable asset was either not petitioners' or was subject to a contingency.

This figure was extrapolated from Schedule K-1 for petitioner and part of Lorelei's 1979 Form 1065 which reflects $6,593 in property subject to investment tax credit.

* This figure was taken directly from Schedule K-1 for petitioner.

7 One statutory notice, issued Jan. 24, 1984, concerned petitioners' 1978 taxable year. The other notice, issued Jan. 11, 1984, concerned petitioners' 1980 taxable year. The 1980 notice contained explanatory paragraphs concerning the Lorelei disallowances, whereas the 1978 notice designated the specific amounts of disallowance, without express explanatory paragraphs.

On brief, respondent advanced the additional ground that neither Lorelei nor petitioners attached the statement required by section 1.48-8(g)(3), Income Tax Regs., as a prerequisite to enablement to claim the investment tax credit for a movie purchased after January 19, 1978.8 Respondent, also on brief, abandoned reliance upon the fair market value, economic substance, contingency of indebtedness or income stream, and method of depreciation bases for disallowance. Respondent's remaining positions for disallowance of depreciation, amortization, and investment tax credit are failure to comply with requirements of section 1.48-8(g)(3), Income Tax Regs., and that the partnership did not acquire an ownership interest in the movie which would entitle its partners to claim depreciation or investment tax credit.

Timeliness of Respondent's Sec. 1.48-8(g)(3),
Income Tax Regs., Position

This Court has on numerous occasions addressed the timeliness of a party's attempt to raise a new position.9 It is within our discretion to permit a new issue or ground if we find that the opposing party is not prejudiced by such permission. Commissioner v. Erie Forge Co., 167 F.2d 71, 74-75 (3d Cir. 1948), affg. a Memorandum Opinion of this Court; Law v. Commissioner, 84 T.C. 985, 992 (1985); Estate of Horvath v. Commissioner, 59 T.C. 551, 555-556 (1973).

Of key importance in evaluating the existence of prejudice is the amount of surprise and the need for additional evidence on behalf of the party in opposition to the new position. To be sure, petitioners were surprised to learn of respondent's "regulation position" on brief, due to its absence from the statutory notices and the pleadings. In this case, the parties submitted the case with the facts fully stipulated and presumably with an understanding of the

8 Our ultimate finding that Lorelei did not purchase the movie, but instead joined the producer in a joint venture, would appear to obviate the need to comply with sec. 1.48-8(g)(3), Income Tax Regs., because there was no purchase of the qualified film "by taxpayer other than original owner."

There is no need to consider whether respondent's position is merely a new theory which clarifies or develops respondent's original determination (Estate of Scharf v. Commissioner, 38 T.C. 15, 27-28 (1962), affd. 316 F.2d 625 (7th Cir. 1963)), or a new matter, for which respondent would bear the burden of proof (Achiro v. Commissioner, 77 T.C. 880, 890 (1981)), because of our ultimate conclusion regarding respondent's timeliness in raising this position.

legal issues to be presented and defended. Respondent raised numerous grounds for disallowance by statutory notice, which would have come within the presumption of correctness afforded respondent, Welch v. Helvering, 290 U.S. 111, 115 (1933), and respondent had several other opportunities to raise new issues or grounds. Seligman v. Commissioner, 84 T.C. 191, 198 (1985).10

Respondent's new position is that Lorelei's and petitioners' failure to comply with section 1.48-8(g)(3), Income Tax Regs., by not attaching a statement to returns which are the subject of this case would prohibit petitioners from claiming the investment tax credit with respect to the movie. Respondent raises this ground after raising more than five in the statutory notice and refining the major thrust, on brief, to one of the original grounds and the proposed new ground. The longer respondent delays in disclosing theories, "the more reason there is to conclude that the taxpayer has not received fair notice and has been *** prejudiced." Commissioner v. Transport Mfg. & Equip. Co., 478 F.2d 731, 736 (8th Cir. 1973). This is especially true here, where there was no trial and the facts were fixed by agreement. Compare Stewart v. Commissioner, 714 F.2d 977 (9th Cir. 1983), affg. a Memorandum Opinion of this Court. Accordingly, we hold that petitioners were surprised by the new ground and their ability to present their case was prejudiced. Seligman v. Commissioner, supra; Estate of Horvath v. Commissioner, supra at 556; Nat Harrison Associates, Inc. v. Commissioner, 42 T.C. 601, 617 (1964).

Entitlement to Depreciation and Investment Tax Credit

We are convinced that the movie "Overboard" is an asset for which depreciation and investment tax credit may be available to its owner. Indeed, "Overboard" was a successful movie which had been licensed to NBC and Time-Life Films for more than a 20-year period in exchange for fixed periodic payments that would total $1,490,000. The $1,490,000 were minimum payments and additional royalties

10 It seems ironic that respondent seeks to defeat petitioner for failure to comply with the procedural portion of a regulation which respondent failed to raise during the audit, issuance of the notice of deficiency, filing of an answer or submission of the case for our consideration.

or license fees would be paid to the extent that Time-Life recouped its distribution charges, expenses, and the $300,000 advanced for the license. The only question we are asked to decide is whether petitioner, through his limited partnership interest in Lorelei, was an "owner" of the movie "Overboard" so as to be entitled to claim both depreciation and investment tax credit in connection with the investment.

Respondent does not question the value or bona fides of the subject matter, but only whether Lorelei acquired an ownership interest. Although respondent has broken the question of entitlement to depreciation and investment tax credit into two separate arguments, we find it more convenient to discuss them together. Accordingly, we shall analyze to what extent, if any, ownership of the movie transferred from the producer, Factor, to Lorelei.

Petitioner asserts that the transfer was achieved by means of a sale. A sale is a transfer of property for money or a promise of payment. Commissioner v. Brown, 380 U.S. 563, 570-571 (1965). For purposes of Federal taxation, a sale occurs upon the transfer of the benefits and burdens of ownership, rather than upon the satisfaction of the technical requirements for the passage of title under State law. Houchins v. Commissioner, 79 T.C. 570, 590 (1982); Grodt & McKay Realty, Inc. v. Commissioner, 77 T.C. 1221, 1237 (1981).

The consideration of whether the benefits and burdens have been transferred is essentially a factual determination and as outlined in Houchins v. Commissioner, supra at 591,

is to be ascertained from the intention of the parties as evidenced by the written agreements read in light of the attendant facts and circumstances. Grodt & McKay Realty, Inc. v. Commissioner, supra. Among the factors to be considered in making this determination are: (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. See Grodt & McKay Realty, Inc. v. Commissioner, supra at 1237-1238. * [Fn. ref. omitted.]

The passage of title to a motion picture is accomplished through the transfer of both the negative and copyright. The basic principles to be considered were outlined and set forth in Tolwinsky v. Commissioner, 86 T.C. 1009, 1041-1043 (1986), as follows:

Ownership of a motion picture negative is distinct from ownership of the copyright thereto (17 U.S.C. sec. 202 (1982) (effective Jan. 1, 1978); Michael Todd Co. v. Los Angeles County, 57 Cal. 2d 684, 371 P.2d 340, 21 Cal. Rptr. 604 (1962), and cases cited therein), and ownership of the former without possession of at least certain of the rights encompassed by the latter is commercially valueless. See Misbourne Pictures Ltd. v. Johnson, 189 F.2d 774, 776 (2d Cir. 1951). Copyrights are monopolies; "they entitle the owner to prohibit various kinds of reproduction, and to relieve individuals of these prohibitions by licenses." Goldsmith v. Commissioner, 143 F.2d 466, 467 (2d Cir. 1944) (L. Hand, J., concurring), affg. on other grounds 1 T.C. 711 (1943). The exclusive rights that comprise the so-called "bundle of rights" that is a copyright in a motion picture are detailed in 17 U.S.C. sec. 106 (1982):

Subject to sections 107 through 118, the owner of copyright under this title has the exclusive rights to do and to authorize any of the following: (1) to reproduce the copyrighted work in copies or phonorecords; (2) to prepare derivative works based upon the copyrighted work;

(3) to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending;

(4) in the case of * * * motion pictures and other audiovisual works, to perform the copyrighted work publicly; and

(5) in the case of*** the individual images of a motion picture or other audiovisual work, to display the copyrighted work publicly. Each of the five rights comprising the copyright may be subdivided indefinitely, and under copyright law, each subdivision of an exclusive right may be owned and enforced separately. 17 U.S.C. sec. 201(d) (1982). For tax purposes, a sale of a motion picture occurs when there is a transfer of all substantial rights of value in the motion picture copyright. Carnegie Productions, Inc. v. Commissioner, 59 T.C. 642 (1973) (Courtreviewed); * *. No sale occurs if the transferor retains proprietary rights in the motion picture. See Carnegie Productions, Inc. v. Commissioner, supra at 653; Cory v. Commissioner, 23 T.C. 775 (1955), affd. 230 F.2d 941 (2d Cir. 1956). * * * [Fn. refs. omitted.]

See also Law v. Commissioner, 86 T.C. 1065 (1986).

After thorough consideration of the facts and circumstances of this case we find that Lorelei and its partners became a joint venturer with a 25-percent interest in the film "Overboard."