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RICHARD D. REINBERG AND RUTH REINBERG, ET AL., 1 PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE,

RESPONDENT

Filed January 25, 1988.

Docket Nos. 29326-83, 29997-83,

31535-83, 32938-83,
32940-83, 33395-83,
33396-83, 33398-83,
33425-83, 33426-83,
34738-83, 4284-84,
4285-84, 4286-84,
4403-84, 4446-84,
4447-84, 6720-84,
20644-84.

Ps are limited partners in W, an Ohio limited partnership organized to purchase and exploit the rights to a motion picture. Ps assert that W was the sole owner of the film and is entitled to full depreciation of the film rights. Held, W did not acquire a 100-percent ownership interest in the movie, but did acquire an interest in a joint venture with others to own, exploit, and participate in the profits from the film. Held, further: Ps are limited to determining the film's depreciation under the income forecast method. Ps have not met their burden of proof with respect to the calculation of the depreciation deductions under the income forecast method. As a result, Ps' depreciation deductions are disallowed.

Stephen L. Kadish and Kevin M. Hinkle, for the petitioners.

Richard S. Bloom and John H. Gadon, for the respondent.

HAMBLEN, Judge: In these consolidated cases, respondent determined deficiencies in petitioners' Federal income taxes as follows:

'Cases of the following petitioners are consolidated herewith: Leonard C. Rosenberg and Sally P. Rosenberg, docket No. 29997-83; Richard W. Pogue and Patricia R. Pogue, docket No. 31535-83; S. Sidney Zilber, a.k.a. Sidney Zilber, and Elizabeth L. Zilber, docket No. 32938-83; Beno Michel and Elaine Michel, docket No. 32940-83; Stephen L. Kadish, docket No. 33395-83; Betty J. Schur, docket No. 33396-83; John S. Allerton and Juanita L. Allerton, docket No. 33398-83; Richard B. Steuer and Jean K. Steuer, docket No. 33425-83; Dave Margolis and Thelma Margolis, docket No. 33426-83; Sol J. Roth and Harriet Roth, docket No. 34738-83; Donald P. Schneider and Elaine M. Schneider, docket No. 4284-84; S. Sidney Zilber and Elizabeth L. Zilber, docket No. 4285-84; Lawrence R. Weiss and Joan Weiss, docket No. 4286-84; Allan M. Unger and Constance Unger, docket No. 4403-84; Leonard P. Rome and Nancy G. Rome, docket No. 4446-84; Beno Michel and Elaine M. Michel, docket No. 4447-84; Byron S. Krantz and Joan L. Krantz, docket No. 6720-84; Charles P. Malitz and Gail Malitz, docket No. 20644-84.

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TYE Dec. 31–

1978 1976 1977 1978 1976 1977 1978 1976 1977 1976 1977 1976 1976 1977 1976 1977 1976 1977 1976 1977 1978 1976 1977 1978 1976 1977 1978 1978 1978 1976 1977 1978 1978 1976 1977 1978 1976 1977 1978 1979

Deficiency $1,490.00 7,568.00 7,698.00 2,772.00 22,127.00 22,438.00 8,924.47 6,808.06 2,945.00 1,873.00 3,709.00 6,916.00 21,213.00 18,846.00 22,236.00 22,808.00 10,866.55 11,879.63 19,221.00 4,217.00 2,292.00 44,025.00 19,734.00

8,368.00 20,829.00 11,187.00 4,096.00 2,061.00 13,242.00 23,640.00 27,468.00 4,196.00 4,169.00 30,711.00 18,609.00

8,683.00 14,562.00 14,520.00 6,811.00 1,383.00

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The deficiencies in dispute arise from petitioners' involvement in Wenles Films, Ltd. (Wenles). Wenles is an Ohio limited partnership organized to purchase and exploit the

?Gail Malitz is a party to this action only by virtue of filing a joint Federal income tax return with her husband.

rights in a motion picture based on the story “The Bluebird" by Maurice Maeterlinck. After concessions, the primary issue for decision is whether petitioners, as limited partners of Wenles, are entitled to depreciation deductions for their distributive share of loss reported by Wenles and, if so, in what amounts.

FINDINGS OF FACT

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Some of the facts have been stipulated and are found accordingly. The stipulation of facts, the supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference.

Petitioners Richard D. and Ruth Reinberg resided in Pepper Pike, Ohio, when they filed their petition in this case. Petitioners Leonard C. and Sally P. Rosenberg resided in Shaker Heights, Ohio, when they filed their petition in this case. Petitioners Richard W. and Patricia R. Pogue resided in Shaker Heights, Ohio, when they filed their petition in this case. Petitioners S. Sidney, a.k.a. Sidney, and Elizabeth L. Zilber resided in Cleveland, Ohio, when they filed their petition in this case. Petitioners Beno and Elaine M. Michel resided in Pepper Pike, Ohio, when they filed their petition in this case. Petitioner Stephen L. Kadish resided in Cleveland, Ohio, when he filed his petition in this

case. Petitioner Betty J. Schur resided in Beachwood, Ohio, when she filed her petition in this case. Petitioners John S. and Juanita L. Allerton resided in Annandale, Virginia, when they filed their petition in this case. Petitioners Richard B. and Jean K. Steuer resided in Shaker Heights, Ohio, when they filed their petition in this case. Petitioners Dave and Thelma Margolis resided in Cleveland Heights, Ohio, when they filed their petition in this case. Petitioners Sol J. and Harriet Roth resided in Beachwood, Ohio, when they filed their petition in this case. Petitioners Donald P. and Elaine M. Schneider resided in Chesterland, Ohio, when they filed their petition in this case. Petitioners Lawrence R. and Joan Weiss resided in Pepper Pike, Ohio, when they filed their petition in this case. Petitioners Allan M. and Constance Unger resided in

*Due to the agreement of the parties on certain issues, a computation under Rule 155, Tax Court Rules of Practice and Procedure, will be necessary in docket No. 6720-84.

Rancho Mirage, California, when they filed their petition in this case. Petitioners Leonard P. and Nancy G. Rome resided in Shaker Heights, Ohio, when they filed their petition in this case. Petitioners Byron S. and Joan L. Krantz resided in Aurora, Ohio, when they filed their petition in this case. Petitioners Charles P. and Gail Malitz resided in Pepper Pike, Ohio, when they filed their petition in this case.

Edward Lewis (Lewis) was a movie producer and president of Edward Lewis Productions, Inc. (ELP). During 1972 and 1973, Lewis conducted negotiations to endeavor to co-produce with the U.S.S.R. a film based on the story "The Bluebird.” Lewis envisioned co-producing a picture with the Soviet Union in which the Soviet Union would contribute the production elements and the American company would provide the key stars and director. By agreement dated April 23, 1973, ELP acquired from Louis M. Van Goitsenhoven-Maeterlinck the movie rights in and to the literary work entitled “The Bluebird." Lewis approached Robert H. Greenberg (Greenberg) and Harry N. Blum (Blum) to aid in financing the acquisition of the Maeterlinck rights for $50,000. Blum and Greenberg put up $25,000 for the acquisition of the Maeterlinck rights. An unrelated party put up the remaining $25,000. After Lewis acquired the literary rights to “The Bluebird,” he requested Blum and Greenberg's assistance in financing the entire film project.4

On December 5, 1973, ELP entered into an agreement with Cinema Studio "Lenfilm" V/O “Sovinfilm" to coproduce “The Bluebird” based on the Maurice Maeterlinck novel of the same name and the photoplay by Alfred Hayes and Alexei Kapler.5 The production of “The Bluebird” was the first co-production of a film by an American company with film companies of the Soviet Union. On the same date, ELP entered into a contract with “Sovexportfilm” with respect to the distribution of “The Bluebird.” Pursuant to the terms of the co-production agreement, ELP was to

*Blum and Greenberg arranged the financing of the motion picture "Executive Action," a film produced by Lewis. Cinema Ventures was the funding partnership for "Executive Action."

By agreement dated Nov. 29, 1972, ELP engaged the services of Alfred Hayes, as writer, to work on an adaptation for the screenplay of Maurice Maeterlinck's novel "The Bluebird."

provide the playwright, composer, director, the main actors, the producer, and several enumerated items of equipment. The Soviet company was to provide virtually all other elements necessary for the production of the film.6

Wenles is an Ohio limited partnership. Blum and ROHA Corp., a corporation owned by Blum and Greenberg, are the general partners of Wenles. Thirty-three investors became limited partners in Wenles.?

Prior to the years in issue, Blum was general manager of the Lionel Toy Division of General Mills and was President of Parkway Industries, a hobby and toy contract manufacturer. Subsequent to these positions, Blum headed the venture capital division of W.R. Berkley Co., a financial services company. While employed at W.R. Berkley Co., Blum met Greenberg who was then the senior vice president and executive vice president of Mercantile Industries, an American Stock Exchange Co.

From 1952 through 1965, Greenberg was employed by Heller International, a New York Stock Exchange company. During these years, he served in the positions of director, senior vice president, and general counsel. Prior to meeting Blum, Greenberg was involved in the financing of several motion pictures. Prior to the formation of Wenles, Greenberg formed a partnership known as Cinema Ventures, Ltd. (Cinema Ventures).8 Additionally, Greenberg and Blum formed Worldwide Productions, Ltd. (Worldwide Productions), an Ohio limited partnership. Blum and Greenberg served as Worldwide's general partners. By offering circular dated January 1974, units were offered in Worldwide Productions. Worldwide Productions' primary investment objective was to invest in feature-length motion pictures and other entertainment ventures. On May 31, 1974, an addendum to Worldwide's offering circular stated that “It

On Sept. 24, 1974, Bluebird Productions, Ltd. (BBP),was added to the co-production agreement between ELP and Lenfilm V/O Sovinfilm. However, on Aug. 28, 1974, BBP, contracted with Elizabeth Taylor to perform services as an actress in “The Bluebird."

"The general partners of Wenles contributed $500 for their respective general partnership interests. The 33 investors/limited partners purchased 60 partnership units at a cost of $5,000 per unit. The offering circular stated that the minimum participation was the purchase of two units ($10,000).

Management & Equity, Inc., was the general partner of Cinema Ventures, and Greenberg was the managing director of the partnership.

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