*53 P was a limited partner in a partnership formed to acquire and distribute a motion picture film. The partnership entered into a distribution agreement with D providing that the gross rentals from the exhibition of the film were to be deposited in a bank account from which withdrawals could be made only by the joint approval of the partnership and D. The funds were first to be used to pay certain distribution expenses incurred by D and to pay its fee for its services. In 1972 through 1976, the expenses exceeded the gross rentals. The partnership elected to compute depreciation on the film by use of the income forecast method. Held: Under the income forecast method as authorized by the Commissioner, such depreciation must be based on net income. Because the partnership elected to use such method and because it had no net income for 1975, the partnership is not entitled to any depreciation deduction for that year.
*132 OPINION
This matter is before the Court on the parties' cross motions for partial summary judgment pursuant to
*55 The Commissioner determined a deficiency of $ 9,195 in the petitioners' Federal income tax for 1975. The deficiency resulted from the disallowance of the depreciation deduction claimed by Alpha and from certain other adjustments not now before us. The petitioners, Lorne and Nancy Greene, husband and wife, resided in Los Angeles, Calif., at the time they filed their petition with this Court seeking a redetermination of such deficiency. They filed their joint Federal income tax return for 1975 with the Internal Revenue Service Center in Fresno, Calif. Mr. Greene will sometimes be referred to as the petitioner.
*133 In 1975, the petitioner was a limited partner of Alpha, a New York partnership. Alpha was organized in 1972 for the stated purpose of purchasing the sole and exclusive right to exhibit, distribute, and otherwise exploit the motion picture "Ten Days' Wonder" (the film) in the United States, portions of Canada, and certain other limited areas of the world. The partnership purchased the film from Les Films La Boetie, the French owner of the film, in 1972 for a stated price of $ 2,250,000. 2
*56 After purchasing the film, Alpha entered into a distribution agreement with Levitt-Pickman Film Corp. (Levitt-Pickman). The agreement granted Levitt-Pickman "each and every right, license and privilege with reference to the Picture and the exploitation thereof" for a period of 10 years in the territory purchased by Alpha, with certain minor exceptions. In return for distributing the film, Levitt-Pickman was to receive a distribution fee of 30 percent of the gross receipts from the theatrical exhibition of the film. Additionally, Levitt-Pickman was to be reimbursed for certain distribution expenses.
The distribution agreement further provided that Levitt-Pickman was to deposit all gross receipts which it received from exhibitors into a bank account to be opened by Alpha, entitled the "Ten Days' Wonder Special Account" (special account). Withdrawals could be made from this account only over the joint signatures of representatives of both Alpha and Levitt-Pickman. Insofar as is relevant, the distribution agreement provided that until the gross receipts exceeded $ 1 million and the net receipts 3 exceeded $ 625,000, the gross receipts were to be withdrawn from the account and distributed*57 according to the following order of priority:
(1) To Levitt-Pickman for unrecouped distribution expenses;
(2) Balance, if any, to Levitt-Pickman for distribution fees;
(3) Remaining balance, if any, to Alpha.
*134 Levitt-Pickman began distributing the film in 1972. It premiered in several major cities and, over the next few years, was exhibited in more than 100 motion picture theatres in 76 cities throughout the country. Pursuant to the distribution agreement, Levitt-Pickman deposited in the special account the gross receipts as they were received from the theatres for the exhibition of the film. In 1972, Levitt-Pickman incurred reimbursable distribution expenses of $ 104,091.83, and by the end of 1973, such expenses totaled $ 111,578. 4
*58 For 1972 through 1976, Alpha filed returns on a calendar year basis and used the cash method of accounting. On such returns, the following amounts were reported:
| Item | 1972 | 1973 | 1974 | 1975 | 1976 |
| Gross receipts | $ 34,901 | $ 16,006 | $ 2,920 | $ 6,049 | $ 902 |
| Distribution | 34,901 | 16,006 | 2,920 | 6,049 | 902 |
| expenses | |||||
| Other expenses | 9,442 | ||||
| Depreciation | 1,358,458 | 480,043 | 51,458 | 146,653 | 7,719 |
Because the gross receipts for 1972 through 1976 totaled $ 60,778, Levitt-Pickman was reimbursed over such years for only that amount of its distribution expenses.
The depreciation deductions claimed on such returns were computed by use of the income forecast method. On the returns, the calculation of the deductions were set forth as follows:
| 1972 | 1973 | 1974 | 1975 | 1976 | |
| Current exhibition receipts: | |||||
| Cash | $ 34,901 | $ 1,397 | $ 1,920 | $ 6,049 | $ 902 |
| Accrued | 14,609 | 4,433 | |||
| 49,510 | 5,830 | 1,920 | 6,049 | 902 | |
| Total of current and future | |||||
| receipts | 74,500 | 8,330 | 7,820 | 6,367 | 902 |
| Unrecovered basis of film | 2,044,331 | 685,873 | 205,830 | 154,372 | 7,719 |
| Depreciation rate | |||||
| (Ratio of current exhibition | |||||
| receipts to total current | |||||
| and future receipts) | X 66.45% | X 69.99% | X 25% | X 95% | X 100% |
| Depreciation for year | 1,358,458 | 480,043 | 51,458 | 146,653 | 7,719 |
*59 *135 On their Federal income tax return for 1975, the petitioners claimed a deduction for a loss attributable to the operation of Alpha. Such loss resulted from the depreciation deduction claimed by Alpha in that year. In his notice of deficiency, the Commissioner determined that Alpha was not entitled to such depreciation and disallowed the deduction claimed by the petitioners.
In relevant part,
After an extensive study and consideration of the matter, the Service has concluded*61 that the so-called "income forecast" method is readily adaptable in computing depreciation of the cost of television films without producing any serious distortion of income. This method requires the application of a fraction, the numerator of which is the income from the films for the taxable *136 year, and the denominator of which is the forecasted or estimated total income to be derived from the films during their useful life, including estimated income from foreign exhibition or other exploitation of such films. The term "income" for purposes of computing this fraction means income from the films less the expense of distributing the films, not including depreciation. This fraction is multiplied by the cost of films which produced income during the taxable year, after appropriate adjustment for estimated salvage value. * * *
If in subsequent years it is found that the income forecast was substantially overestimated or underestimated by reason of circumstances occurring in such subsequent years, an adjustment of the income forecast for such subsequent years may be made. * * *
[Emphasis added.]
By
*63 In most cases involving the distribution of motion picture films, the owner or producer includes in gross income only "net receipts." See
In his motion for partial summary judgment, the Commissioner takes the position that the distribution agreement between Alpha and Levitt-Pickman did not substantially differ from the standard distribution agreement, despite the arrangements with respect to the special account. He argues that because the gross receipts from the exhibition of the film were less than the distribution expenses, Alpha had no right to any of such receipts. On the other hand, the petitioners moved for a partial summary judgment in their favor on the grounds that the gross receipts were includable in the gross income of Alpha, and they urge us to hold, as a matter of law, that they are entitled to apply an income forecast method utilizing such gross receipts in the income forecast fraction. If we deny their motion, the petitioners request, in the alternative, that they be given a trial and an opportunity to prove that their method is a reasonable method for computing the allowable depreciation.
When Alpha filed its return for 1972, it had to select a depreciation method for the film. It could have used the straight line method (sec. 162(b); cf.
In
Likewise, this Court rejected another attempted variation in the use of the income forecast method in
In both Siegel and Wildman, the owners of films elected to compute their depreciation deductions by use of the income *139 forecast method, but in both cases, they sought to vary the method prescribed in
petitioners herein chose a clearly acceptable method (income forecast) but simply used such method improperly. Even the case upon which petitioners rely recognized that once a taxpayer selects an acceptable method of depreciation, he may only change that method with the consent of respondent. [
Thus, in both Wildman and Siegel, we held that since the owners of the films had elected to compute depreciation by use of the income forecast method, they had to use the method as prescribed by the Commissioner.
Moreover, the use of the income forecast method as prescribed by the Commissioner has the advantage of assuring similarity of tax treatment for owners of films. If the owner uses a standard distribution agreement, his depreciation deduction is based on the net income received by him. An owner may distribute his own film or may employ an agent, 8 and in such case he will be treated in a like manner if he is required to compute his depreciation on the basis of his net income.
*69 The petitioners have requested an opportunity to prove that their method is reasonable; yet, they neither used a method consistently nor used the method now urged by them. In 1975, Alpha reported actual cash receipts as gross income and used that amount as the numerator of the income forecast fraction. However, in 1972 through 1974, Alpha reported actual cash receipts as gross income but calculated the numerator under an accrual method, adding accrued (but not yet paid) receipts to only those cash receipts earned during the year. Because Alpha reported income under the cash receipts method, it was *140 clearly improper for Alpha to use accrued receipts in computing its income forecast (
After a review of all the arguments, we have concluded that the petitioners have failed to establish that there is any reason for a trial. Because Alpha elected to use the income forecast method, it was required to use that method as prescribed by the Commissioner in the absence of requesting and securing his approval to change its method. *70 Moreover, Alpha never actually used the method urged by it, and its method was clearly improper. Thus, we hold that, as a matter of law, Alpha was required to use net income in the numerator of the income forecast fraction. 9 There is a question as to whether the gross receipts deposited in the special account constituted gross income received by Alpha, but in view of our conclusion that only net income was to be used in the numerator of the income forecast fraction, and in view of the fact that Alpha had no net income in 1975, we need not decide whether the gross receipts constituted gross income of Alpha. Consequently, on the record before us, we can and do hold that Alpha was entitled to no depreciation deduction for 1975, and we will grant the Commissioner's motion for a partial summary judgment.
*71 An appropriate order will be issued.
Footnotes
1. Any reference to a Rule is to the Tax Court Rules of Practice and Procedure.↩
2. The purchase price was paid with cash of $ 250,000 and delivery of a $ 2 million nonrecourse promissory note, payable 10 years from closing, at an interest rate of 4 percent per annum.↩
3. For this purpose, the net receipts were defined as "the balance of Gross Receipts remaining, after deducting all local cooperative advertising costs incurred in connection with the Picture therefrom."↩
4. The record is bare as to the amount of distribution expenses incurred by Levitt-Pickman in subsequent years.↩
5. All statutory references are to the Internal Revenue Code of 1954 as in effect during the year in issue, unless otherwise indicated.↩
6.
Sec. 167(b)↩ authorizes the use of the straight line method, the double declining balance method, and the sum of the years digits method.7.
Bizub v. Commissioner, T.C. Memo 1983-280">T.C. Memo. 1983-280 ;Perlman v. Commissioner, T.C. Memo. 1983-166↩ .8. See R. Kopple & B. Stiglitz, Taxation of the Motion Picture Industry 6-7 (1978).↩
9. The petitioners argue that even if Alpha was required to use only net income in the fraction, it actually had net income in 1975, and in support of that assertion, the petitioners submitted the affidavit of Morris Engel. However, there are substantial questions as to the weight to be given such affidavit because it did not include the papers with respect to which Mr. Engel attested and because his statements would not constitute admissible testimony.
Rule 121(d) ;Ruffa v. Johns, 11 Fed. R. Evid. Serv. (CBC) 1195">11 Fed. R. Evid. Serv. 1195 (W.D. Pa. 1982) (affidavit unacceptable under the "best evidence rule"); C. McCormick, Evidence, sec. 233 (2d ed. 1972); seeUnited States v. Ratliff, 623 F.2d 1293">623 F.2d 1293 (8th Cir. 1980);Herzog Bldg. Corp. v. Commissioner, 44 T.C. 694">44 T.C. 694↩ (1965). Moreover, the yearend balances to which he attested do not establish that the receipts each year exceeded the payments during that year.