Unpublished Dispositionnotice: Seventh Circuit Rule 53(b)(2) States Unpublished Orders Shall Not Be Cited or Used As Precedent Except to Support a Claim of Res Judicata, Collateral Estoppel or Law of the Case in Any Federal Court Within the Circuit.frederick H. Prince and Diana C. Prince, Petitioners-appellants, v. Commissioner of Internal Revenue, Respondent-appellee, 937 F.2d 610 (7th Cir. 1991)

ORDER

Frederick and Diana Prince appeal the tax court's finding of a deficiency in their federal income tax liability for 1976 in the amount of $23,715. The tax court determined the deficiency on the basis of its denial of certain deductions to a business partnership organization in which Frederick Prince¹  invested. Prince further appeals the tax court's imposition of interest (penalty), holding that the partnership's excessive deductions caused a substantial underpayment of taxes due to tax motivated transactions under 26 U.S.C. § 6621(c). We affirm for the reasons articulated in the tax court's opinion.

Review of the tax court's findings is deferential, and we will not disturb them unless they are clearly erroneous. Cf. Durkin v. Commissioner, 872 F.2d 1271, 1276 (1989). Based upon the record in this case, we are convinced that the tax court's findings are proper. We agree with the tax court that the partnership's alleged purchase of "A Matter of Time" was an acquisition of an intangible contract interest rather than ownership of the film, since the partnership received merely a right to income with no control over the film and that the non-recourse note was properly excluded from the basis, as it lacked economic substance. See id. at 1275 ("It is axiomatic that the substance of a transaction rather than its form controls for federal tax purposes."). Since the non-recourse note was not bona fide debt (the only apparent purpose of the note was to raise the partnership's depreciable basis in "A Matter of Time"), the tax court properly found that the purported interest payments on it were investments in the intangible contract rights and thus includable in the depreciable basis rather than deductible as interest payments. Further, in view of the tax-motivated purpose of the non-recourse note, it was clearly not includable in the investment tax credit base.

In dealing with the appropriate depreciation method, the tax court noted that the taxpayers failed to demonstrate error²  in the Commissioner's determination that the income-forecast method³  was the correct method or to claim that the now-asserted straight-line method⁴  should be the alternative to their erroneous usage of the sliding-scale method.⁵  Notwithstanding Prince's reliance upon the tax court's assertion in Durkin v. Commissioner, 87 T.C. 1329, 1373 (1986), aff'd, 872 F.2d 1271 (7th Cir.), cert. denied, 110 S. Ct. 84 (1989), that "the straight-line method of depreciation is to be used in all cases where the taxpayer has not adopted a different acceptable method of computing the depreciation expense of a depreciable asset," we did not address that issue when affirming Durkin. We also decline to so hold today. Since the income-forecast method is an acceptable method that realistically relates the depreciation deductions to the income produced in the year the deduction is claimed, the tax court did not err as a matter of law in applying it.

The tax court was not clearly erroneous in denying the partnership deductions for expenses incurred in regard to the production services films, as the partnership performed none of the production services. And finally, Prince has failed to cite authoritative case law for his proposition that the tax court may not impose penalty interest in response to a motion or to demonstrate that such interest was appropriate here. Penalty interest pursuant to 26 U.S.C. § 6621(c) was proper in view of the tax motivated nature of the transactions at issue, which were largely a sophisticated attempt on the part of the partnership at constructing a private tax shelter. While Congress has the authority to designate what business deductions are legitimate tax shelters, private individuals do not. In the absence of a congressional mandate, we refuse to create a tax subsidy of this nature for the motion picture industry. The decision of the tax court is

AFFIRMED.