Santa Monica Pictures, LLC, Perry Lerner, Tax Matters Partner - Page 187

                                        -260-                                         
          million receivable on its contribution and had no basis in that             
          receivable when it was sold to TroMetro in 1997.180  Consequently,          
          we hold:  (1) SMP is not entitled to a $147,486,000 capital loss            
          on its sale to TroMetro of the $150 million receivable in 1997;             
          (2) SMP is not entitled to capital losses of $11,647,367 and                
          $62,237,061 on its sales to Imperial of portions of its Corona              
          membership interest in 1997; (3) SMP is not entitled to a                   
          $80,190,418 capital loss on its sale to TroMetro of the $81                 
          million receivable in 1998; and (4) Corona is not entitled to a             
          capital loss on its sale to TroMetro of the $79 million                     
          receivable in 1997.181                                                      





               180 We also conclude that the step transaction doctrine                
          applies to recast the banks’ contributions of the SMHC                      
          receivables and stock as direct sales of those properties from              
          the banks to Somerville S Trust, followed by Somerville S Trust’s           
          contributions of the SMHC receivables and stock to SMP in                   
          exchange for preferred interests in SMP.  Presumably, Somerville            
          S Trust would be entitled to a cost basis totaling $10 million in           
          the SMHC receivables and stock, which would carry over to SMP               
          under sec. 723.  The parties have not addressed the manner in               
          which the $10 million basis amount would be divided among the               
          receivables and stock; because we decide on alternative grounds             
          that SMP received a zero basis in the SMHC receivables, we need             
          not decide this issue.                                                      
               181 Corona claimed a $78,768,955 capital loss on this                  
          transaction.  We do not have jurisdiction over the $74,671,378              
          portion of the loss that Corona claimed on its 1997 return.  See            
          supra note 7.  As a practical matter, the effect of our holding             
          is to disallow the $4,097,577 portion of the claimed loss that              
          flowed through to SMP.                                                      





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