Santa Monica Pictures, LLC, Perry Lerner, Tax Matters Partner - Page 225

                                        -295-                                         
          worthless when those assets were contributed to SMP.  In                    
          addressing that issue, Shearman & Sterling discusses Los Angeles            
          Shipbuilding & Drydock Corp. v. United States, 289 F.2d 222 (9th            
          Cir. 1961) and Higgenbotham-Bailey-Logan Co. v. Commissioner, 8             
          B.T.A. 566 (1927), cases which we have discussed supra in the               
          context of the worthlessness issue.  In concluding that the SMHC            
          receivables were not worthless under those cases, Shearman &                
          Sterling relied on the faulty factual assumption that the EBD               
          film rights and Carolco securities had considerable value.209  The          
          memorandum provided the following analysis:                                 
                    Debt of a corporation, such as * * * [SMHC], which                
               has valuable assets that could be sold or exploited to                 
               pay off a portion of the debt is certainly not                         
               worthless.  * * * [SMHC] has retained extensive films                  
               rights and properties which had been acquired by Credit                
               Lyonnais in connection with its lending activities.                    
               Those rights include distribution rights to                            
               approximately sixty-five films, sequel rights and film                 
               development rights.  In addition, * * * [SMHC] also                    
               owns approximately $60 million (face value) of the                     
               securities of Carolco, Inc., which is engaged in                       
               bankruptcy proceedings.  The Company [SMP] is actively                 
               exploiting * * * [SMHC’s] film rights and the Company                  
               has commenced discussions with a number of parties to                  
               acquire additional film libraries.  The Company is also                
               pursuing its rights to maximize its recovery of its                    
               investment in Carolco.                                                 
                    We understand that * * * [SMHC’s] rights in the                   
               Carolco investment have been valued at approximately                   
               $11 million.  The projected income stream from the next                
               cycle of * * * [SMHC’s] film rights has been estimated                 
               to have a present value of approximately $29 million                   
               and a future value in excess of $35 million.  This                     

               209 The Shearman & Sterling memorandum does not discuss                
          whether the NOLs in SMHC had any value.                                     





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