*1 HUG, GOODWIN, SNEED, argue The defendants now that introduc- Before: prejudicial Judges. tion of the word “hits” was so as Circuit warrant a their reversal of the convictions. However, because the court district sustained ORDER Davis, 761, objection, a valid see 932 F.2d at independent and because the evidence Pursuant to the order of remand of the against the defendants overwhelms whatever Reno, Supreme United States Attor Court incriminating may effect this statement have General, ney et al. v. Catholic Social Servic id., isolation, reject argu- had see we — es, Inc., al., U.S.-, 2485, et ment. (1993), this ease is remanded L.Ed.2d 38 proceedings to the district court for further alleged prose- The final4 instance of opinion. consistent with Agent Hough’s cutorial misconduct involves testimony appeared trial that Galaz’s name drug ledger. request Defense counsel’s
that the answer be stricken was denied. Be during
cause this statement occurred defense questioning Agent Hough,
counsel’s we fail prosecutorial it is tantamount to see how were, indepen
misconduct. Even if it against
dent evidence Galaz overwhelms incriminating
whatever effect this statement CORPORATION, Accordingly, TRANSAMERICA have had isolation. Id. Plaintiff-Appellant, we conclude that the court district did not denying abuse its discretion the motion for v. a mistrial. America, UNITED STATES of
AFFIRMED. Defendant-Appellee. No. 90-16674. Appeals, United States Court of Ninth Circuit. 10, Argued and Submitted Dec. 1991.
LEAGUE OF UNITED LATIN 5, Submission Withdrawn Feb. 1992. CITIZENS, AMERICAN et al., Plaintiffs-Appellees, Resubmitted Feb. 1993.
v. July Decided 1993. DEPARTMENT U.S. OF IMMIGRATION SERVICE,
AND NATURALIZATION
Defendant-Appellant.
No. 88-6447. Appeals,
United States Court
Ninth Circuit.
July rejected argument previously we 4. Because the defendants’ not address that here. claim, II.B., supra, Bruton violation see we do *2 Wolfe, Jr., Orrick, Herrington
Cameron W. Sutcliffe, Francisco, CA, plaintiff- & San appellant. Division, Rosenberg, Tax
Kenneth W. U.S. Justice, DC, Dept, Washington, for defen- dant-appellee. HUG, HALL,
Before: O’SCANNLAIN, Judges. Circuit HUG, Judge: Circuit appeal This is an Transamerica from a judgment disallowing a refund income tax- subsidiary, to its former Unit- es attributable (“UA”), pro- Corporation for the ed -Artists acquired duction of films that it and distrib- uted for exhibition. The Internal Revenue (“IRS”) assessed income tax deficien- Service years cies for disallowed for the 1971, 1972, paid and 1973. Transamerica and sued for a refund. The additional tax interpretation on is the of a appeal sole issue in Rev.Rul. 60-358 for formula established production of the cost of and motion films. The television interpretation on the question of focuses proper costs that are treatment percentage of the income earned paid as a from the exhibition of the films. district summary judgment court entered Government, disallowing the refunds. 670 F.Supp. reverse. 1454. We in the district court was based Jurisdiction 1346(a)(1) appellate § our on 28 U.S.C. jurisdiction is based on 28 U.S.C. I. issue, years in Transamerica
For UA, produc- which contracted for owned picture films and distributed tion of motion The income tax due on them for exhibition. of the films is profit from the distribution the matter contention. upon deficiency formula based the forecast of future paid assess 64-273, In Rev.Rul. 1964-2 C.B. actions for refund of income. and filed two
ments years acknowledged that this method of paid for the the IRS and interest taxes calculating depreciation applicable in also is originally actions and 1973. These *3 issues, picture which have since motion films. numerous volved dispute involves the de resolved. The been method, taxpayer must Under which expense attributable to films preciation forecast the total-amount of income that and for which income was were distributed produce over its entire motion will years. in tax The actions received those then The is allowed lifetime. to the court were consolidated and submitted year in each take a deduction summary for on cross-motions decision proportion income received to the amount of stipulated facts. The judgment on based amount of year in relative to the total issue, strictly legal appeal, being a issue on income forecasted. novo review. to de subject interpretation 60-358 is The of Rev.Rul. dispute. ruling The
II. the crux of this revenue pertinent part in provides as follows: parties with third contracted UA It come to the attention of the Inter- films it distributed. It-has production of the writers, that the methods of producers, nal Revenue Service pay certain contracted in directors, actors, computing a flat amount described sec- others 167(b) are in most eases gross film’s future tion of the Code plus percentage a of the applied percentage por inadequate when to television The receipts profits. or net films, resulting in income “par- a distortion of on payments are known as tions of these deriving period, taxpayers returns filed in- During this UA also ticipations.” bargaining agree come from such films. distortion is This operated under collective writers, strikingly a uneven flow of in- representing ac caused guilds ments with come, by groups tors, directors, programs earned of with- others who contributed to series, films, resulting required from contract re- which of the strictions, percentage all methods of distribution and au- payment guilds of to those programs____ appeal dience of the [T]he from the television exhi revenues it received taxpayer’s pay usefulness of such assets each film it distributed. These bition of is measurable “residuals.” trade or business ments are known as produces income it and cannot be ade- profit makes on the distribu- that UA quately passage measured of time revenue it earns from tion of a film is the Therefore, avoid alone. order to distor- exhibition, under the costs incurred less tion, depreciation must follow the “flow of production and its distri- these contracts for income.” produced expenses. The film that is bution producers of television films have capital asset. The Some is considered to be (“IRC”) recovery” provides used the so-called “cost method Internal Revenue Code reporting By their income. use of this may deduct the cost of taxpayers not method, reported capital no taxable income is un- producing a asset purchasing or til the income from the films exceeds the are incurred. In- year in which the costs However, stead, thereof. such “cost recov- be allocated means the costs must acceptable for period ery” method is not Federal depreciation expense over the dur- produce purposes. in- income tax ing capital asset will which the objective evenly allocate is to come. study an extensive and consider- After with the flow possible the cost of the asset matter, has con- ation of the the Service produces. it .income that the so-called “income forecast” cluded readily adaptable computing recognition special circumstances method is films, of television films depreciation of the cost the IRS issued involved with television producing any serious distortion of 60-358, allowing without 1960-2 Rev.Rul. C.B. requires applica- This method on a depreciation expense to be calculated incpme. fraction, expense numerator of which income from the films less the tion of the films for the taxable the income from films, distributing including depre- not is the the denominator of which year, and multiplied by ciation. This fraction is income to be or estimated total forecasted produced during cost of films which income during the films their useful derived from year, appropriate adjust- the taxable after life, from for- including estimated income salvage ment for estimated value. The exploitation of eign exhibition or other “income forecast” method be illustrat- pur- “income” for films. The term such fraction means ed as follows: poses computing produced television films which income Example: Certain dollars, the first taxable cost 800x after within adjustment salvage appropriate for estimated value. *4 year therefrom for the The income first taxable was dollars; dollars; 600x second 150x and third year, 300x dollars. Total estimated income to be from the films 1200x dollars. derived = (first x year’s dollars 400x 600x dollars 800x dollars depreciation) 1200x dollars = (second x year’s 800x dollars lOOxdollars 150x dollars depreciation) 1200x dollars (third x year’s dollars 200x dollars 300x dollars 800x depreciation) 1200x dollars expenses evenly tion in to match with ruling goes explain on to how income order The adjusted subsequent in income. forecasts can be forecast years if it is found that the income III. substantially overestimated or underesti-
was application The issue before us is the mated. participations The costs of the and residu- above-quoted. The es- als, the basic formula actuality, clearly produc- in costs of are question the “cost of the ing expenses sential is whether film in the and not incurred percentage general- films” is to include the cost Transamerica followed distribution. ly accounting principles utilizing The tax- “participations” accepted and “residuals.” is; spread it is these payer contends it the IRS contends the “income forecast method” proportion- practical including partic- participation effect of and residual costs not. The income ately over the flow of the net derived ipations and residuals in the cost factor is Furthermore, produe- from the film.1 this seems to permit of all costs of and then amortized and Certified Public Ac- lifetime film revenues 1. The American Institute of study through expensed using special the income forecast method. conducted a countants costs, including production appropriate spread the most Both the total committee to determine residuals, accounting the flow of income. method of for motion evenly. study, they These methods are identical part that discussed the income As a although impact the income statement ipation and the manner in their on and residual liabilities taxpayer’s they bal- they have different effects on should be treated. The Committee which stipulation of facts in this case ance sheet. The three methods. The "contract” considered method, only parties only expensed issue between "[t]he the costs are states: which depreciation pur- a film for gross receipts profits a level whether the basis of when or net reach projected participation poses and requires participations include that the and resid- which yet payable.” due and paid, residual costs that are not be is the method the Government uals Thus, discussing appli- appeal, an we are been used Trans- contends should have methods, capitalization The Com- "capitali- method. cation of america. The other two method, pro- and the American Institute mittee recommended zation” method and the "accrual” eventually Certified Public Accountants participation residual liabilities vide that and capitalization adopted as a standard either based on the forecasts should be estimated production, including participations imperative in accord with the of the reve- costs of be residuals, distortion, must ruling that “in avoid and be included. nue order to in- depreciation must follow the ‘flow of The Government contends that because ” Rev.Rul. come.’ 60-358. the amounts of the and residu- uncertain, they 60-358, not included als should be explaining Rev.Rul. depreciated, in the cost to be but rather anticipated expenses of distribu- deducts they deducted when should be calculating revenue forecast to tion payable various used, due under the become production but allocates cost of approach contracts.2 Government does recognized un- depreciation. There are produc- in spreading not result the costs of gross reve- certainties formula. evenly over the as does tion flow of income an estimate ex- nue is and the distribution the American Institute of Certified Public Thus, penses are estimates. the net revenue approach, Accountants which was utilized estimate, in the formula but is factor is an This Transamerica. is demonstrated accepted calculating depreciation. for use in examples following using the Rev.Rul. 60-358 cost of The fact element of the formula. attributed dependent revenue upon residuals is the net Assume that net revenue is preclude not estimate should the inclusion of $1,200,000, pre-release cost is *5 element in The Gov- that cost the formula. $600,000. projected profit would be agree that ernment and Transamerica $600,000. Further assume that participations amount of and residuals ipations require payments residuals accurately calculated from the net income Thus, $200,000. profits, being 33Wo Thus, pro- projection. $200,000 with the net income $600,000 pre-release plus costs of jection being given factor participations equal and residuals would participations $800,000. $300,000 are also a Finally, residuals assume that given factor that formula. In order for years is for four realized in income net operate designed, the formula to so as to expenses. of distribution Transamerica’s spread production evenly the costs application and the Government’s of the Rev. film, of income all the flow derived from the Rui. 60-358 formula be as follows: would Application Transamerica’s Depreciation Net Total Income Cost First Year = $300,000 $800,000 $200,000 $1,200,000 Second Year $800,000 = $300,000 $200,000 $1,200,000 Third Year = $300,000 $800,000 $200,000 $1,200,000 Fourth Year $300,000 $800,000 $200,000 $800,000 $1,200,000 rejected ordinary expenses accrual method and meth- contract er these costs deducted as od. practical or as makes no difference they upon gross when are based revenue. It is 2. When are based on and residuals depen- when the and residuals are revenue, gross ordinary their ex- treatment as profits upon net arises dent that the distinction penses practical would make no they contractually do not due because become they difference because would become due and pre-release produc- payable until costs of gross payable the annual revenue is received. recovered, is, have been until the cumu- tion that agrees they The Government would become that costs, pre-release lative net revenue exceeds properly accrued though deductible even Thus, subsequent year. resulting profit. paid in a wheth- Application
Government's
Depreciation
Expense
Total Cost
Net Income
$600,000
$300,000
$150,000
x
$1,200,000
Year
Second
,
$600,000
$150,000
x
$300,000
$1,200,000
Third Year
$300,000
$600,000
$150,000
$100,000
x
+
$1,200,000 ,
Fourth Year
$300,000
$600,000
$150,000
$Í00,000
x
+
$600,000
$200,000
$1,200,000
apparent
pertinent
under
A brief discussion of the
statuto
It
Transamerica’s
167(a)
depreciation,
produc-
ry
provisions
method of
Section
warranted.
proportionately to the flow of
provides
tion is allocated
the Internal Revenue Code
income,
intent
which fulfills the
of Rev.
sháll
there
be allowed as
de
per-
Rui. 60-358. The Government’s method
duction a reasonable allowance for the ex
*6
due
the deduction of the element of cost
mits
haustion,
tear,
obsolescence,
wear and
and
of
“con-
participations and residuals on the
to
property
in a trade or business or
used
held
method,
tract”
which allows the deduction
, production
for the
of income. 26 U.S.C.
only
pre-release costs of
expense
an
after the
167(a).
167(g) provides
§
that
Section
de
Thus,
$600,000
the
have been recovered.
preciation
are determined
ref
deductions
production cost does
deduction of the total
adjusted
provided in
erence to the
basis
sec
income,
of
which is the
not follow the flow
determining gain on
sale or
tion 1011 for
the
rejected by
was
the
reason this method
property.
disposition
other
of
26 U.S.C.
Accountants
American Institute of Public
167(c) (1990)),
§
167(g) (redesignated
§§
depreciating these
capitalizing
favor of
(1988).
1011 refers to section
1011
Section
costs.
thqt
1012,
proper
of
provides
which
the basis
.
ty
property
the cost of such
26
shall be
IV.
1011,
§§
The
here is
issue
U.S.C.
argues
that
the
The Government
and residuals
whether
included in
ipations and residuals cannot be
part
the cost of the films.
were
of
depreciation- because the
the cost basis for
paid
as the amount
Cost is defined
contingent
participations and residuals are
property.
property in cash or other
Treas.
profit.
a net
on whether
the film makes
(1992).
§
For an accrual tax
Reg.
1.1012-1
However,
allowing
for not
contin-
the reason
generally
paid
amount
includes
payer, the
gent
part of the
basis
liabilities to fund
property
when
that encumber
liabilities
pertain to this situ-
does not
acquired,
that are assumed
property In-
mandated an
ation where the IRS has
acquiring
property.
taxpayer in
depreciation.
come Forecast Formula for
Commissioner,
1,
331 U.S.
67
v.
Crane
major
in the non-formula cases
S.Ct.
concern
(1947);
1047,
Com
Western
(1974).
the inclusion of
1266,
involve situations
which
597,
Under
1269
505 F.2d
the cost basis would
contingent liabilities in
however,
that are contin
standably,
liabilities
on costs
permit depreciation deduction
ordinarily
occur are
gent and
never
See, e.g., Colum
might never be incurred.
so as not to
the cost basis
excluded from
Commissioner, 42
Ry.
v.
bus
Greenville
See
phantom
costs.
allow
(where
(1964)
834, 849,
1354
1964 WL
T.C.
Waddell,
at 266. The Government
841 F.2d
subject
a
acquired property
to
petitioner
contingent
where
points to several cases
subject
of which was
mortgage, the amount
part
as a
of the cost
disallowed
costs were
mortgage was not allowed
negotiation,
to
depreciated.
to be
basis
curiam,
basis),
per
358
to be added to
aff'd
Commissioner,
367,
Lemery
52 T.C.
v.
(5th
denied,
827,
Cir.), cert.
385 U.S.
F.2d 294
curiam,
(1969),
per
451
1536
1969 WL
(1966);
aff'd
Albany
1369
deprecia
Income Forecast method for
incurred. The
may never be
expense that
anof
fol
Properties,
tion set forth
has the
Hughes
v.
See, e.g.,
States
United
2092,
Proposition 1: “The
593,
lowing feature noted
Inc.,
90 L.Ed.2d
106 S.Ct.
476 U.S.
depreciation
always
Dynam
cumulative
to date is
less
(1986),
States v. General
United
569
Simply
costs to date.”
95 than the cumulative
Corp., 481 U.S.
ics
stated,
that the
neces
(1987);
Airways, Inc. v.
the reason is
revenue
L.Ed.2d
World
sary
produce
and resid
Commissioner,
1974 WL
62 T.C.
(9th Cir.1977).
included in
uals included
the cost basis is
(1974),
If the net income is increased $1,200,000 $1,000,000, $1,800,000, depreciable of the calculation yielding profit of 33)é% year would be as follows: profit of with the same
$300,000 $1,000,000 $166,000 x $1,800,000 desirability years matching mere of with
Regardless of the number of projected necessarily taxpayer’s or the which the net income is income sustain a de- profits upon percentage of net which the taxpayer’s If of duction. method ac- based, are income, and residuals counting elqarly reflect does not total deduction will decrease as impose a method that does. Id. IRS increases, income case, however, provided the IRS has in the mathematical calcula- demonstrated production the costs of of a method which Appendix. in provided tions depreciated, provided and has film must be which is to be method Thus, including participations and re- conclude, Supreme calculated. We as the in can- in the cost factor the formula siduals that, instance, Hughes, in in this that exceeds Court did not result total costs, front-loading actual nor can it result of and residuals the inclusion early the total-costs in the justified. of It in the cost basis is follows years. operation fulfills of the formula rationale of the IRS’s own formula. certainty required policy under section Treasury regulation An reflects IRS applica- as the “all-events” test 1012 as well principles. general application of these 461.4 ble to section accounting A method of which reflects application generally accepted consistent V. accounting particular trade principles general followed the accepted in accordance with or business ly accepted accounting principles recognized practices in that trade or conditions Public by the American Institute Certified ordinarily regarded business will including participations Accountants income, provided clearly reflecting all to be residuals the costs of gross expense income and items of annually. recognize, howev depreciated We consistently year. from treated er, following accepted generally account 1.446-1(a)(2) (1992). Treas.Reg. ing principles accounting pur for financial necessarily poses does not assure VI. *9 recognized for tax accounting method will be that in for Rev.Rul. 60- Inc., We conclude order Hughes Properties, 476 purposes. See intended, spread operate so as at Nor 358 to at 2097. does U.S. depreciated projections in the cost of the film to be included 4. We note that if total net income greater because the total net income depreciation will be understated there will be a understated projected The Rev.Rul. 60- pre-release is underestimated. costs because the life of the film is However, adjustments provision periodic of the anticipated this is 358 in effect shortened. projections the contin- any net income assures due to inclusion of total in the formula and is not fact, deprecia- accuracy apportionment of the participations ued and residuals. costs of net income. costs to the flow of tion of the total amount of the and residuals
1371 APPENDIX residuals of the the cost income the films of net the stream The INCOME FORECAST METHOD participations and resid- cost of produce, the Forth FOR DEPRECIATION Set in the cost of the films included uals must be by Transamerica equation. Rev.Rul. 60-358 in the reflected Suppose total cost these costs inclusion of result in depreciated cannot the films to be = profit participation x and residuals in excess of depreciation deduction a total percentage, Furthermore, it cannot result costs. actual = R the total lifetime net reve- depreciation deduction disproportionate in a nues, of these costs early years. The inclusion depreciated clearly to be in the total costs = through r the cumulative net revenues taxpayer. of the the taxable income reflects year, current Therefore, remand to the we reverse and = depreciation D the cumulative taken as thus to allow the refund court district through prior year, appropriate al- together with calculated interest.5 lowance for film. pre-release costs of the C by Then definition: REMANDED. REVERSED Depreciation for the current II O + x(R C) - D] - [1] Cumulative to date II II II í-i|P3 ¡L,|tá filtó O w O t-i + iniM + x)C x(R C) (R C)x - + rx D [1"] - - ] - D [1'] [2] S-dtá - (R C)x II o + [2'] 5-i|Ph x)C II + rx [2"1 T-H _ íh|Ph Comments appeal apply- in this is to determine this case. Our task does not contest the fact 5. The dissent opinion ing application of the formula both for the IRS formula as set forth in this the correct deducting taxpayer precedent. costs that taxpayer cannot result in the and for future As Rather, argues brief, that the it pointed opening are never incurred. out in its problem. timing of the deduction is the applica- reveals that Transamerica's the record point misses the in its discussion dissent deprecia- forecast method of tion of the income "timing the “time value of of the deduction” and by majority film utilized of other tion has been claiming money,” apparently it results in excess specifically approved companies and was early years. See Dissent at 1373. at [Brief Warner Brothers. Commissioner for by analysis, by example, and we have shown As Furthermore, noted, as we have 9.] n. the inclusion mathematical approved the American Institute of method is basis not and residuals in appropriate as an method Public Accountants only cannot result in the deduction spreads the because it calculation of incurred, result in that are never it also cannot evenly flow of the costs over the early years. disproportionate See page n. See income. pages at 1369-71. discussion interpret law case Our function in this n film applies and to all other as it to this speculates, any without factual The dissent cannot, us to as the dissent invites We record, makers. may support as to what taxes do, speculation of what on a base our decision subsequent pur- paid not have been *10 may for a subse- have been allowed tax treatment applied have its own chaser. How the IRS bearing quent purchaser from Transamerica. no on formula to another has 1372 two
measure release cost as measured 1. components In costs of the film as second [2] of the costs incurred. APPENDIX —Continued the bracketed is the this: the first is the x(R C). participations/residuals - term measured represents a There are turn, pre- C, pre-release and C (r/R)(R C)x, and the second is the first is the [2] In each - known; only costs participations/residuals application as displayed in [2']. input-data the number depreciation allowed film, of the formulas [1] allowed namely numbers R an (r/R)C, costs, is x, r, components: estimate. resulting depreciation has two following representation: regard cumulative costs the setting, we have in In this same Cumulative costs to date = C if r < C [3] -
= x(r C) > + if r C [3'] C following has the depreciation set forth income forecast method for two features: PROPOSITION always date. less than the cumulative costs to cumulative to date is expressed depreciation to date can be By the cumulative [2"]
Proof. —(1 x)C rx,+ r R than which is less
-(1 x)C rx+ < C, by [3] <1. If r then since r/R - — = = < <
(1 x)C (1 x)C date, r, if costs to while C then + rx + Cx C cumulative [3'] — — = C)
(1 x)C +x(r to date. + rx cumulative costs C PROPOSITION increased, any then at time the cumula- If the total lifetime net revenue
tive
is decreased.
expressed
By
the cumulative
to date
[2"]
Proof
-
(1)
(1
x)C + rx.
r
R
HALL,
Noting
always less than 1 and hence
CYNTHIA HOLCOMB
Circuit
that x is
-
Judge, dissenting:
positive, it
that the
that 1
x is
is immediate
(1)
whenever the
expression
is decreased
appeal
proper interpreta-
This
involves
calculating
tion of the
formula for
number R is increased.
IRS’s
*11
taxpayers
of a
deducting
they
of the cost of
vent
from
depreciation
costs
majority
IRS,
film.
that
picture
taxpayers,
holds
never incur. The
motion
taxpayer
participations
can include
and re-
equally
and these courts were
concerned with
yet
timing
deduction, i.e.,
that have
to be incurred in
siduals
the time
calculating
a film
money.
cost basis of
when
value of
that can be deducted
amount
just
This concern has
as much force in the
given year.
disagree
I
with this
in a
Because
I
any-
instant case.
am not aware of
other
conclusion,
respectfully
I
dissent.
situation
where
is allowed to take
It is well established that liabilities which a
actually
deduction before he
incurs it ab-
only be calculated on the basis of future
express statutory
sent
authorization.
I do
contingent
events are
and cannot be included
appropriate
not think it
excep-
to create an
See, e.g.,
in a cost basis.
Columbus & Green
tion to this rule at this time.
Commissioner,
834, 846,
Ry.
ville
v.
T.C.
Thus, I would affirm the district court’s
(5th
(1964),aff'd,
anyone than a other mathematician could be Instead,
completely them. comfortable with disagree majority’s assumption
I with the -Lemery
that the rule established in and oth- designed solely pre-
er related cases was