IN THE UNITED STATES COURT OF APPEALS

                         FOR THE FIFTH CIRCUIT

                         _____________________

                              No. 95-60148
                         _____________________


          James L. Hudson,

                                 Plaintiff-Appellant,

                versus

          Commissioner of Internal Revenue,

                                 Defendant-Appellee.

_________________________________________________________________

             Appeal from the United States Tax Court
                            (4272-92)
_________________________________________________________________
                        November 13, 1995
Before KING, DeMOSS, and STEWART, Circuit Judges.

PER CURIAM*:

     James L. Hudson appeals the United States Tax Court's

affirmance of the Commissioner's determination of deficiencies

for the tax years 1981 through 1985.    Finding no error, we

affirm.



                             I. BACKGROUND




     *
          Local Rule 47.5 provides: "The publication of opinions
that have no precedential value and merely decide particular
cases on the basis of well-settled principles of law imposes
needless expense on the public and burdens on the legal
profession." Pursuant to that Rule, the court has determined
that this opinion should not be published.
     From 1982 to 1985, James L. Hudson ("Hudson"), through his

wholly-owned subchapter S corporation named Texas Basic

Educational Systems, Inc. ("TBES"), engaged in an investment

program in which TBES purchased and then leased master audio

tapes.   TBES leased the master tapes to investors who were to

make cassette copies and market the copies on a retail basis to

consumers.   In August 1982, Educational Audio Resources, Inc.

("EAR") was formed by Michael Brovsky and Chet Hanson to produce

and sell the master tapes to TBES.

     During 1982 and 1983, TBES entered into agreements with EAR

to purchase 423 master audio tapes for $200,000 each.   The

$200,000 purchase price for each master tape was represented by a

$5,000 cash payment and a $195,000 promissory note bearing

interest at an annual rate of ten percent for a ten-year term.

Under the terms of the promissory notes, TBES had no obligation

to make principal or interest payments during the ten-year term

unless it realized profits from the lease of the master tapes.

If TBES did realize a profit, payments on the notes were to be

made to the extent of 30% of the net profits.   At the end of the

ten-year term, the balance and accrued interest would become due.

TBES has made no payments on the promissory notes.

     EAR began producing the master tapes in late 1982 and 1983.

EAR's budgeted and actual costs of production for each master

tape were approximately $500, including between $100 and $200 for

the script writer, the cost of recording, and art work.   The tax

court found that the quality of the master tapes was poor, that


                                 2
the scripts were written by unknown authors, poorly written, and

too short, and that the recordings were made with the voices of

unknown individuals and contained mispronunciations and

grammatical errors.

     During 1982 and 1983, TBES entered into lease agreements for

the master tapes with 423 investors.    Each investor agreed to pay

$10,000 cash plus 60% of the revenue generated from the sale of

cassette copies of the master tape.    Hudson represented to the

investors that each master tape had a fair market value of

$200,000.   Hudson also advised the investors that each would be

entitled to claim an investment tax credit of $20,000--10% of the

fair market value of the leased master tape--regardless whether

the investor sold any copies.

     In March 1985, the commissioner brought suit in the United

States District Court for the Southern District of Texas ("the

prior proceeding") under Internal Revenue Code ("IRC") sections

6700 and 7408 to enjoin Hudson's further promotion of the master

audio tape investment program, alleging that the program was an

abusive tax shelter and that the master tapes were overvalued by

more than 200%.   On August 16, 1988, after trial, the district

court denied the injunction, finding that the master audio tapes

leased by Hudson were not overvalued by more than 200%, that each

master tape was worth at least $100,000, and that Hudson's

actions in promoting the master audio tape investment program

were not illegal.




                                 3
     The commissioner appealed the district court's judgment to

the United States Court of Appeals for the Fifth Circuit.   On

April 3, 1990, this court affirmed the district court's judgment

denying the injunction, but on different grounds ("the Fifth

Circuit opinion").   Our entire opinion reads as follows:

     This is an appeal from a denial of an injunction by a
     United States District Court. The Internal Revenue
     Service requested that defendants be enjoined from
     engaging in activities violative of statutes and rules
     regulating tax shelters. We affirm the denial of
     injunctive relief but not for the reasons stated by the
     district court. Rather, we affirm the denial of
     injunctive relief for the reason that the record is
     bereft of evidence sufficient to warrant a conclusion
     that continuing violations were threatened. The
     transactions complained of by the government have
     apparently collapsed of their own weight. We emphasize
     that we do not suggest that the government was
     incorrect in its contentions that the complained of
     transactions were not legal.

     On December 21, 1988, Hudson filed his untimely 1982 and

1983 individual federal income tax returns on which he claimed

substantial losses related to TBES and created by depreciation

deductions for the master audio tapes.   The commissioner, after

an audit, disallowed the losses on the grounds that the master

audio tapes purchased by TBES had little or no value and did not

support the substantial depreciation deductions taken, that the

promissory notes issued as payment for the tapes were not

genuine, and that the master tapes were not "placed in service"

in 1982 and 1983.

     On February 27, 1992, Hudson filed a petition in the tax

court challenging the deficiencies assessed by the commissioner

("the tax court proceeding").   After trial on March 5, 1993, the


                                 4
tax court requested that the parties brief the collateral

estoppel issue that had been raised by Hudson.   On June 23, 1993,

the tax court entered an opinion holding that the commissioner

was not collaterally estopped from litigating the fair market

value of the master tapes by the district court's finding in the

prior proceeding that each tape was worth at least $100,000,

because the Fifth Circuit specifically declined to address this

fact finding in affirming the denial of the injunction.

     On July 27, 1994, the tax court entered an opinion holding

that: (1) the promissory notes did not constitute genuine

indebtedness; (2) each master tape had a fair market value of

$5,000 or less; (3) no master tapes were placed in service in

1982, and 125 master tapes were placed in service in 1983; (4)

TBES is thus entitled to depreciation deductions for 125 master

tapes beginning in 1983 at a cost basis of $5,000; (5) no

depreciation is allowed for the remaining 298 master tapes

because they were not produced or placed in service in 1982 and

1983; and (6) because the promissory notes were not genuine,

Hudson did not realize any discharge of indebtedness income in

1984 and 1985.   The tax court's decision assessing deficiencies

in income tax and additions to tax for the tax years 1981 through

1985 was entered on November 22, 1994.   Hudson filed a timely

notice of appeal on February 16, 1995.



                      II. STANDARD OF REVIEW




                                 5
    We review the decision of a tax court under the same

standards that apply to district court decisions.      Thus, issues

of law are reviewed de novo, and findings of fact are reviewed

for clear error.   Park v. Commissioner, 

, 1291 (5th

Cir.), cert. denied, 

(1994); McKnight v.

Commissioner, 

, 450 (5th Cir. 1993).       A finding of fact

is clearly erroneous when, although there is enough evidence to

support it, the reviewing court is left with a firm and definite

conviction that a mistake has been committed.       Henderson v.

Belknap (In re Henderson), 

, 1307 (5th Cir.), cert.

denied, 

(1994).



                          III. DISCUSSION

     On appeal, Hudson presents two arguments.      First, he

contends that the tax court erred in holding that the

commissioner was not collaterally estopped from litigating the

fair market value of master audio tapes for which Hudson had

claimed depreciation deductions.       Second, Hudson argues that the

tax court's determination that Hudson was entitled to

depreciation deductions with respect to only 125 master audio

tapes in 1983, and none in 1982, was clearly erroneous.      We will

address each claim of error in turn.



A. Collateral Estoppel

     Hudson argues that the doctrine of collateral estoppel

should have been applied by the tax court to preclude the


                                   6
commissioner from relitigating the fair market value of the

master tapes in the tax court proceeding because the district

court in the prior proceeding conclusively found that each master

tape had a fair market value of at least $100,000.   The

government argues that the tax court correctly determined that

the district court's findings of fact in the prior proceeding do

not have preclusive effect.

     The doctrine of collateral estoppel prevents relitigation

between the same parties of issues of fact or law that were

decided in an earlier proceeding on a different cause of action.

Montana v. United States, 

, 154-55 (1979).     The

purposes of collateral estoppel are to protect parties from the

burden of relitigating an issue that has been already decided and

to prevent inefficient use of judicial resources.    Parklane

Hosiery Co. v. Shore, 

, 326 (1979).

     For collateral estoppel to apply, a court must decide

whether "(i) the issue at stake is identical to the one involved

in the prior litigation, (ii) the determination of the issue in

the prior litigation was a critical, necessary part of the

judgment in that earlier action, and (iii) special circumstances

exist which would render preclusion inappropriate or unfair."

McDuffie v. Estelle, 

, 685 (5th Cir. 1991); Hicks v.

Quaker Oats Co., 

, 1166 (5th Cir. Unit A, 1981).

Although an issue has been fully litigated, the prior judgment

will not act as collateral estoppel if the issue was not




                                7
necessary to the rendering of the prior judgment.    

.

     When a trial court's judgment is vacated, reversed, or set

aside by an appellate court, collateral estoppel will not

preclude relitigation of the trial court's conclusions of law or

findings of fact.   

a trial court's findings

are challenged on appeal, "once the appellate court has affirmed

on one ground and passed over another, preclusion does not attach

to the ground omitted from its decision."    Dow Chemical v. EPA,

, 323 (5th Cir. 1987) (quoting C. Wright, A. Miller &

E. Cooper, Federal Practice and Procedure § 4421 (1981)); 

("the general rule is that if a judgment is

appealed, collateral estoppel only works as to those issues

specifically passed upon by the appellate court"); see also,

Borst v. Chevron Corp., 

, 1314 n.11 (5th Cir.)

(noting that because the court did not consider an issue, "the

district court's ruling on that issue is not conclusive between

the parties"), cert. denied, 

(1994).

     In the prior proceeding, the district court denied the

United States's request for an injunction on the grounds that

Hudson had done nothing illegal, finding, inter alia, that the

fair market value of the master audio tapes was at least $100,000

each.   The Commissioner challenged those findings on appeal.     The

Fifth Circuit affirmed the district court's denial of the

injunction, but did so on the grounds that no evidence was

presented that continuing violations were threatened.   The court


                                  8
of appeals emphasized that "we do not suggest that the government

was incorrect in its contentions that the complained of

transactions were not legal."   Because the Fifth Circuit in the

prior proceeding did not address the district court's fact

finding on the fair market value of the master tapes, that

finding could not preclude the Commissioner from contesting the

fair market value of the master tapes in the tax court

proceeding.   See Dow 

.    Therefore, the

tax court did not err in determining that collateral estoppel

does not bar the Commissioner from arguing that the master audio

tapes had a fair market value of less than $100,000.



B.   How many Master Tapes were Placed in Service?

     Hudson contends that the tax court's determination that only

125 master tapes, rather than 423, were placed in service in

1983, and none in 1982, was clearly erroneous.     The government

responds that the tax court's finding that no more than 125

master tapes had been placed in service in 1983 is amply

supported by the record and is not clearly erroneous.     Before we

address Hudson's argument, we will first summarize the relevant

factual findings.

     In its final opinion, the tax court found that "during 1982

and 1983, TBES entered into 423 lease agreements with individual

investors with respect to master tapes that were purportedly

produced and completed."   However, the tax court additionally

found that "the record does not support a conclusion that the


                                 9
same number of actual master tapes had been produced and existed

during 1982 and 1983."   The tax court stated that "by the end of

1983, only 125 tapes had been produced," and that "in 1982 and

1983 EAR sold to TBES only 125 master tapes."     Finally, the tax

court found that because only 125 tapes had been produced by the

end of 1983, only 125 tapes had been placed in service for the

1983 tax year.   Therefore, the tax court concluded that Hudson

could only claim depreciation deductions with respect to those

125 tapes for tax year 1983.   The tax court also concluded that

Hudson could take no depreciation deductions for master tapes in

1982.

     Hudson argues that the tax court should be estopped from

finding that only 125 master tapes were placed in service in 1983

because the Commissioner had conceded in the prior proceeding and

earlier in the tax court proceeding that 423 tapes were purchased

and leased during 1982 and 1983.     Hudson contends that because

423 master tapes were leased by the end of 1983, 423 tapes were

placed in service for purposes of depreciation deductions.

     The Commissioner concedes that 423 tapes were purchased by

TBES during 1982 and 1983.   The Commissioner argues that,

although TBES entered into 423 lease agreements with investors by

the end of 1983, and even if it purchased 423 master tapes from

EAR, Hudson failed to demonstrate that more than 125 tapes had

been produced and actually existed by the end of 1983, or that

any tapes actually existed in 1982.




                                10
     The taxpayer bears the burden of proving his entitlement to

a deduction.    Welch v. Helvering, 

, 115 (1933).

Depreciation deductions are allowed in the year in which

qualifying property is placed in service by the taxpayer.      26

C.F.R. § 1.167(a)-10(b); Noonan v. Commissioner, 

, 544 (1986), aff'd, 

(9th Cir. 1992).     Property

is placed in service when it is first placed "in a condition or

state of readiness and availability for a specifically assigned

function."   26 C.F.R. § 1.167(a)-11(e)(1)(i); Noonan, 52 T.C.M.

(CCH) at 544.   Property held for lease is placed in service when

it is ready and available for lease and is first held out for

lease.   Waddell v. Commissioner, 

, 898 (1986), aff'd,

(9th Cir. 1988).

     Hudson argues that because 423 leasing agreements were

entered into in 1982 and 1983, 423 master tapes were held out for

lease, thus placed in service, in 1982 and 1983.    However,

Hudson's argument "exalt[s] form over substance."     

.    Although the leasing agreements existed in

1982 and 1983, and although TBES may have entered purchasing

agreements with EAR for 423 master tapes in 1982 and 1983, the

tax court found that the evidence demonstrated that only 125

master tapes actually existed by the end of 1983.    Hudson cannot

take depreciation deductions for master tapes that were not yet

produced in the relevant tax year.     Property that does not exist

cannot depreciate.     See Donahue v. Commissioner, 

, 2469 (holding that a transaction lacked economic substance


                                  11
because the taxpayer failed to produce evidence that the subject

matter of the transaction, a master recording, actually existed

at the end of the tax year), aff'd, 

(6th    Cir.

1992).

     Finally, we conclude that the tax court's finding that only

125 master tapes were produced, thus placed in service, by the

end of 1983, is not clearly erroneous.   The evidence demonstrates

that as of July 29, 1983, EAR had produced and sold a total of

125 master audio tapes to TBES.    Chet Hanson, one of the owners

of EAR, testified that EAR ceased producing tapes in 1983.      Ms.

Raun, an employee of TBES and EAR, testified that many scripts

were unfinished at the end of 1983 and that she was still writing

scripts at the end of 1984.   Ms. Raun testified further that she

did not even begin the art work for many tapes until 1984.      One

investor testified that the tapes he leased during 1983 were not

finished until 1984.   Testimony of an employee of Hallmark showed

that Hallmark's catalog, which was prepared during the period of

late 1983 through early 1984, included many tapes that had not

yet been produced.

     There was also evidence that many of the tapes that were

"produced" and existed at the end of 1983 were nevertheless not

ready and available to be leased at that time.   An employee of

Hallmark testified that Hudson considered a tape to have been

produced even if only "a sentence was read onto a reel to reel

tape," and considered "writing a real script and putting together

a real . . . total production" to be "post-production" work.


                                  12
     This evidence supports the conclusion that by the end of

1983, only 125 master tapes were placed in service.   Thus, we

affirm the tax court's disallowance of Hudson's depreciation

deductions for the remaining 298 master tapes in 1983, and for

all 423 master tapes in 1982.



                         IV. CONCLUSION

     For the foregoing reasons, we AFFIRM the judgment of the tax

court.




                                13