Donald R. Campbell and Patricia A. Campbell v. Commissioner of Internal Revenue , 868 F.2d 833 ( 1989 )

JOHN W. POTTER, District Judge,

dissenting.

I respectfully dissent from the majority opinion as to parts I and III, and from the majority’s conclusion that there should be no assessment of a penalty against taxpayers for negligence and/or fraud under § 6653(a) of the Internal Revenue Code, 26 U.S.C. § 6653(a)(1) on the assessment for the underpayment resulting from the Health Air loss deductions.

As to part I, dealing with 26 U.S.C. § 183, the Tax Court made the following finding:

We conclude that Health Air partnership was not in the trade or business of leasing an airplane and its activity was an activity “not engaged in for profit” within the meaning of section 183.

The interplay of Section 162 and Section 183 is explained as follows by Justice Kennedy, then Judge Kennedy, in Independent Electric Supply, Inc. v. Commissioner, 781 F.2d 724, 727 (9th Cir.1986):

While it is true that I.R.C. section 183 itself does not come into play until after it is determined that an activity is not engaged in for profit, the courts have relied on the section 183 factors in conducting the profit motive analysis under section 162. Brannen, 722 F.2d at 704. This list is nonexclusive, id., and the assessment of motivation is made after considering all the facts and circumstances of each case, Treas.Reg. § 1.183-2(a) (1972); see Hirsch [v. Commissioner ], 315 F.2d [731] at 737 [9 Cir.1963].

The standard for review is whether or not the Tax Court’s finding is clearly erroneous. Polakof v. Commissioner, 820 F.2d 321 (9th Cir.1987), cert. denied, — U.S. -, 108 S.Ct. 748, 98 L.Ed.2d 761 (1988); Tallal v. Commissioner, 778 F.2d 275 (5th Cir.1985); Brannen v. Commissioner, 722 F.2d 695 (11th Cir.1984).

Based on the record, the finding of the Tax Court was not clearly erroneous. This court posed to the parties at oral argument on appeal the question whether a profit motive was established because the Partnership’s airplane leasing activity, by benefiting the Corporation, would increase the individual partners’ profits as shareholders of the Corporation. Relying on Horner v. Commissioner, 35 T.C. 231 (1960); Lee v. Commissioner, 51 T.C.M. 1438 (1986); Louisment v. Commissioner, 43 T.C.M. 1496 (1982); and Cornfeld v. Commissioner, 797 F.2d 1049 (D.C.Cir.1986), the majority finds that the expection of future profits to be generated by HCC made the partnership undertaking an activity engaged in for profit. While the majority refers to other factors, it appears to tilt the decision on a permutable profit motive.

First, I respectfully suggest that the cases cited above have different scenarios. Particularly in the Homer case, the situation was characterized as a joint venture with the taxpayer and the corporation. The asset or activity in those cases played a major role in the success of the other business entity. In the case sub judice, providing corporate transportation was peripheral.

Looking at profit motive, appellee contends that the existence of a profit motive under § 183 must be determined at the partnership level. See Brannen, 722 F.2d 695; Tallal, 778 F.2d 275; Polakof, 820 F.2d 321. The majority points out that these cases deal with limited partnerships; however, the appellants and the majority agree that the taxpayer is the partnership and the analysis as to whether the activity was engaged in for profit must be made with regard to the partnership.

Without piercing the partnership “veil,” it is apparent that the Partnership, which held title to the airplane, was not a shareholder of the corporation. It could not expect any profits in the form of salaries or dividends. The testimony of Mr. Aber-crombie, one of the partners, was that the objective of the Partnership and the Corporation was totally different. Health Care Corporation was in the business of operating health care facilities. Health Air was not.

I do not find this is a case where individual partners’ motivation should be considered but even so, considering the profit motive of the partners, I respectfully suggest that the record does not support a conclusion that the partners were motivated by an expectation of profit from the Corporation in the form of wages, dividends or an appreciation in value of their corporate stock.

The record suggests that the partners tried to avoid the impression that this was a hand-in-glove arrangement with the Corporation. The testimony is to the effect that the volume of useage of the airplane by the Corporation was not a primary consideration for the formation of the Partnership. Also, the number of shareholders of the Corporation increased yearly until December of 1981, there were eighteen shareholders, thereby diluting any expectation of great return to the Partnership members from the use of the airplane by the Corporation.

That petitioners expected to make a profit from the Corporation use of the airplane is more argumentative than factual. I find the following from Landry v. Commissioner, 86 T.C. 1284 (1986), applicable:

The issue of whether the requisite profit motive exists is one of fact to be resolved on the basis of all the evidence in the case. Sutton v. Commissioner, 84 T.C. 210, 221 (1985); Brannen v. Commissioner, 78 T.C. [471] at 506; Dunn v. Commissioner, 70 T.C. 715, 720 (1978); aff'd. 615 F.2d 578 (2d Cir.1980). In making this determination, more weight must be given to the objective facts than to the taxpayer’s mere after-the-fact statements of intent. Thomas v. Commissioner, 84 T.C. 1244, 1269 (1985), aff'd. 792 F.2d 1256 (4th Cir., June 6, 1986); Engdahl v. Commissioner, 72 T.C. 659 (1979).

In addition to the transferable profit motive, the majority finds a profit motive in the partnership operation. I find the record supports the Tax Court’s finding that the partnership motive was one of tax avoidance. The purchase of the airplane was entirely financed. Even the downpayment was returned from the financed funds. No partner contributed any cash until 1982, yet petitioners claimed a business loss of $12,825.58 and an investment tax credit of $14,392.55 in 1979. The Corporation was a guarantor on the note. The operational lease between the Partnership and the Corporation was only to secure financing. The Partnership had a separate understanding with the Corporation in regard to use of the airplane. Not until 1982, when the Corporation began its negotiations with Hospital Corporation of America, were the terms of the lease honored. The Corporation, except for limited payments by Hangar I, advanced all sums for debt reduction, operating expenses and costs of repair of the airplane. The Corporation at one time indicated it would write off its costs over the credits it received for using the airplane.

The Partnership had no office and the Corporation provided most of the bookkeeping. Petitioner did not discuss any aspect of buying and leasing the airplane with his partners and had nothing to do with the management. The Partnership sustained substantial losses over a number of years and generated large deductions.

For all of the foregoing reasons, I would find that the Tax Court’s finding that the Partnership was not carrying on a trade or business, but was formed for tax avoidance, is not clearly erroneous.