DocketNumber: Docket Nos. 24495-89, 16527-93.
Citation Numbers: 1995 T.C. Memo. 458, 70 T.C.M. 801, 1995 Tax Ct. Memo LEXIS 455
Judges: HALPERN
Filed Date: 9/26/1995
Status: Non-Precedential
Modified Date: 11/20/2020
*455 Decisions will be entered under Rule 155.
These cases involve two similar transactions: A leasing company purchased equipment with funds borrowed from a bank. The leasing company leased the equipment to an end-user. Rent payments to be received from the end-user were assigned to the bank as security for the loan. The leasing company then sold the equipment to a middle company, which, in turn, sold the equipment to P. With regard to both of those sales, substantially all of the purchase price was evidenced by a long-term note and the equipment was acquired subject to both the lease to the end-user and the security interest of the bank. P then leased the equipment back to the leasing company. Payments from the leasing company to P, from P to the middle company, and from the middle company to the leasing company were, with one small exception, identical.
*456 1.
2.
3.
4.
MEMORANDUM FINDINGS OF FACT AND OPINION
HALPERN,
Additions to Tax | ||||
Sec. | Sec. | Sec. | ||
Year | Deficiency | 6651(a)(1) | 6653(a)(1) | 6653(a)(2) |
1980 | $ 81,541.67 | $ 16,477.20 | $ 5,097.06 | -- |
1981 | 35,032.19 | 5,254.83 | 4,116.46 | 50% of interest |
due on $ 15,956 | ||||
1982 | 246,433.50 | -- | 12,321.68 | 50% of interest |
due on $ 3,195 | ||||
1983 | 411,000.00 | -- | 21,312.00 | 50% of interest |
due on | ||||
$ 411,000 |
Additions to Tax | Increased Interest | ||
Sec. | Sec. | Sec. | |
Year | 6659 | 6661 | 6621(c) |
1980 | -- | -- | Due on $ 81,541.67 |
1981 | $ 5,765.00 | -- | Due on $ 35,032.19 |
1982 | 5,680.80 | $ 56,874.38 | Due on $ 246,443.50 |
1983 | -- | 102,750.00 | Due on $ 411,000.00 |
For 1982 respondent determined an addition to tax under
Unless otherwise indicated, all section references are to the Internal Revenue Code in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The parties have filed a stipulation of settled issues, which is accepted by the Court. The issues remaining for decision are: (1) Whether petitioners' deductions for losses suffered on certain equipment leasing transactions are allowable, (2) whether the transactions were tax-motivated transactions, rendering petitioners liable for increased interest, and (3) whether petitioners are liable for certain additions to tax.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulations of fact filed by the parties and the accompanying*458 exhibits are incorporated herein by this reference. Petitioners Richard and Virginia Santulli are husband and wife. They made joint returns of Federal income tax for the calendar years in issue. Petitioners resided in New York City at the time they filed the petitions herein. Hereafter, all references to petitioner shall refer to petitioner Richard Santulli.
Our remaining findings of fact are concerned with two equipment leasing transactions entered into by petitioner. One of those transactions involved computer equipment, and the other involved telecommunications equipment. The parties have characterized those transactions as the "computer equipment activity" and the "telecommunications equipment activity", respectively. We will adopt those characterizations.
Sha-Li Leasing Associates, Inc. (Sha-Li), is a New Jersey corporation involved in equipment sales and leasing. During the years in issue, petitioner was a director of Sha-Li. Sometime prior to January 1979, Sha-Li purchased certain computer equipment (the computer equipment), which it leased to the Bank of New York (BNY), pursuant to eight separate*459 leases (the BNY leases). The dates of, terms of, and monthly rental obligations under the BNY leases are as follows:
Date of Lease | Term | Monthly Rental |
12/19/78 | 48 mos. | $ 1,177 |
12/19/78 | 48 mos. | 1,188 |
12/17/78 | 48 mos. | 1,188 |
12/19/78 | 48 mos. | 1,188 |
12/19/78 | 48 mos. | 1,188 |
12/19/78 | 48 mos. | 1,188 |
12/19/78 | 48 mos. | 1,188 |
1/27/78 | 36 mos. | 3,381 |
Sha-Li had purchased the computer equipment with money borrowed from Manufacturers Hanover Leasing Corp. (MHLC). Sha-Li borrowed the money pursuant to agreements entitled "Assignment of Lease Without Recourse and Security Agreement" (the assignment agreements). Among other provisions, each assignment agreement contains the following: A statement that, as of the date of the agreement, unpaid rent under the related BNY lease exceeded the amount borrowed by Sha-Li pursuant to the agreement; an assignment to MHLC of Sha-Li's rights to the proceeds (principally rent) under the related BNY lease; a grant to MHLC of a security interest in the computer equipment subject to the related lease; and an agreement by MHLC to take no recourse against Sha-Li should the lessee default in the payment of any of its obligations as a *460 result of the lessee's financial inability to meet those obligations.
Proz Leasing Associates, Inc. (Proz), a New York corporation, was organized in June 1979 to be a "middle company" in leasing transactions. Pursuant to an agreement between Proz and Sha-Li dated as of June 30, 1979 (the Proz computer purchase agreement), Proz purchased the computer equipment from Sha-Li. The Proz computer purchase agreement recites a purchase price of $ 449,700, payable as follows: 1. $ 200 in cash payable to Sha-Li no later than December 31, 1979. 2. $ 1,500 by delivery to Sha-Li of a recourse note concurrently with execution of the Proz computer purchase agreement. 3. $ 11,500 by delivery to Sha-Li of another recourse note concurrently with execution of the Proz computer purchase agreement. 4. $ 436,500 by delivery to Sha-Li of an installment note (the Proz computer installment note) concurrently with execution of the Proz computer purchase agreement.
In connection with Proz' purchase *461 of the computer equipment from Sha-Li, Proz and Sha-Li also entered into an agreement entitled "Assumption Agreement" dated as of June 30, 1979 (the Proz assumption agreement). The Proz assumption agreement provides that Proz agrees to be bound by the obligations of Sha-Li contained in the assignment agreements and that Proz' ownership interest in the computer equipment shall be subordinate to the security interest granted to MHLC by the assignment agreements. Under the Proz assumption agreement, no recourse shall be had against Proz or Proz' officers, directors, or stockholders with respect to any such obligations assumed by Proz, and, as to Proz, all such obligations are nonrecourse obligations.
Pursuant to an agreement between petitioner and Proz dated as of June 30, 1979 (the petitioner computer purchase agreement), petitioner purchased the computer equipment from Proz. The petitioner computer purchase agreement recites a purchase price of $ 450,000 ($ 300 more than payable under the Proz computer purchase agreement), payable as follows: 1. $ 500 in cash payable to Proz no later than June 30, 1979. 2. $ 1,500 by delivery to Proz of a recourse*462 note concurrently with execution of the petitioner computer purchase agreement. 3. $ 11,500 by delivery to Proz of another recourse note concurrently with execution of the petitioner computer purchase agreement. 4. $ 436,500 by delivery to Proz of a limited recourse installment note (the petitioner computer installment note) concurrently with execution of the petitioner computer purchase agreement.
The petitioner computer installment note gives petitioner the right to defer any or all note payments owed to Proz to the extent amounts due petitioner under a lease of the computer equipment to be entered into by petitioner with Sha-Li are not received when due. Amounts so deferred become due and payable to Proz when, and to the extent that, petitioner receives from Sha-Li or Proz amounts due petitioner under petitioner's lease with Sha-Li. Amounts so deferred become due and payable on February 28, 1996, whether or not petitioner has then received from*463 Sha-Li or Proz amounts due under petitioner's lease with Sha-Li. No interest accrues on amounts so deferred.
In connection with petitioner's purchase of the computer equipment from Proz, petitioner and Proz also entered into an agreement entitled "Assumption Agreement" dated as of June 30, 1979 (the petitioner computer assumption agreement). The petitioner computer assumption agreement provides that petitioner agrees to be bound by the obligations of Sha-Li contained in the assignment agreements and that petitioner's ownership interest in the computer equipment shall be subordinate to the security interest granted to MHLC by the assignment agreements. Under the petitioner computer assumption agreement, no recourse shall be had against petitioner with respect to any such obligations assumed by petitioner, and, as to petitioner, all such obligations are nonrecourse obligations.
Sha-Li, not Proz, negotiated with petitioner the terms of the petitioner computer installment note. Any accounting records concerning Proz' purchase and sale of the computer equipment have at all times been maintained by Sha-Li. Proz never monitored payments on the petitioner computer installment note. Proz*464 relied on Sha-Li to manage the flow of all payments between Proz, petitioner, and Sha-Li. Proz never monitored or questioned Sha-Li's management of the payments.
Pursuant to an agreement of lease between petitioner and Sha-Li dated as of June 30, 1979 (the Sha-Li lease), petitioner leased the computer equipment to Sha-Li. The Sha-Li lease commenced as of July 1, 1979, and had a term of 96 months. "Fixed rent" was set at $ 6,928.79 a month. Pursuant to the Sha-Li lease, Sha-Li was responsible during the term of the lease for all risk of physical damage to, or loss or destruction of, the computer equipment, unless caused by petitioner's willful misconduct or negligence. Also pursuant to the Sha-Li lease, Sha-Li agreed to indemnify, hold harmless, and defend petitioner against certain losses, liabilities, claims, and other risks arising from or in connection with, among other things, (1) any default by Sha-Li under the Sha-Li lease and (2) any claim by "the holders of the Lien". The term "Lien" is defined in the Sha-Li lease to include the term "Lien" as defined in the Proz computer purchase agreement. In the Proz computer purchase agreement, the term*465 "Lien" is defined as: "The security interest in favor of * * * [MHLC], and the assignment of payments due under the * * * [BNY leases] to * * * [MHLC] * * * ".
Pursuant to a marketing agreement between petitioner and Sha-Li dated as of June 30, 1979, petitioner appointed Sha-Li as marketing agent for the computer equipment after the termination or expiration of the BNY leases.
Until December 1982, Sha-Li's payments of rent to petitioner pursuant to the Sha-Li lease, petitioner's payments to Proz pursuant to the petitioner computer installment note, and Proz' payments to Sha-Li pursuant to the Proz computer installment note were made by check. Payments were not always timely. For example, Sha-Li's payments due for July through September 1980 were not made until November 1980; petitioner's payments due for July through October 1980 were not made until November 1980.
Manufacturers and Traders Trust Co. (Manufacturers) is a financial institution located in New York City. During 1982, petitioner, Proz, and Sha-Li all maintained accounts at Manufacturers. In December 1982, each of petitioner, Proz, and Sha-Li gave instructions to Manufacturers*466 concerning their respective accounts. All of the instructions were effective from November 1982 through June 1987. Sha-Li instructed Manufacturers to charge its account on the first day of each month in the amount of $ 6,928.79 and to credit that amount to the account of petitioner. Petitioner's and Proz' instructions were similar, except that petitioner's account was to be charged $ 6,908.79, with that amount to be credited to the account of Proz, and Proz' account was to be charged $ 6,908.79, with that amount to be credited to the account of Sha-Li.
RTS Teleleasing Corp. (RTS) is a New York corporation involved in equipment sales and leasing. The initials RTS in the name "RTS Teleleasing Corporation" stand for Richard T. Santulli (petitioner). During the years in issue, petitioner indirectly owned 50 percent of the shares of stock of RTS. On October 1, 1982, RTS purchased certain telecommunications equipment (the telecommunications equipment) from a corporation then known as U.S. Telephone Communications, Inc. (U.S. Telephone). (U.S. Telephone is now known as U.S. Sprint.) RTS purchased*467 the telecommunications equipment for $ 3,610,205. Also on October 1, 1982, RTS leased the telecommunications equipment back to U.S. Telephone pursuant to an agreement entitled "Master Agreement of Lease" (the U.S. Telephone lease). The term of the U.S. Telephone lease is 60 months, commencing on October 1, 1982. U.S. Telephone's monthly rental obligation under the U.S. Telephone lease is $ 81,420.95.
RTS had purchased the telecommunications equipment in part with a loan of $ 3,239,620 from MHLC. RTS borrowed that sum from MHLC pursuant to an agreement entitled "Loan and Security Agreement" (the loan agreement). Pursuant to the loan agreement, RTS executed a promissory note (the RTS promissory note) to MHLC. The RTS promissory note is interest bearing and calls for 58 monthly payments of $ 81,420.95, commencing on December 1, 1982. Among other provisions, the RTS promissory note contains the following statement: MHLC ACKNOWLEDGES AND AGREES THAT THE PERSONAL LIABILITY OF * * * [RTS] WITH RESPECT TO PAYMENT OF SUMS EVIDENCED BY THIS NOTE IS LIMITED AND IS SUBJECT TO THE TERMS AND CONDITIONS CONTAINED IN THE SECURITY AGREEMENT. 7. * * * * 14. * * * * 16.
Pursuant to an agreement between Proz and RTS dated December 30, 1982 (the Proz telecommunications purchase agreement), Proz purchased the telecommunications equipment from RTS. The Proz telecommunications purchase agreement recites a purchase price of $ 3,605,205, payable as follows: 1. $ 175,510 by check or wire transfer to RTS concurrently with the execution of the Proz telecommunications purchase agreement. 2. $ 3,429,695 by delivery to RTS of an installment note (the Proz telecommunications installment note) concurrently with the execution of the Proz telecommunications purchase agreement.
The Proz' telecommunications note additionally gives Proz the right to defer payments on the petitioner telecommunications*472 installment note if Proz fails to receive payments from petitioner under petitioner's "Limited Recourse Promissory Note - Security Agreement". Amounts so deferred become due and payable to RTS when, and to the extent that, Proz receives such payments from petitioner. In any event, Proz must pay all deferred amounts no later than December 31, 1999. No interest accrues on amounts so deferred.
Pursuant to the Proz telecommunications purchase agreement, Proz acquired the telecommunications equipment subject to the loan agreement and the U.S. Telephone lease.
Pursuant to an agreement between petitioner and Proz dated December 30, 1982 (the petitioner telecommunications purchase agreement), petitioner purchased the telecommunications equipment from Proz. The petitioner telecommunications purchase agreement recites a purchase price of $ 3,610,205 ($ 5,000 more than payable under the Proz telecommunications purchase agreement), payable as follows: 1. $ 180,510 by check or wire transfer to RTS concurrently with the execution of the petitioner telecommunications purchase agreement. 2. $ 3,429,695 by delivery to RTS of an installment note (the petitioner*473 telecommunications installment note) concurrently with the execution of the Proz telecommunications purchase agreement.
The petitioner telecommunications installment note additionally gives petitioner the right to defer payments on that note if petitioner fails to receive payments from RTS under petitioner's lease of the equipment to RTS. Amounts so deferred become due and payable to Proz when, and to the extent that, petitioner receives such payments from RTS. In any event, petitioner must*474 pay all deferred amounts no later than December 31, 1999. No interest accrues on amounts so deferred.
Petitioner acquired the telecommunications equipment subject to the loan agreement and the U.S. Telephone lease.
Any accounting records concerning Proz' purchase and sale of the telecommunications equipment have at all times been maintained by RTS. Proz never monitored payments on the petitioner telecommunications installment note. Proz relied on Sha-Li to manage the flow of all payments between Proz, petitioner, and RTS. Proz never monitored or questioned Sha-Li's management of the payments.
Pursuant to an agreement of lease between petitioner and RTS dated December 30, 1982 (the RTS lease), petitioner leased the computer equipment to RTS. The RTS lease commenced on December 30, 1982, and, subject to earlier termination, has a term of approximately 144 months. The RTS lease calls for payments of "Fixed Rent" identical with the payments called for under both the Proz telecommunications installment note and the petitioner telecommunications installment note: (1) An initial payment of $ 2,212.70 on December 31, 1982, (2) monthly payments of $ 34,296.96*475 for the next 24 months, and (3) monthly payments of $ 49,206.16 for the next 120 months. Pursuant to the RTS lease, RTS was responsible during the term of the lease for all risk of physical damage to, or loss or destruction of, the computer equipment, unless caused by petitioner's willful misconduct or negligence. In addition, the RTS lease provided for indemnification of the lessor (petitioner) as follows:
17. 17.1 Lessee will indemnify Lessor and protect, defend and hold him harmless from and against any and all loss, cost, damage, injury or expenses, including, without limitation, reasonable attorneys' fees, wheresoever and howsoever arising which Lessor, or any of his agents or employees, may incur by reason of any breach by Lessee of any of the representations by, or obligations of, Lessee contained in this Lease or in any way relating to or arising out of this Lease, the Equipment or Underlying Leases; * * *
Pursuant to a "Remarketing Option" between petitioner and RTS dated December*476 30, 1982, RTS agreed, at petitioner's option, to act as petitioner's agent to remarket the telecommunications equipment as and when the RTS lease expired.
Until September 1983, RTS' payments of rent to petitioner pursuant to the RTS lease, petitioner's payments to Proz pursuant to the petitioner telecommunications installment note, and Proz' payments to RTS pursuant to the Proz telecommunications installment note (together the telecommunications payments) were made by check. The telecommunications payments were not always timely. For example, neither petitioner, Proz, nor RTS made any payment due for January through July 1983 until December 1983.
In April 1983, RTS opened an account at Manufacturers. Beginning in September 1983, the telecommunications payments were made by Manufacturers charging and crediting the accounts of RTS, petitioner, and Proz. By letter dated July 23, 1983, petitioner instructed Manufacturers to charge petitioner's account and credit RTS' account in the following amounts: (1) $ 34,296.96 each month through and including December 1984 and (2) $ 49,206.16 each month commencing January 1985 through and including December 1994. From September*477 1983 to June 1990, Manufacturers complied with those instructions. Additionally, Manufacturers (1) charged RTS' account in like amounts and credited such amounts to Proz' account and (2) charged Proz' account in like amounts and credited such amounts to petitioner's account. As part of the telecommunications equipment activity, (1) petitioner had no obligation to make any payment to RTS, (2) RTS had no obligation to make any payment to Proz, and (3) Proz had no obligation to make any payment to petitioner.
With regard to the computer equipment, petitioners reported the following on their tax returns for the years is issue:
1980 | 1981 | 1982 | 1983 | |
Income | $ 83,145 | $ 83,145 | $ 83,145 | $ 83,145 |
Deductions | ||||
Depreciation | 94,438 | 73,450 | 73,450 | 73,450 |
Interest | 45,816 | 41,322 | 41,322 | 56,185 |
Losses | 57,109 | 31,627 | 31,627 | 46,490 |
With regard to the telecommunications equipment, petitioners reported the following on their tax returns for the years in issue:
1982 | 1983 | |
Income | $ 2,213 | $ 411,564 |
Deduction | ||
Depreciation | 541,531 | 794,245 |
Interest | 2,213 | 411,564 |
Losses | 541,531 | 794,245 |
OPINION
I.
A. *478
These cases involve two equipment leasing transactions entered into by petitioner and characterized by the parties as the "computer equipment activity" and the "telecommunications equipment activity" (together, the activities). Both activities comprised similar elements: A leasing company purchased equipment with funds borrowed from a bank. The leasing company leased the equipment to an end-user. Rent payments to be received from the end-user were assigned to the bank as security for the loan. The leasing company then sold the equipment to a middle company, which, in turn, sold the equipment to petitioner. With regard to both of those sales, substantially all of the purchase price was evidenced by a long-term note, and the equipment was acquired subject to both the lease to the end-user and the security interest of the bank. Petitioner then leased the equipment back to the leasing company.
With regard to both activities, petitioners claimed deductions for both depreciation and interest on their Federal income tax returns. With regard to both activities, the parties have stipulated: 1. The activity was not a sham. 2. Petitioner had a business purpose in entering*479 the activity. 3. Petitioner's investment in the activity had substance. 4. Petitioner acquired the benefits and burdens of ownership in the activity.
*480 B.
*481 "The purpose of subsection 465(b)(4) is to suspend at risk treatment where a transaction is structured--by whatever method--to remove any realistic possibility that the taxpayer will suffer an economic loss if the transaction turns out to be unprofitable. A theoretical possibility that the taxpayer will suffer economic loss is insufficient to avoid the applicability of this subsection. We must be guided by economic reality. If at some future date the unexpected occurs and the taxpayer does suffer a loss, or a realistic possibility develops that the taxpayer will *482 suffer a loss, the taxpayer will at that time become at risk and be able to take the deductions for previous years that were suspended under this subsection.
In determining whether a taxpayer is protected against loss within the meaning of
The question presented is one of fact, and petitioners bear the burden of proof. Rule 142(a). With regard to leasing activities, we scrutinize the economic reality of the transaction, focusing in particular upon the relationships between the parties, whether the underlying debt is nonrecourse, the presence of offsetting payments and bookkeeping entries, the circularity of the transaction, and the presence of any payment guarantees or indemnities. See
We find no significant difference between the facts in this case and those in the cases cited above. For example,
C.
In the instant cases, sufficient factors are present that we must find that there was no realistic possibility that petitioner*485 would suffer an economic loss on account of the installment notes if the underlying activities became unprofitable.
1.
In the computer equipment activity, Sha-Li was required to make monthly lease payments to petitioner of $ 6,928.79, petitioner was required to make monthly installment note payments to Proz of $ 6,908.79, and Proz was required to make monthly installment note payments to Sha-Li of $ 6,908.79. All payment obligations were for the same term. In the telecommunications equipment activity, all payment obligations--from RTS to petitioner as rent, from petitioner to Proz on the Proz telecommunications installment note, and from Proz to RTS on the petitioner telecommunications installment note--were identical both in amount and in term. In both activities, petitioner's obligation to Proz was matched (and, in the computer equipment activity, slightly exceeded) by the respective obligation of Sha- Li and RTS to petitioner.
2.
In both activities, not only were the payments matching, but the flow of payments was circular. It would thus appear to make no difference whether the payments were made or not, so long as each of the parties in the circle*486 did the same thing. Indeed, in the telecommunications equipment activity, virtually no scheduled payments were made for the first 7 months. Payment lapses also occurred in the computer equipment activity. Moreover, in the telecommunications equipment activity, when the payments were automated, by instructing a bank to debit and credit each participant's account, 1. She believed that as president of RTS, petitioner had more important things to be concerned with, 2. By the time the bookkeeper learned of the reverse flow of payments, the payments had been circling in that direction for several years, if * * * [the party equivalent to Sha-Li or RTS] stopped making payments on its lease, it could only have expected a chain reaction resulting in * * * [the taxpayer], and then * * * [the middle entity] ceasing to make payments as well. Any ensuing litigation would similarly have resulted in a chain reaction. Whether or not a litigant would be entitled to setoff in a particular court action, it is clear that once the dust settled, the claims*488 among the parties would have cancelled each other out.
3.
Both the petitioner computer installment note and the petitioner telecommunications installment note are claimed by petitioner to be "limited recourse" obligations. Assuming that such obligations exposed petitioner to some personal liability, such liability would only be theoretical for purposes of
Petitioners do not argue that the assignment agreements imposed any personal liability on Sha-Li, and we find that they did not. Petitioners do argue that the loan agreement (in the telecommunications equipment activity) did impose personal liability on RTS. The RTS promissory note states: MHLC ACKNOWLEDGES AND AGREES THAT THE PERSONAL LIABILITY OF * * * [RTS] WITH RESPECT TO PAYMENT OF SUMS EVIDENCED BY THIS NOTE IS LIMITED AND IS SUBJECT TO THE TERMS AND CONDITIONS CONTAINED IN THE SECURITY AGREEMENT.
4.
Both installment notes give petitioner the right to defer any or all note payments owed to Proz to the extent amounts due petitioner under the Sha-Li lease or the RTS lease, respectively, are not received when due. Thus, even if the underlying debts of Sha-Li and RTS under the assignment*490 agreements and the loan agreement, respectively, were not recourse, petitioner's obligations during the years in issue would be "theoretical", in the words of the Court of Appeals for the Second Circuit in
5.
In connection with the computer equipment activity, under the Sha-Li lease, Sha-Li agreed to indemnify, hold harmless, and defend petitioner against certain risks and any losses attendant to those risks. Included was any claim arising in connection with MHLC's security interest in the computer equipment or the assignment of payments due under the BNY leases to MHLC. The indemnification provisions of the Sha-Li lease eliminate for petitioner any risk of default if MHLC stops receiving rent payments from BNY.
In connection with the telecommunications equipment activity, under the RTS lease, RTS agreed to indemnify petitioner and protect, defend, and hold him harmless from losses in any way relating to or arising out of the U.S. Telephone lease. While not as clear as the indemnification provision in the Sha-Li lease, we believe that the indemnification provisions of the RTS lease eliminate*491 for petitioner any risk of default if MHLC stops receiving payments from U.S. Telephone.
6.
Petitioners argue: In sale leaseback transactions governed by the Uniform Commercial Code (e.g., the transactions in the case at bar), the institution financing the original acquisition by the leasing company (Manufacturer's) obtains a security interest in the middle company (Proz) and/or investor (Petitioner) Notes because said Notes constitute "proceeds" from the disposition of the collateral. If the leasing company defaults (because, for example, the underlying end-user ceases paying rent), the original lending institution can enforce the middle company and/or investor Notes, directly or through the chain, to the extent that the proceeds from foreclosure and sale of the collateral (equipment) are insufficient to satisfy the outstanding balance of the leasing company's debt.
N.Y. Uniform Commercial Code (U.C.C.) Law Except where this Article otherwise provides, a security interest continues in collateral notwithstanding sale, exchange*492 or other disposition thereof unless the disposition was authorized by the secured party in the security agreement or otherwise,
We need not get into the fine points of the commercial law involved. Assuming, for the sake of argument, that, upon the default of Sha-Li or RTS to MHLC, MHLC could have moved around the circle and ended up with petitioner being liable for any deficiency, we do not see how that aids petitioner. First, that did not happen during any of the years in question. We have found that both the assignment agreements and the loan agreement were nonrecourse debts. Sec. I.C.3., In any event, the pertinent "arrangement" to be assessed at the close of each taxable year was the*493 existing nonrecourse debt, not the theoretical possibility that its nonrecourse nature would be disregarded by * * * [RTS] in some future contingency.
The commercial law consequences that petitioners put forth were both theoretical and contingent during the years in question, and do not change our analysis of the meaningless nature of the circle of payments. Second, the payment deferral provisions discussed above dilute even more the argument that petitioner had any present liability. Third, the indemnification provisions eliminate it entirely.
D.
During the years in issue, petitioner was not at risk on account of either installment note. We therefore uphold respondent's determinations of deficiencies in tax as they relate thereto.
II.
A.
An underpayment, for purposes of
We have sustained respondent's disallowance*496 of certain items for each of the years in issue. For none of those years have petitioners carried their burden of showing the absence of an underpayment. Accordingly, we find
Petitioners focus on the computer equipment activity and the telecommunications activity and argue first that they cannot be negligent in claiming their losses therefrom because respondent has stipulated that the activities were not a sham, that petitioner had a business purpose, that the investments had substance, and that petitioner acquired the benefits and burdens of ownership. We do not agree with petitioners. The consequence of that stipulation is to limit our inquiry with regard to the activities to the question of whether petitioners were negligent in taking*497 the position that petitioner was at risk within the meaning of Petitioner, who himself was a longtime expert in structuring leasing transactions, and who relied on the many professionals associated with the transactions, including but not limited to * * * [certain] major New York law firms * * * and independent tax counsel (who either negotiated, reviewed or drafted the documents in issue and advised Petitioner) believed that he would be "at risk" with respect to the Notes he signed in the transactions. * * *
As a general rule, the duty of filing accurate returns cannot be avoided by placing responsibility on a tax return preparer or other expert. See, e.g.,
We do not believe that petitioners have satisfied those criteria. Petitioner is a self-proclaimed expert in structuring leasing transactions. Therefore, for him, the activities in question were not complex. Moreover, petitioners have not carried their burden of showing that petitioner relied on expert opinion that the at-risk positions in question had a reasonable basis in law. Petitioner testified that he consulted with various attorneys and others in structuring certain aspects of the activities. Nevertheless, he has not convinced us that he exposed the whole of each activity to a qualified expert and obtained a reasonable opinion, or any other opinion, as to whether petitioner was at risk within the meaning of
Accordingly, for 1980, we uphold respondent's determination of an addition to tax pursuant to
B.
Respondent has determined additions to tax under
If, however, the understatement is attributable to a tax shelter, disclosure of the item will not enable the taxpayer to avoid the addition, and the substantial authority test will not apply unless the taxpayer can show that he reasonably believed the treatment causing the understatement was more likely than not proper. The principal purpose of an entity, plan, or arrangement is the avoidance or evasion of Federal income tax if that purpose exceeds any other purpose. * * * Typical of tax shelters are transactions structured with * * * nonrecourse financing * * *. The existence of economic *501 substance does not of itself establish that a transaction is not a tax shelter if the transaction includes other characteristics that indicate it is a tax shelter.
Petitioners bear the burden of proof. Rule 142(a).
The record is clear that there are substantial understatements in tax for*502 both 1982 and 1983 unless the amounts that would otherwise be understatements for such years are reduced pursuant to
We find that both activities constitute tax shelters within the meaning of
Because both activities constitute tax shelters, petitioner cannot rely on substantial authority unless, at the time the 1982 and 1983 returns were filed, he reasonably believed that the tax treatment claimed was more likely than not the proper tax treatment. See
Accordingly, petitioners cannot claim that there was substantial authority that would allow them to reduce the amounts of understatements on their returns. See
III.
Respondent also*507 seeks increased interest pursuant to
1. Respondent has proposed that we find that petitioner was not at risk with respect to petitioner's long-term note issued with respect to each activity (viz, the petitioner computer installment note and the petitioner telecommunications installment note). Respondent has not requested that we find that petitioner lacked risk with respect to the cash and any short-term notes issued with respect to the activities. We assume that respondent concedes that petitioner was at risk with respect to such cash and short-term notes as of the beginning of the activity here in question, and we will not further address such items.↩
2. Additionally, respondent argues that petitioner is not at risk because he is not personally liable on the installment notes (see
robert-s-young-and-kimberly-c-young-v-commissioner-of-internal-revenue , 926 F.2d 1083 ( 1991 )
John J. Waters and Jeanne M. Waters v. Commissioner of ... , 978 F.3d 1310 ( 1992 )
Gary M. Emmons and Martha C. Emmons v. Commissioner of ... , 898 F.2d 50 ( 1990 )
wade-l-moser-and-lynn-r-moser-gary-a-bahmiller-and-cody-k-bahmiller , 914 F.2d 1040 ( 1990 )
James v. Martuccio Louise A. Martuccio v. Commissioner of ... , 30 F.3d 743 ( 1994 )
william-a-brown-joseph-h-ferrill-margaret-ferrill-frank-h-abbott , 398 F.2d 832 ( 1968 )
Brown v. Commissioner , 47 T.C. 399 ( 1967 )
american-principals-leasing-corporation-adams-partners-ltd-harrison , 904 F.2d 477 ( 1990 )
Metra Chem Corp. v. Commissioner , 88 T.C. 654 ( 1987 )
Pallottini v. Commissioner , 90 T.C. 498 ( 1988 )
Emmons v. Commissioner , 92 T.C. 342 ( 1989 )