Norwest Corp. & Subsidiaries v. Comm'r of Internal Revenue
| Decision Date | 28 April 1997 |
| Docket Number | No. 20567–93,26213–93.,20567–93 |
| Citation | 108 T.C. No. 15,108 T.C. 265 |
| Parties | NORWEST CORPORATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
Norwest Bank Nebraska, N.A., a subsidiary of petitioner, removed asbestos-containing materials from its Douglas Street building in connection with the building's renovation and remodeling. On its 1989 return, petitioner claimed a $902,206 ordinary and necessary business deduction with respect to the asbestos-removal expenditures. In the notice of deficiency, respondent disallowed the deduction.
Held: The costs of removing the asbestos-containing materials must be capitalized because they were part of a general plan of rehabilitation and renovation that improved the Douglas Street building.
Petitioner's subsidiary Norwest Bank Minneapolis (NBM) owned “blocked deposits” at the Central Bank of Brazil (Central Bank) consisting of principal repayments of dollar-denominated loans previously made to Brazil in the ordinary course of NBM's banking business. The Central Bank prevented petitioner from repatriating these deposits because Brazil had insufficient hard currency (U.S.dollars) to make payments on the loans. In order to reduce petitioner's blocked deposit holdings and decrease its foreign debt exposure, petitioner entered into a debt-equity conversion transaction in 1987 as follows: $12,577,136 of petitioner's blocked deposits was exchanged for a 14.361–percent interest in a Brazilian company. Petitioner agreed to maintain the invested funds in Brazil for 12 years.
On its consolidated 1987 return, P claimed a $4,577,136 loss with regard to the debt-equity conversion transaction. In the notice of deficiency, respondent disallowed petitioner's claimed loss on the grounds that petitioner did not establish that any deductible loss was sustained in 1987.
1. Held: The step transaction doctrine is not applicable. The Central Bank converted the full face value of petitioner's blocked deposits, plus accrued interest, at the official exchange rate without diminution or discount into cruzados, which were used to pay a third party in exchange for its 14.361–percent interest in the Brazilian company. The exchange of the blocked deposits for the cruzados and the conversion of the cruzados into stock was not a transitory step but rather a substantive and significant element of the conversion. Petitioner's loss, if any, is measured by the difference between its basis in the blocked deposits and the fair market value of the cruzados it received. G.M. Trading Corp. v. Commissioner, 103 T.C. 59, 1994 WL 386151 (1994), supplemented by 106 T.C. 257, 1996 WL 182279 (1996), on appeal (5th Cir., Oct. 4, 1996), followed. Petitioner did not realize a loss because the basis of the blocked deposits and the fair market value of the cruzados were identical on the date of the transaction.
2. Held, further: The 12–year repatriation restriction imposed on petitioner's invested funds warrants a 15–percent discount on the fair market value of the cruzados P received, rendering a $1,886,570 loss for petitioner's 1987 tax year.
In 1989, Norwest Financial Resources, one of petitioner's affiliates, acquired the lease portfolio and other assets of Financial Investment Associates, Inc., for $141,456,620. On its 1989 return, petitioner allocated $131,513,038 of the $141,456,620 purchase price to the lease portfolio. The purchase agreement provided that no part of the purchase price is attributable to goodwill. In the notice of deficiency, respondent determined that petitioner overstated the fair market value of the lease portfolio by $1,328,618, which amount should be allocated to goodwill, going-concern value, or other nonamortizable intangible assets.
The parties presented experts who valued petitioner's lease portfolio. The difference between the experts' valuations centers around the different discount rates they used (respondent's expert used a 15.6–percent discount rate, while petitioner's expert used an 11.5–percent discount rate).
Held: Giving consideration to all the evidence presented, 13 percent is determined to be the appropriate discount rate.
Mark Alan Hager, Joseph Robert Goeke, Thomas C. Durham, David Farrington Abbott, William Albert Schmalzl, Glenn A. Graff, Daniel A. Dumezich, and Scott Gerald Husaby, for petitioner.
Lawrence C. Letkewicz, Dana Hundrieser, and Gary J. Merken, for respondent.
Page ----General Findings ............................................................ 6 Issue Removal of Asbestos“Containing Materials ............................ 6 I. A. The Douglas Street Building ...................................... 7 B. Remodeling Plans ................................................. 7 C. Use of Asbestos“Containing Materials in the Douglas Street Building ....................................................... 8 D. Federal Asbestos Guidelines ...................................... 8 E. Testing at the Douglas Street Building and Decision To Remove Asbestos“Containing Materials ................................. 10 F. Contractors and Work Performed .................................. 13 G. Health Concerns ................................................. 15 H. Liability Issues ................................................ 16 I. Tax and Accounting Matters ...................................... 17 J. Petitioner's Returns and Petitions .............................. 18 K. Notice of Deficiency ............................................ 19 Discussion ...................................................... 19 L. Capital Expenditures vs. Current Deductions ..................... 19 M. General Plan of Rehabilitation Doctrine ......................... 21 N. The Parties' Arguments .......................................... 23 0. Analysis ........................................................ 27 Issue Brazilian Debt“Equity Conversion ................................... 29 II. A. The Brazilian Debt Crisis ....................................... 31 1. Deposit Facility Agreements and Blocked Deposits ......... 31 2. The Cruzado Plan ......................................... 33 3. Moratorium on Interest ................................... 34 B. Petitioner's Blocked Deposits ................................... 34 C. Papel e Celulose Catarinense, S.A................................ 36 1. PCC's Expansion Plans .................................... 38 2. Petitioner's Internal Analysis of a PCC Investment ....... 39 3. Petitioner's Conclusions About the PCC Investment ........ 40 D. Steps Leading Up to the Conversion ............................. $41 E. The Conversion Transaction ...................................... 42 F. Petitioner's Tax and Accounting Treatment of the Conversion ..... 45 G. Petitioner's Return and Petition ................................ 46 H. Notice of Deficiency ............................................ 47 I. Subsequent Events ............................................... 47 Discussion ...................................................... 47 J. Respondent's Arguments .......................................... 47 K. Petitioner's Arguments .......................................... 50 L. Law and Analysis ................................................ 52 Issue Allocation of Purchase Price ....................................... 64 III. A. FIA ............................................................. 64 B. Federal's Acquisition of FIA .................................... 66 C. Petitioner's Acquisition of FIA ................................. 67 D. Petitioner's 1989 Return ........................................ 71 E. Notice of Deficiency ............................................ 71 Discussion ...................................................... 71 F. Residual Value .................................................. 72 G. Expert Witnesses ................................................ 73 1. Petitioner's Expert ...................................... 74 2. Respondent's Expert ...................................... 75 3. Critique of Experts ...................................... 77 H. Conclusion ...................................................... 80
In docket No. 20S67–93, respondent determined deficiencies in petitioner's 1987 and 1988 Federal income taxes in the respective amounts of $93,413 and $3,999,398, as well as additional interest under section 6621(c) for 1988. Pursuant to an amended answer filed on September 23, 1994, respondent increased the amount of the 1988 deficiency to $4,644,201.
In docket No. 26213–93, respondent determined a deficiency in petitioner's 1989 Federal income tax in the amount of $10,532,064. Respondent increased the amount of the 1989 deficiency to $22,757,717 pursuant to an answer filed on February 14, 1994, and further increased the deficiency amount to $22,791,923 pursuant to a September 22, 1994, amendment to answer.
These cases were consolidated for trial, briefing, and opinion.
The issues for decisions are: 1 (1) Whether petitioner is entitled to deduct the costs of removing asbestos-containing materials from its Douglas Street...
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