Nicole Rose Corp. v. Comm'r of Internal Revenue
| Decision Date | 28 December 2001 |
| Docket Number | No. 3328–00.,3328–00. |
| Citation | 117 T.C. 328,117 T.C. No. 27 |
| Parties | NICOLE ROSE CORP., Formerly Quintron Corporation, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Corporate taxpayer petitioned for redetermination of deficiencies arising from disallowance of $22 million in ordinary business expense deductions. The Tax Court, Swift, J., held that: (1) deductions lacked business purpose and economic substance, and (2) accuracy-related penalty for negligence was warranted.
Decision for IRS. Held: Approximately $22 million in claimed ordinary business expense deductions are disallowed because they relate to transactions lacking in business purpose and in economic substance.Stanley C. Ruchelman, Harold L. Adrion, and Sandra Gale Behrle, for petitioner.
Lewis R. Mandel and Andrew J. Mandell, for respondent.
For petitioner's taxable years ending January 31, 1992, 1993, and 1994, respondent determined deficiencies in petitioner's Federal income taxes and accuracy-related penalties as follows:
+-----------------------------------------------------+
¦Year¦Deficiency¦Accuracy–Related Penalty Sec. 6662(a)¦
+----+----------+-------------------------------------¦
¦1992¦$1,171,365¦$234,273 ¦
+----+----------+-------------------------------------¦
¦1993¦684,700 ¦136,940 ¦
+----+----------+-------------------------------------¦
¦1994¦4,559,237 ¦911,847 ¦
+-----------------------------------------------------+
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 primary issue for decision is whether the transfer of petitioner's interests in multilayered leases of computer equipment and related trusts had business purpose and economic substance and should be recognized for Federal income tax purposes and whether petitioner should be entitled to the $22 million in claimed ordinary business expense deductions relating thereto.
Some of the facts have been stipulated and are so found.
At the time the petition was filed, petitioner's principal place of business was located in Jericho, New York.
In 1992, Quintron Corp. (Quintron), a Virginia corporation, entered into negotiations with Loral Aerospace Corp. (Loral), a Delaware corporation, for the sale to Loral of Quintron stock or for the sale to Loral of Quintron's assets.
Quintron was engaged in the design, manufacture, sale, and service of aircraft flight simulators and other electronic equipment. Loral was a major defense contractor and was engaged in the design, manufacture, sale, and service of communications and satellite equipment.
Representatives of Quintron wanted Loral to purchase from Quintron's shareholders their stock in Quintron. Representatives of Loral wanted Loral to purchase the assets of Quintron.
In 1993, representatives of Intercontinental Pacific Group, Inc. (IPG), a California corporation and the parent corporation of QTN Acquisition, Inc. (QTN), suggested that, with IPG's and QTN's participation as a type of intermediary or facilitator in the transaction, the stock in Quintron could be sold, and Loral could purchase Quintron's assets. The controlling shareholder of IPG was Douglas Wolf (Wolf).1
After further negotiations, in September of 1993, QTN, until that point in time a dormant shell corporation and a subsidiary of IPG, purchased from the shareholders of Quintron for $23,369,125 in cash their stock in Quintron. QTN financed this stock purchase through a bank loan.
Upon purchase of the stock in Quintron, QTN was merged into Quintron, and Quintron thereafter remained as the surviving corporation and was controlled by IPG.2 A major benefit to IPG and to QTN of retaining Quintron as the surviving corporation after the merger between Quintron and QTN was that Quintron had significant taxable income in 1993 and prior years against which claimed carryback losses (arising from the claimed ordinary deductions relating to the transactions at issue herein) could be applied in an attempt to produce large tax refunds for the successor corporation to Quintron (and even though, as stated, QTN in prior years had been a dormant shell corporation).
By prearrangement and simultaneously with the above stock purchase transaction, Quintron (the stock of which was now controlled by IPG) sold to Loral the assets of Quintron.3 Quintron's sale price for the assets was approximately $20.5 million in cash, plus the assumption by Loral of certain liabilities of Quintron. Expenses of $892,943 were incurred by QTN and Quintron in connection with the stock purchase and asset sale transactions.
In spite of the transactions involving the purchase of its stock by QTN, QTN's merger with Quintron, and the sale of assets to Loral, and in spite of Quintron's name change on October 27, 1993, to “Nicole Rose Corp.”, for convenience generally hereinafter we refer to Quintron as “petitioner”.
The $20.5 million received on the sale of assets to Loral was used by petitioner to pay off most of the bank loan obtained to purchase the stock in Quintron.
Upon the sale of assets to Loral (due to petitioner's low carryover tax bases in the assets) petitioner would be required to recognize on its 1994 Federal income tax return approximately $11 million in income.4
The above $11 million in income that petitioner would have to report on its 1994 Federal income tax return (relating to petitioner's sale of assets) explains the transactions that were entered into in order to produce the claimed $22 million in ordinary Federal income tax deductions that are at issue herein. Petitioner, QTN, IPG, other entities controlled by Wolf, and other domestic and foreign entities, planned and participated in a series of complicated, tax-oriented transactions involving the establishment and transfer of petitioner's interests in certain leases of computer equipment and related trusts.
We first explain the background and history relating to the leased equipment. We then seek to explain the complicated tax-oriented maneuvers that petitioner and others entered into in order to produce the claimed $22 million tax deductions relating thereto.
In 1990, N.V. Brussels Airport Terminal Co. (Brussels Airport), a Belgium corporation which financed, developed, and managed the Brussels, Belgium, airport, purchased from ABN AMRO Bank, N.V. (ABN), a commercial Dutch bank, certain computer equipment and leased the equipment back to ABN, which was the end user of the equipment. Brussels Airport financed the purchase of the equipment with a loan from Pierson, Heldring & Pierson N.V. (Pierson), a subsidiary of ABN (Pierson loan).
The initial term of the leaseback of the equipment from Brussels Airport to ABN (the Brussels Leaseback) extended from December 28, 1990, to December 31, 1997. Under the Brussels Leaseback, ABN had the option to extend the Brussels Leaseback for up to 3 additional years.
Because of similarities in the amounts due under the Brussels Leaseback and the Pierson loan, ABN was to make lease payments due under the Brussels Leaseback directly to Pierson, and the lease payments were then to be applied by Pierson in satisfaction of the payments due on the Pierson loan.
One year later, on December 12, 1991, ABN assigned to Atrium Finis (Atrium), an equipment leasing and financing partnership organized under the laws of the United Kingdom, all of its interest as lessee under the remaining 6–year term of the 7–year Brussels Leaseback. ABN, however, simultaneously leased back from Atrium for approximately 3 years, until December 31, 1994, use of the equipment covered by the Brussels Leaseback, and ABN retained an option to extend this leaseback for an additional 4 years, until December 31, 1998 (the Atrium Sublease).
On December 12, 1991, ABN prepaid to Atrium approximately $25 million, reflecting generally lease payments scheduled to be paid to Atrium by ABN over the course of the 3–year Atrium Sublease. This $25 million (taking into account the time value of money) apparently corresponded generally to approximately 90 percent of the total lease payments to be paid during the remaining 6–year term of the Brussels Leaseback.
By prearrangement, with receipt from ABN of the $25 million in prepaid lease payments, the $25 million was transferred into a trust fund (the Trust Fund) to secure Pierson's right to receive the lease payments due under the remaining 6–year term of the Brussels Leaseback.
Under the December 12, 1991, assignment to Atrium of ABN's interest in the Brussels Leaseback, even though Pierson was secured for the lease payments due from Atrium under the Brussels Leaseback, Atrium was stated to be nominally obligated on the lease payments due thereunder (which as stated were to be paid directly to Pierson as lender). Pierson, however, had no recourse to Atrium on the Pierson loan. Pierson's recourse thereon was limited to the equipment covered by the Brussels Leaseback and to the $25 million that was transferred into the Trust Fund.
As creditor on Brussels Airport's purchase of the equipment from ABN and as the entity to whom the ABN end-user lease payments ultimately were due to be paid under the Brussels Leaseback, the beneficiary of the Trust Fund was Pierson. Even though Pierson, however, was the beneficiary of the Trust Fund and was to receive distributions from the $25 million Trust Fund over the course of the remaining term of the Brussels Leaseback, Pierson also was the trustee of the Trust Fund, and, as such, from the December 12, 1991, date on which the funds were transferred into the Trust Fund, Pierson had possession of the $25 million.
Under the terms of the Trust Fund, in 1995, 1996, and 1997 Atrium was required to make additional payments into the Trust Fund of...
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