Nicole Rose Corp. v. C.I.R., Docket No. 02-4110.
| Decision Date | 13 December 2002 |
| Docket Number | Docket No. 02-4110. |
| Citation | 320 F.3d 282 |
| Parties | NICOLE ROSE CORP., formerly known as Quintron Corporation, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. |
| Court | U.S. Court of Appeals — Second Circuit |
Robert F. Denvir, Winston & Strawn (James M. Lynch, Peter W. Poulos, David L. Theyssen, on the brief), Chicago, IL, for Petitioner-Appellant.
Thomas J. Sawyer, Tax Division, Department of Justice (Eileen J. O'Connor, Assistant Attorney General, Teresa E. McLaughlin, on the brief), Washington, DC, for Respondent-Appellee.
Before: WALKER, Chief Judge, OAKES and CARDAMONE, Circuit Judges.
Petitioner-appellant Nicole Rose Corp.1 ("Rose") appeals from the December 28, 2001 decision of the United States Tax Court finding deficiencies of $1,171,365, $684,700, and $4,559,237 for 1992, 1993, and 1994, respectively and imposing penalties totaling $1,283,060, pursuant to 26 U.S.C. § 6662(a). On appeal, Rose argues that the tax court erred because it disregarded the real economic effects of the transfer of lease interests and the pre-tax profit earned by Rose through the disputed transactions. We affirm.2
The dispute between the Commissioner of Internal Revenue ("Commissioner") and Rose concerns approximately $22 million in claimed business expense deductions. Rose maintains that the business expenses arose from the transfer of Rose's interest in certain leases of European computer equipment. The leases originated when Brussels Airport purchased computer equipment from ABN, a commercial Dutch bank, and then leased the equipment back to ABN for a term extending from 1990 until December 31, 1997. The Brussels Airport financed this purchase with a loan from Pierson, Heldring & Pierson, N.V. ("Pierson"), a subsidiary of ABN. Rather than pay Brussels Airport under the leaseback, ABN paid Pierson. In 1991, ABN assigned its interest under the lease to Atrium Finis ("Atrium"), a British firm; Atrium then subleased the equipment back to ABN for three years with the option to extend the leaseback for an additional four years. ABN prepaid to Atrium approximately $25 million, 90 percent of the amount due over the six-year term of the original Brussels Airport lease. This $25 million was placed in a trust fund to secure Pierson's right to repayment on its loan to Brussels Airport. Pierson, not Atrium, was both beneficiary and trustee of the trust fund and had no recourse against Atrium for payments on the loan to Brussels Airport. Atrium was required to make additional payments of approximately $1.6 million to cover the remaining ten percent due on the Brussels lease.
In September of 1993, Rose's director, Douglas Wolf, assisted in the renegotiation of some of the terms of the payments due under the Atrium-ABN leaseback. In particular, the additional $1.6 million owed by Atrium to Pierson was reduced to $400,000 and ABN agreed to continue subleasing the equipment from Atrium for the four-year renewal period of the sublease. On September 30, 1993, the parties restructured ABN's lease payments during the renewal period in a residual value certificate ("RVC") under which ABN would pay Rose on November 30, 1996 and November 30, 1998, 200 percent of the equipment's fair market value in excess of $5 million on the first date and in excess of $2 million on the second date. The tax court found that no credible effort was made to establish whether the base amounts were reasonable and whether the RVC had any foreseeable value.
At some point prior to September 29, 1993, Atrium transferred its rights and obligations relating to the underlying Brussels leaseback, the Atrium sublease, and the trust fund to companies controlled by Douglas Wolf. On September 30, 1993, Wolf transferred these interests to Rose. Rose immediately transferred its interest in the Brussels leaseback to Handelsmaatschapij Wildervank, a Dutch bank, along with $400,000 in cash and ten shares of stock in Cove Enterprises, Inc., an unrelated corporation. Rose retained its interest in the RVC but never tried to determine the value of the leased equipment.
Rose claimed a loss of approximately $22 million on the transaction with Wildervank. This loss was based on the transfer of the $400,000 in cash, a $2,118,644 capital loss from the transfer of the Cove stock, and an ordinary business expense of $21,840,660 from the transfer of Brussels Lease and the Trust Fund.
Rose applied the claimed $22 million business deduction to income generated through Rose's purchase of Quintron Corp., a Virginia corporation, and the sale of...
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