781 F.2d 724 (9th Cir. 1986), 85-7060, Independent Elec. Supply, Inc. v. C.I.R.
|Docket Nº:||85-7060, 85-7077.|
|Citation:||781 F.2d 724|
|Party Name:||INDEPENDENT ELECTRIC SUPPLY, INC., Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Frank PRESTIPINO and Leana Prestipino, Hildegard K. Marks, and Jean D. Littlefield, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.|
|Case Date:||January 24, 1986|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
Argued and Submitted Dec. 10, 1985.
Clarence J. Ferrari, San Jose, Cal., for Independent Elec. Supply.
J. Richard Johnston, Johnston & Horton, Oakland, Cal., for petitioners-appellants.
Richard Driscoll, Ann Belanger Durney, Dept. of Justice, Tax Div., Washington, D.C., for respondent-appellee.
Appeal from the United States Tax Court.
Before WRIGHT, KENNEDY, and BEEZER, Circuit Judges.
KENNEDY, Circuit Judge:
The taxpayers in these consolidated cases appeal the Tax Court's disallowance of deductions for depreciation, ordinary and necessary business expenses, and research and development expenses. 1 We affirm.
The appellants each invested in limited partnerships, trusts, or both, set up by Fred Solomon and George Nicoladze for the ostensible purpose of acquiring and exploiting patents. The patents were acquired for the partnerships and trusts by Solomon and Nicoladze for relatively small amounts of cash ($0 to $300,000) and relatively large nonrecourse obligations ($497,000 to $250,000,000). Many were acquired hastily in an effort to avoid limitations on distributive partnership losses attributable to nonrecourse debt which took effect on January 1, 1977. I.R.C. Sec. 704(d) (1976) (subsequently amended by Revenue Act of 1978, Pub.L. No. 95-600, Sec. 201(b), 92 Stat. 2763, 2815-16). The patents, over thirty-five in number, include rights to inventions as diverse as a geothermal turbine, acquired in December 1979 for $300,000 down and a $149,000,000 nonrecourse obligation, and a disintegrating golf tee, acquired, like approximately half the patents, for $3,000 down and a $2,000,000 nonrecourse obligation. None of the patents has earned any net income, and losses associated with the sixteen partnerships and trusts invested in by appellants have exceeded $90,000,000.
The appellants claimed, in their capacities as limited partners or trust beneficiaries,
deductions for depreciation under I.R.C. Sec. 167(a), ordinary and necessary business expenses under I.R.C. Sec. 162(a), and research and development expenses under I.R.C. Sec. 174(a). As a result of these deductions, the appellants reported large losses with respect to their interests in the partnerships and trusts, losses far in excess of their actual investments. The losses largely reflect the depreciation deductions taken against the inflated basis in the patents provided by the nonrecourse indebtedness.
The Commissioner determined deficiencies in the taxpayers' federal income taxes. The Tax Court denied the taxpayers' petitions for redetermination of the deficiencies, holding that the taxpayers' patent activities did not constitute a "trade or business" required for deductibility under I.R.C. Secs. 162(a), 167(a), and 174(a) since the patents were not held or exploited for profit. Rather, the court found that the primary motivation for the formation and continuance of the partnerships and trusts was tax avoidance, noting that " 'if anything can be described as an "abusive tax shelter," this is it'." Paul J. Lahr v. Commissioner, 53 T.C.M. (P-H) p 84,472, at 1884, 1893 (1984) (quoting Flowers v. Commissioner, 80 T.C. 914, 941 (1983)).
Appellants argue that the Tax Court clearly erred in finding that the trusts and partnerships were not created and continued with the intention of making a profit. Moreover, appellant Independent Electric Supply, Inc. (IES) argues that the court clearly erred in finding that it did not have a profit motive when it invested in three of the patent trusts. IES argues that its own motivation is relevant because, it claims, the existence of a profit motive for a trust should be determined with respect to each beneficiary. Because the Tax Court found no profit motive at either the trust or beneficiary level, it declined to decide at which level business motive should be assessed. We sustain the Tax Court's findings regarding the nonexistence of a profit motive, and we affirm.
The deductions taken by the appellants were claimed under I.R.C. Sec. 167(a), granting a deduction for depreciation of property "used in [a] trade or business" or "held for the production of income"; I.R.C. Sec. 162(a)...
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