Young v. C.I.R., s. 89-6213

• Citation: 926 F.2d 1083
• Decision Date: 19 March 1991
• Docket Number: 89-6231 and 89-6246,Nos. 89-6213,s. 89-6213
• Parties: -710, 91-1 USTC P 50,159 Robert S. YOUNG and Kimberly C. Young, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Osvaldo DIAZ and Zoraida Diaz, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Jorge EGURROLA, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Ann WILSON, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. John L. WILSON, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. OSVALDO DIAZ, M.D., P.A., Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Steven GOLD, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Harold GOLD and Helen Gold, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Thomas O. GENTSCH and Betty F. Gentsch, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Edward ROSENGARTEN and Katherine Rosengarten, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Allen J. COHEN and Dorothy E. Cohen, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 1083

926 F.2d 1083

67 A.F.T.R.2d 91-710, 91-1 USTC P 50,159

Robert S. YOUNG and Kimberly C. Young, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Osvaldo DIAZ and Zoraida Diaz, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Jorge EGURROLA, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Ann WILSON, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

John L. WILSON, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

OSVALDO DIAZ, M.D., P.A., Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Steven GOLD, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Harold GOLD and Helen Gold, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Thomas O. GENTSCH and Betty F. Gentsch, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Edward ROSENGARTEN and Katherine Rosengarten, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Allen J. COHEN and Dorothy E. Cohen, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

Nos. 89-6213, 89-6231 and 89-6246.

United States Court of Appeals Eleventh Circuit.

March 19, 1991.

Robert S. Lamont, Neiman & Feuerman, P.A., Jan S. Neiman, Miami, Fla., for petitioners-appellants and No. 89-6231.

Theodore F. Brill, Planation, Fla., for petitioners-appellants and No. 89-6213.

Steven S. Brown, Leigh D. Roadman, Silets & Martin, Chicago, Ill., for petitioners-appellants and No. 89-6246.

Peter K. Scott, Acting Chief Counsel, IRS, Shirley D. Peterson, Asst. Atty. Gen., Tax Div., U.S. Dept. of Justice, Gary R. Allen, Chief, Joan I. Oppenheimer, Brian C. Griffin, David I. Pincus, Appellate Section, Tax Div., Washington, D.C., for respondent-appellee.

Appeals from a Decision of the United States Tax Court.

Before TJOFLAT, Chief Judge, EDMONDSON, Circuit Judge, and DYER, Senior Circuit Judge.

DYER, Senior Circuit Judge:

Three sets of taxpayers ¹ seek review of tax court decisions denying their petitions for redetermination of deficiencies with respect to losses claimed on investments in computer equipment leasing activities. The tax court concluded that a portion of the claimed losses under long-term installment partial recourse notes used to purchase equipment were in substance nonrecourse obligations and subject to a loss-limiting arrangement. The amount of the allowed deductions was limited to the amounts for which the investors were "at risk" within the meaning of the Internal

                Revenue Code, 26 U.S.C. Sec. 465. 2   In each case, the tax court determined that the taxpayers were liable for the increased interest rate provided for under section 6621(c)(3), 3 applicable in a tax motivated transaction, for the loss disallowed by reason of section 465(a).  We affirm
                

Computer Sale/Leaseback Transactions

As the facts have been set out in great detail in the tax court's opinions ⁴, we need only briefly summarize them here. The taxpayers in these cases entered into sale/leaseback transactions in the form of agreements by the taxpayers to purchase computer equipment from a company named Elmco, Inc. or its wholly-owned subsidiary CTC. By agreements, the taxpayers acquired Elmco's leases, and leased the equipment back to the party from whom it was purchased by Elmco. The purchase price to each investor consisted of a partial cash payment, a recourse purchase money equity note, and an installment note stated to be partially recourse and partially nonrecourse. The original owners, referred to as third-party lessors, had purchased the equipment, leased it to end-users, and then sold the equipment to Elmco and entered into a leasing arrangement with Elmco, CTC or the investor/taxpayers. ⁵ The third-party lessor was indebted to a bank for the purchase price of the equipment, and the bank had a first lien on the equipment. When Elmco purchased the equipment from the third-party lessor subject to end-user leases and the bank lien, its purchase money note was nonrecourse.

Elmco leased the equipment back to the third-party lessor for rental payments equal to or in excess of its payments due to the third-party lessor. When Elmco sold the "package" to an investor, it assigned its rights under the lease, including the receipt of rent, to the investor. The documents contain a guarantee by the third-party lessor of its subsidiary's rent obligations. Elmco indemnified the taxpayers for any material breach of its representations or obligations set forth in the agreement. Pursuant to a written or oral agreement, no part of the rent payments were actually made to anyone by the third-party lessor, except the amount in excess of the nonrecourse note payments due to the third-party lessor by Elmco. These note payments were in the exact amount as the partial recourse note payments due from the investor to Elmco. The third-party lessor credited the rent amount to the investor, credited the investor's note to Elmco with the amount due on it, and credited its note from Elmco with an equal amount. Periodically, the excess, if any, of the rentals over the note payments was paid by the third-party lessor to Elmco and transferred by Elmco to the investor. Obligations due to each party in this circular arrangement were credited as bookkeeping entries. It would be unnecessary for the third-party lessors to make any payment at all, as the transfers were made on the books of a designated depository or agent. The circular arrangement brought back to the third-party lessor its own rental payments applied against the nonrecourse note of Elmco.

Amendment to Answer to Assert "At Risk" Theory

As an initial procedural issue, ⁶ appellants Rule 41(a) of the Rules of Practice and Procedure of the United States Tax Court ⁸ provides that "leave [to amend] shall be given freely when justice so requires". Appellants argue that the late date that the Motion for Leave to File Amendment to Answer was granted resulted in prejudice and injury. The government argues that appellants have failed to demonstrate prejudice, as the facts relevant to the "at risk" issue were the same facts relevant to the other issues raised in the notices of deficiency. ⁹ We agree. The determination of whether justice requires an amendment is within the sound discretion of the trial court. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962); Gregory v. Mitchell, 634 F.2d 199, 203 (5th Cir.1981). ¹⁰ The tax court did not abuse its discretion in allowing the amendments to the answers, where the amendments were proposed over 30 days prior to the trial date and reflected in content the stated issues broadly covered by the deficiency notices.

contend that the tax court abused its discretion by permitting the government to amend its answer in each case [except Cohen ] to set forth the theory that the appellants were not "at risk" within the meaning of 26 U.S.C. Sec. 465, ⁷ inserting a new issue into these cases prior to trial. The motion to amend was granted three days prior to the commencement of the trial.

Not At Risk Under Section 465(b)(4)

The fundamental issue is to what extent the investors were at risk pursuant to section 465 with respect to the long-term installment notes. Their claimed losses are allowed to the extent that the taxpayers were at risk on their investments. The tax court analyzed whether, in fact, considering all the documents signed by the parties in the cases, Elmco would have any right to collect the "recourse" part of the installment notes from the investors. The tax court determined that if the third-party lessor Appellants contend that there was no arrangement which protected the taxpayers against loss. They argue that there was no offsetting arrangement, that neither the guarantee by the parent company third-party lessor of its subsidiary's rent obligation, nor the indemnification clause in the purchase agreement which provides that Elmco will indemnify the taxpayer against any loss which the taxpayer may incur by reason of any material breach by Elmco of any of its representations or obligations set forth in the agreement, constitutes a loss-limiting arrangement. They further argue that it is not the labels such as "guarantee" which must control, Levy v. Commissioner, 91 T.C. 838, 869 (1988), and that the court must look to the substance of the transaction, Thornock v. Commissioner, 94 T.C. 439 (1990).

                defaulted on its rental payments, that the investors were not the party of last resort, since the third-party lessor would in effect merely cease paying itself.  Elmco's indebtedness would be discharged since its notes to the third-party lessor were nonrecourse, and it would therefore be unrealistic to believe that Elmco would make any attempt to collect on the investors' notes to it.  The court found unconvincing the testimony of Elmco's principal officer, Mr. Meadows, that he would have compelled appellants to pay the stated recourse portion of the note.  He "believed [he would collect] because it would be a windfall for [Elmco], in effect."    There is no clear error in the lower court's credibility determination.  Henson v. Commissioner, 887 F.2d 1520, 1526 (11th Cir.1989) (citing Marsellus v. Commissioner, 544 F.2d 883, 886 (5th Cir.1977))
                

Primary weight must be given to the factual findings of the tax court judge. Commissioner v. Scottish American Inv. Co., 323 U.S. 119, 125, 65 S.Ct. 169, 172, 89 L.Ed. 113 (1944), cited in, Turner v. Commissioner, 812 F.2d 650, 654 (11th Cir.1987). "Where there are two permissible views of the evidence, the tax court's choice between them cannot be clearly erroneous." Piggly Wiggly Southern, Inc. v. Commissioner, 803 F.2d 1572, 1576 (11th Cir.1986). Accordingly, we hold that the tax court properly determined the effect of the...