Andantech L.L.C. v. Commissioner

• Citation: 83 T.C.M. 1476
• Decision Date: 09 April 2002
• Docket Number: Docket No. 15532-98.,Docket No. 6348-00.,Docket No. 4277-00.
• Parties: Andantech L.L.C., Wells Fargo Equipment Finance, Inc. (f/k/a Norwest Equipment Finance, Inc.), Tax Matters Partner, and Wells Fargo & Company (f/k/a Norwest Corporation), A Partner Other Than the Tax Matters Partner, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner.
• Court: United States Tax Court

83 T.C.M. 1476

T.C. Memo. 2002-97

Andantech L.L.C., Wells Fargo Equipment Finance, Inc. (f/k/a Norwest Equipment Finance, Inc.), Tax Matters Partner, and Wells Fargo & Company (f/k/a Norwest Corporation), A Partner Other Than the Tax Matters Partner, et al.¹ v. Commissioner.

Docket No. 15532-98.

Docket No. 4277-00.

Docket No. 6348-00.

United States Tax Court.

Filed April 9, 2002.

Mark Alan Hager, Walter A. Pickhardt, John R. Kalligher, William K. Wilcox, and Myron L. Frans, for the petitioners in Docket No. 15532-98.

Walter A. Pickhardt, Mark Alan Hager, and William K. Wilcox, for the petitioner in Docket No. 4277-00.

Walter A. Pickhardt, for the petitioner in Docket No. 6348-00.

Robert M. Ratchford, Donna C. Hansberry, John C. Schmittdiel, and Robert J. Burbank, for the respondent.

CONTENTS

                FINDINGS OF FACT ..................................................................... 1479
                I. Norwest and Its Affiliated Group .................................................. 1479
                   A. Norwest ........................................................................ 1479
                   B. NEFI ........................................................................... 1479
                II. Comdisco and CIG ................................................................. 1479
                III. Negotiations .................................................................... 1480
                     A. CIG's Initial Discussions With Norwest and NEFI .............................. 1480
                     B. NEFI's Credit Approval Presentation .......................................... 1481
                     C. Financial Projections and Appraisals ......................................... 1481
                     D. The Foreign Investors ........................................................ 1489
                IV. Formation of Andantech and the Sale-Leaseback (Appendixes A, B, and C) ........... 1490
                    A. The Purchase Price ............................................................ 1491
                    B. The Equipment Lease ........................................................... 1491
                    C. The Bank Loan ................................................................. 1494
                V. Sale of Comdisco Rents (Appendix D) ............................................... 1494
                VI. Mr. de la Barre d'Erquelinne's and Mr. Parmentier's Withdrawal From Andantech .... 1495
                

                    A. Mr. de la Barre d'Erquelinnes's and Mr. Parmentier's Withdrawal of Capital
                       Contributed to Andantech ...................................................... 1495
                    B. Transfer of Mr. de la Barre d'Erquelinnes's Membership Interest in Andantech to
                       EICI (Appendix E) ............................................................. 1495
                    C. Transfer of Mr. Parmentier's Membership Interest to RD Leasing in Exchange for
                       Preferred Stock (Appendix F) .................................................. 1495
                VII. Repayment of Bank Loan (Appendxies F and G) ..................................... 1496
                VIII. Sale of Computer to End User ................................................... 1496
                IX. Comdisco's Exercise of Early Termination Options ................................. 1496
                X. Dissolution of RD Leasing and Andantech ........................................... 1498
                XI. Andantech's Federal Income Tax Returns ........................................... 1498
                XII. Respondent's Determinations ...................................................... 1498
                     A. EPAAs for the 1993 Short Years ............................................... 1498
                     B. FPAA for the 1994 Taxable Year ............................................... 1498
                OPINION .............................................................................. 1499
                I. Procedural Issues ................................................................. 1499
                II. Whether the Sale-Leaseback Transaction Should Be Respected ....................... 1499
                    A. Overview of Statutory Framework for the Transactions .......................... 1499
                    B. Positions of the Parties ...................................................... 1501
                    C. Analysis ...................................................................... 1501
                       1. Andantech Is Not a Valid Partnership and Is Not Recognized for Federal Tax
                          Purposes ................................................................... 1502
                          a. Andantech-Foreign Should Be Disregarded Messers. Parmentier and
                             de la Barre d'Erquelinnes Did Not Intend To Join Together for the Purpose
                             of Carrying On a Business and Sharing in the Profits or Losses From the
                             Equipment Leasing Activity .............................................. 1502
                          b. Andantech-US Should Be Disregarded Because EICI Did Not Intent To Join
                             With RD Leasing for the Purpose of Carrying On Partnership Business and
                             Sharing in the Profits or Losses From the Partnership's Equipment Leasing
                             Activity ................................................................ 1503
                       2. Andantech Acted as a Mere Shell or Conduct To Strip the Income From the
                          Transaction and Avoid Income Taxation and, Under the Step Transaction
                          Doctrine, Should Be Disregarded ............................................ 1503
                          a. Binding Commitment Test ................................................. 1504
                          b. Find Result Test ........................................................ 1504
                          c. Interdependence Test .................................................... 1505
                       3. The Sale-Leaseback Transaction Lacked Business 20 Purpose and Economic
                          Substance .................................................................. 1507
                          a. The Experts ............................................................. 1508
                          b. No Reasonable Possibility for Profit Existed ............................ 1510
                          c. RD Leasing/Norwest Was Not Motivated by Any Business Purpose Other
                             Than Obtaining Tax Benefits ............................................. 1512
                             i. Presence or Absence of Arm's-Length Price Negotiations ............... 1512
                             ii. The Relationship Between the Selling Price and the Fair Market Value. 1513
                             iii. The Structure of the Financing ..................................... 1513
                             iv. The Degree of Adherence to Contractual Terms ........................ 1514
                             v. The Reasonableness of the Income and Residual Value Projections ...... 1514
                             vi. Insertion of Other Entities ......................................... 1515
                       4. The Transaction Was Not a Sale and the Financing Did Not Constitute Genuine
                          Debt ....................................................................... 1515
                    D. Conclusion .................................................................... 1516
                  APPENDIX A ......................................................................... 1518
                

MEMORANDUM FINDINGS OF FACT AND OPINION

JACOBS, Judge:

Respondent issued Andantech, L.L.C. (Andantech), a limited liability Wyoming company, notices of final partnership administrative adjustment (FPAAs) that reflected adjustments to Andantech's partnership returns for taxable years which ended on December 10, 1993 (the 12/10/93 FPAA), December 31, 1993 (the 12/31/93 FPAA), and December 31, 1994 (the 12/31/94 FPAA).

These consolidated cases involve an equipment sale-leaseback transaction that is described in flow chart form, in attached appendixes A through G. The transaction is designed to produce tax benefits to RD Leasing, Inc. (RD Leasing), a member of an affiliated group in which Norwest Corp. (Norwest) is the common parent, through RD Leasing's membership in Andantech.

The substantive issue to be resolved is whether the sale-leaseback transaction involved herein should be respected for Federal tax purposes.

All section references are to the Internal Revenue Code as in effect for the years in issue.

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly. The stipulations of facts and the attached exhibits are incorporated herein by this reference.

I. Norwest and Its Affiliated Group

A. Norwest

At all relevant times, Norwest was a Delaware corporation, maintaining its principal place of business in Minneapolis, Minnesota. In 1998, Norwest merged with Wells Fargo & Co. Norwest was the surviving corporation, but it subsequently changed its name to Wells Fargo & Co.

Norwest is a bank holding company registered with the Federal Reserve Bank under the Bank Holding Company Act of 1956. Norwest's affiliates provide banking and other financial services. From 1993 through 1996, Norwest and its affiliated corporations filed consolidated Federal income tax returns. Norwest is a publicly held company whose stock is traded on the New York Stock Exchange and on the Midwest Stock Exchange.

J. Daniel Vandermark was Norwest's senior vice president of tax; he reported to John Thornton, Norwest's chief financial officer. All sale-leasebacks had to be approved by Mr. Vandermark.

B. NEFI

Norwest Equipment Finance, Inc. (NEFI), now known as Wells Fargo Equipment Finance, Inc., is a Minnesota corporation engaged in the business of equipment leasing. At all relevant times, NEFI was a wholly owned subsidiary of Norwest Bank Minnesota, N.A. (NBM), which in turn was a wholly owned subsidiary of Norwest.

NEFI was actively involved in leasing transactions involving "middle market" equipment (i.e., equipment having a market value between $25,000 and $2 million). NEFI was also involved, albeit to a lesser extent, in leasing transactions involving higher end equipment.

Within the Norwest group, sale-leasebacks were usually taken in the name of NEFI's parent, NBM. James Renner was president of NEFI. Phyllis Grossman was vice president of sale-leaseback transactions for NEFI. She was primarily responsible for reviewing the structure of, and overseeing the completion of, all proposed...