Bealor v. Commissioner

• Decision Date: 25 September 1996
• Docket Number: Docket No. 27614-90.,Docket No. 3457-92.,Docket No. 23719-93.,Docket No. 25519-91.,Docket No. 14820-91.,Docket No. 22496-91.,Docket No. 3453-92.,Docket No. 3461-92.,Docket No. 10897-93.,Docket No. 22407-91.,Docket No. 27125-91.,Docket No. 3221-93.,Docket No. 14819-91.,Docket No. 9950-92.,Docket No. 14112-89.,Docket No. 26434-89.,Docket No. 3456-92.,Docket No. 13364-89.,Docket No. 3462-92.,Docket No. 3551-92.,Docket No. 17236-89.
• Court: U.S. Tax Court
• Parties: Barry B. Bealor and Nancy L. Bealor, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner.

72 T.C.M. 730

T.C. Memo. 1996-435

Barry B. Bealor and Nancy L. Bealor, et al.¹ v. Commissioner.

Docket No. 13364-89.

Docket No. 14112-89.

Docket No. 17236-89.

Docket No. 26434-89.

Docket No. 27614-90.

Docket No. 14819-91.

Docket No. 14820-91.

Docket No. 22407-91.

Docket No. 22496-91.

Docket No. 25519-91.

Docket No. 27125-91.

Docket No. 3453-92.

Docket No. 3456-92.

Docket No. 3457-92.

Docket No. 3461-92.

Docket No. 3462-92.

Docket No. 3551-92.

Docket No. 9950-92.

Docket No. 3221-93.

Docket No. 10897-93.

Docket No. 23719-93.

United States Tax Court.

Filed September 25, 1996.

Stephen J. Jozwiak, for the petitioners in Docket Nos. 13364-89, 14112-89, 17236-89, 26434-89, 27614-90, 22407-91, 22496-91, 25519-91, 27125-91, 9950-92, 10897-93, and 23719-93. Fred Bryen (an officer), for the petitioners in Docket Nos. 14819-91, 14820-91, 3453-92, 3456-92, 3457-92, 3461-92, 3462-92, 3551-92 and 3221-93. John E. Becker, Jr., James C. Fee, Jr., and Joseph M. Abele, for the respondent.

                CONTENTS
                Subject                                                                                          [CCH
                                                                                                                 Page]
                Issues .......................................................................................    733
                FINDINGS OF FACT .............................................................................    734
                Background ...................................................................................    734
                MIT 80 .......................................................................................    734
                  Formation of MIT 80 ........................................................................    734
                  Investors in MIT 80 ........................................................................    735
                  Organization and Management of MIT 80 ......................................................    735
                  MIT 80 Employee Leasing Arrangement ........................................................    735
                  Operation of MIT 80 ........................................................................    736
                  Petitioner Crescenzo's Deduction MIT 80 Partnership Loss ...................................    737
                  Post-1980 Transactions of MIT 80 ...........................................................    737
                  Illustration No. 1 .........................................................................    739
                  Purported Transactions—MIT 80 ..............................................................    740
                  Termination Agreement of MIT 80 ............................................................    740
                  Partnership Income of MIT 80 ...............................................................    741
                MIT 82 .......................................................................................    741
                  Formation of MIT 82 ........................................................................    741
                  Investors in MIT 82 ........................................................................    742
                  Organization and Management of MIT 82 ......................................................    742
                  MIT 82 Employee Leasing Agreement ..........................................................    742
                  Operation  of MIT 82 .......................................................................    743
                  Individual Peititioners' Deducations of
                    Partnership Loss .........................................................................    744
                  Intercoastal's Deducation of Compensation Fee ..............................................    744
                  Post-1982 transactions of MIT 82 ...........................................................    744
                  The Petitioners' Deductions of Interest Payments ...........................................    744
                  Illustration No. 2 .........................................................................    746
                  Purported Transactions—MIT 82 ..............................................................    747
                  Termination Agreement of MIT 82 ............................................................    747
                  Partnership Income of MIT 82 ...............................................................    747
                MIT 83 .......................................................................................    748
                  MIT 83 Investors ...........................................................................    748
                  Organization and Management of MIT 83 ......................................................    748
                  MIT 83 Employee Leasing Agreement ..........................................................    749
                  Operation of MIT 83 ........................................................................    749
                  Tax Deductions .............................................................................    750
                  Other Developments .........................................................................    750
                  Post-1983 Transactions of MIT 83 ...........................................................    751
                  Illustration No. 3 .........................................................................    752
                

                  Investment Program—MIT 83 ..................................................................    753
                  Termination Agreement of MIT 83 ............................................................    753
                  MIT 83 Income ..............................................................................    753
                MIT 84 .......................................................................................    754
                MIT 85 .......................................................................................    756
                MIT 86 .......................................................................................    758
                W & A Payroll Service ........................................................................    760
                The Investors ................................................................................    762
                OPINION ......................................................................................    763
                    I.  Neither the Partners Nor the Partnerships Are Entitled to Loss Deductions Based Upon
                          Payment of Machise's Payroll Costs .................................................    763
                       A.  The Requirement of Economic Substance .............................................    763
                            1.  The Relationship of the Employees and Independent Contractors of Machise and
                                 to the Partnerships .........................................................    764
                             2.  Lack of Economic Substance of the Employee Leasing Agreements ...............    766
                                  a.  Structure of the Financing .............................................    766
                                  b.  Termination Agreements .................................................    768
                                  c.  Arm's-Lenght Negotiations ..............................................    770
                                  d.  Adherence to Contractual Terms .........................................    770
                                  e.  Reasonableness of Income Projections ...................................    772
                                  f.  Insertion of Other Entities ............................................    773
                        B.  Lack of Profit Objective of the Employee Leasing Partnerships ....................    773
                   II.  The Petitioners Are Not Entitled to Deductions for Interest Claimed on Their Long-Term
                          Notes ..............................................................................    776
                  III.  Intercoastal Is Not Entitled To Deduct From Its Income the Accrued Interest
                          Management Fees, or Override Payments to the Leasing Partnerships ..................    777
                   IV.  The Transactions at Issue Are Not Recognized for Purposes of Claiming Deductions or
                          Reporting Income ...................................................................    778
                        A.  In Summary .......................................................................    778
                        B.  No Procedural Defense to Determined Deficiencies .................................    778
                        C.  No Need To Address Other Issues ..................................................    780
                

MEMORANDUM FINDINGS OF FACT AND OPINION

BEGHE, Judge:

In seven of these consolidated cases respondent determined deficiencies in Federal income taxes as follows:

                Taxable
                Docket No.   Petitioners                                                Year    Deficiency
                13364-89     Barry B. Bealor and Nancy L. Bealor...................     1982     $  23,434
                14112-89     Frank A. Pettisani and Lucille M. Pettisani ..........     1982        12,344
                17236-89     James D. Cameron and Anita B. Cameron ................     1982        33,749
                26434-89     Intercoastal Management Co. and Subsidiaries .........     1982       312,775
                                                                                        1983       471,918
                27614-90     Donald P. Crescenzo and Kathleen Crescenzo ...........     1980        23,903
                27125-91     Intercoastal Management Co. and Subsidiaries .........     1984       644,814
                                                                                        1985       670,597
                                                                                        1986       725,758
                23719-93     Frank A. Pettisani1 and Lucille M. Pettisani ..........    1983       270,425
                                                                                        1984       606,481
                                                                                        1985     1,014,702
                                                                                        1986     1,304,694
                                                                                        1987       293,682
                1 In this case, respondent determined substantial deficiencies and additions to tax arising from petitioners'
                activities, including investments in various partnerships and S corporations. The only portions of the deficiencies

...