Boca Investerings Partnership v. United States, Civil Action No. 97-0602 (PLF) (D. D.C. 10/5/2001)

• Decision Date: 05 October 2001
• Docket Number: Civil Action No. 97-0602 (PLF).
• Parties: BOCA INVESTERINGS PARTNERSHIP, et al., Plaintiffs, v. THE UNITED STATES OF AMERICA, Defendant.
• Court: U.S. District Court — District of Columbia

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BOCA INVESTERINGS PARTNERSHIP, et al., Plaintiffs, v. THE UNITED STATES OF AMERICA, Defendant.

Civil Action No. 97-0602 (PLF).

United States District Court, District of Columbia.

October 5, 2001.

OPINION, FINDINGS OF FACT AND CONCLUSIONS OF LAW INTRODUCTION

PAUL L. FRIEDMAN, District Judge.

Plaintiffs Boca Investerings Partnership ("Boca" or the "Partnership") and its tax matters partner, American Home Products Corporation ("AHP" or the "Company"), brought this action under Section 6226(a) of the Internal Revenue Code of 1986, as amended, 26 U.S.C. § 6226(a) (1994), seeking a judicial readjustment of certain partnership items affected by the Commissioner of Internal Revenue's Notice of Final Partnership Administrative Adjustment ("FPAA"), dated December 30, 1996. As a result of financial transactions entered by the Boca partnership, AHP — one of the partners — enjoyed a significant tax benefit: the ability to declare substantial capital losses on its tax returns for fiscal years ending May 31, 1990, 1991, 1992 and 1993, which in turn would offset a large capital gain it incurred in 1990.

In the FPAA the Commissioner reallocated to AHP much of the capital gain accrued by Boca through the transactions after finding that Boca was a sham partnership created by AHP for the sole purpose of creating the capital loss. Plaintiffs argue that the adjustments made by the Commissioner should be readjusted to the amounts originally reported by Boca on its partnership federal income tax returns because Boca was a bona fide partnership for federal income tax purposes and because the financial transactions entered by Boca that created the capital loss had sufficient economic substance to be recognized for federal income tax purposes. Defendant asserts that the Commissioner's determination must be upheld and judgment must be entered for defendant because plaintiffs failed at trial to show by a preponderance of the evidence that the Commissioner's findings were erroneous.

The case was tried before the Court without a jury over a period of 17 days in June, September and November 2000, and in January and April 2001. At trial, plaintiffs called as witnesses Thomas M. Nee, AHP Vice President, Taxes; Milan Kofol, AHP Deputy Treasurer; Richard J. Walsh, AHP Assistant Vice President, Taxes; John R. Considine, AHP Vice President and Treasurer; E. S. Purander Das, Merrill Lynch Managing Director and then Vice Chairman, Investment Banking; Elizabeth A. Case, an expert in tax accounting with an emphasis on partnership tax accounting; and Leslie Rahl, an expert in risk management, financial engineering, valuation of complex instruments and new securities, and market practices.

Defendant called as witnesses in its case-in-chief David J. Ross an expert in financial economics, corporate finance, and valuation; Alan Tucker, an expert in corporate finance and financial engineering; and Warren D. Matthei, a Merrill Lynch relationship manager at the time of the events at issue.

Plaintiffs called as rebuttal witnesses Harry Gifford Fong, an expert in the areas of corporate finance, valuation, financial engineering, and risk management; Richard Luciano, Merrill Lynch Associate and then Vice President; Mr. Kofol; Mr. Nee; and John DeVora, an AHP administrative assistant in the Payroll Department and later Payroll Manager. Defendant called as a rebuttal witness Richard Leftwich, an expert in finance, financial instruments, corporate finance and investment analysis.

The parties also submitted the deposition testimony of Mr. Das, Mr. Considine, Mr. Nee and Mr. Walsh, as well as the deposition testimony of the following individuals who did not testify at trial: Hans den Baas, Vice President, Derivatives and then Vice President, Financial Engineering at the New York branch of ABN Bank ("ABN"); Robert G. Blount, Executive Vice President and Chief Financial Officer of AHP; John Clark, Comptroller at Sumitomo Bank Capital Markets; Parker Douglas, Vice President, Risk Management at the New York branch of ABN; Claudia Morf, Vice President and Assistant Treasurer at PepsiCo, Inc.; David Oston, Vice President and Manager of the Structured Finance Department at the New York Branch of Banque Fancaise du Commerce Exterieur ("BFCE"); Paul Pepe, Associate and then Vice President of Merrill Lynch Capital Services, Inc.; Mark Rosenbaum, Senior Tax Accountant at Arthur Andersen; John Stafford, Chairman, CEO and President of AHP; Macauley R. Taylor, Merrill Lynch Managing Director; Joel Van Dusen, Financial Analyst and then Associate at Merrill Lynch; and Arshad Zakaria, Merrill Lynch Associate Vice President and then Managing Director.

For reasons expanded upon in the Findings of Fact section, the Court credits the testimony of most of plaintiffs' witnesses, both because of their believability and demeanor as witnesses at trial and the logic of their testimony, and because the exhibits and testimony of other credible witnesses in this case support their testimony. In most instances, and particularly with respect to some of the larger linchpin issues, the only exhibits that contradict plaintiffs' witnesses are ones that were only provisionally admitted at trial, that lack any reference to either of the plaintiffs in this case, and/or were obtained by defendant through discovery in cases unrelated to this one. In most instances, the only testimony offered by defendant to contradict the critical testimony of plaintiffs' witnesses was that of Walter Matthei, to whose testimony the Court gives virtually no weight because of his lack of knowledge of relevant events, the inconsistencies in his testimony, and the fact that much of it was contradicted by other, more credible witnesses, as well as because of Mr. Matthei's general untrustworthiness (including his history of lying and/or making false statements in previous court proceedings), and his bias and animosity towards Merrill Lynch.

I. FINDINGS OF FACT

Upon a careful consideration and evaluation of the stipulation of facts agreed upon by the parties, the testimony of all the witnesses, the documentary evidence admitted at trial, the post-trial written submissions of counsel and the relevant case law, and making credibility findings as necessary and appropriate to resolve any material discrepancies in the testimony, the Court makes the following findings of fact. On the basis of these findings, the Court concludes that plaintiffs have proven by a preponderance of the evidence that the Commissioner erred. The Court therefore will enter judgment for plaintiffs and reverse the determinations of the Commissioner.

A. American Home Products

1. AHP Generally

1. AHP, headquartered in Madison, New Jersey, is a large, publicly traded pharmaceutical company whose products include, inter alia, Robitussin, Advil, and Premarin. In the late 1980's and early 1990's, AHP's primary lines of business were prescription pharmaceuticals, over-the-counter medicines, medical instruments, foods, and household products. During this time frame, AHP typically invested excess funds in interest-bearing instruments. Stip. ¶ 7.¹

2. AHP is the tax matters partner of Boca under Section 6237(a)(7) of the Internal Revenue Code. Stip. ¶ 8.

3. During all relevant times, the following individuals held positions at AHP: John R. Stafford was Chief Executive Officer, Chairman and President; Robert Blount was Executive Vice President and Chief Financial Officer; John R. Considine was Vice President and Treasurer; Thomas M. Nee was Vice President, Taxes; Milan Kofol was Deputy Treasurer; and Richard J. Walsh was Assistant Vice President, Taxes. Stip. ¶ 9; PEX 715; Kofol Tr. (6/21/00 a.m.) 10:2-8.

4. As Vice President and Treasurer of AHP, Mr. Considine was responsible for investing the Company's funds and managing the cash flow from the Company's business operations. With respect to Boca, Mr. Considine was appointed as AHP's representative at the organizational meeting on April 19, 1990. During the relevant period, Mr. Considine was responsible for evaluating potential investments by both AHP and Boca to ascertain whether they would be sound investments, separate and apart from any potential tax benefits. JEX 5; Considine Tr. (9/12/00 a.m.) 7:22-8:25, 22:21-23:1, 60:4-16; Considine Dep. (4/12/99) 26:22-25, 78:25-79:10.

5. As Vice President, Taxes of AHP, Mr. Nee was responsible for the Company's worldwide tax matters. This included providing tax counsel on all transactions the Company might enter into and having responsibility for filing all corporate tax returns. Mr. Nee's responsibilities with respect to Boca included acting as a representative for AHP 10 at the organizational meeting and providing tax counsel to AHP and AHP 10 (the "AHP partners") regarding transactions contemplated by the Partnership. Nee Tr. (6/20/00 a.m.) 15:8-20; Nee Tr. (6/20/00 p.m.) 38:2-13, 49:20-50:2; Nee Dep. (3/17/98) 10:19-11:17, 50:1-15.

6. Mr. Kofol, the Deputy Treasurer of AHP, was the most knowledgeable person within AHP on capital assets. As Deputy Treasurer, Mr. Kofol was responsible for the management of cash, debt and financial investments. This responsibility included monitoring exchange rates and interest rates. With respect to Boca, Mr. Kofol was appointed as alternative representative to represent both AHP and AHP 10 at Partnership Committee meetings. In addition, Mr. Kofol was responsible for reviewing proposed investments, for evaluating whether such investments were potentially in the economic interest of the AHP partners, and for monitoring the performance of Boca's assets. Kofol Tr. (6/21/00 a.m.) 11:20-14:10, 38:18-25, 51:10-53:15; Kofol Tr. (6/21/00 p.m.) 46:13-19, 77:25-78:13, 96:9-14; Considine Tr. (9/12/00 a.m.) 54:22-55:2.

7. As Assistant Vice President, Taxes, Mr. Walsh assisted Mr. Nee in providing tax advice to the Company. With respect to Boca, Mr. Walsh was responsible for advising Mr. Nee and preparing the Partnership's tax...