Coleman v. Comm'r of Internal Revenue
| Decision Date | 23 July 1986 |
| Docket Number | Docket No. 7216-83. |
| Citation | 87 T.C. 178,87 T.C. No. 12 |
| Parties | RONALD COLEMAN and NANCY COLEMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners purchased an interest in certain computer equipment from C, which had purchased such interest from E, which had purchased an interest in the equipment from A. Petitioners then leased their interest back to C. HELD, petitioners did not have a depreciable interest in the equipment during the years in issue. HELD FURTHER, interest payments on petitioners' nonrecourse note, which does not constitute genuine indebtedness, are not deductible. HELD FURTHER, interest payments on a recourse note are deductible. Matthew H. Ross and Leon C. Baker, for the petitioners. 1
Susan G. Lewis and Patricia H. Delzotti, for the respondent.
Respondent determined deficiencies in petitioners' Federal income taxes for taxable years 1979 and 1980 of $2,189 and $2,442, respectively, relating to petitioner Nancy Coleman's 1 percent interest in a computer leasing transaction. In his amended answer, respondent alleged additional deficiencies for taxable years 1979 and 1980 of $31,840 and $64,700, respectively, relating to petitioner Ronald Coleman's interest in the same transaction. The issues for decision are whether petitioners' deductions for depreciation and interest expenses were properly disallowed.
Some of the facts have been stipulated and are so found. This reference incorporates the stipulations of facts and attached exhibits. At the time they filed their petition in this case, petitioners resided in Oradell, New Jersey. Petitioners timely filed joint Federal income tax returns for 1979 and 1980.
During the years 1979 and 1980, petitioner Ronald Coleman was a one-third partner in Majestic Construction Co. (‘Majestic‘), a New Jersey general partnership. The other partners were Ronald Coleman's brothers, Harvey and William Coleman. Majestic's business was constructing rental income properties for its own account. During 1979, William Coleman and Leon C. Baker, a first cousin of the Colemans' and an attorney who had been involved with equipment leasing since 1972, discussed Majestic's need for a tax shelter and the economic and tax aspects of computer leasing. Baker approached Nigel Leopard, a representative of Carena (Computers) B.V. (‘Carena,), a Netherlands corporation, to develop a deal for the Colemans. Baker had dealt with Leopard for about seven years, the latter generally acting as an intermediary between European leasing companies and American brokers who, in turn, sought investors for equipment leasing transactions. Baker sought from Leopard an equipment transaction that gave the Colemans an ‘inside price,‘ i.e., a higher percentage of leverage than that featured in typical equipment deals.
Leopard contacted Vernon Davies, co-founder and, at that time, president of Atlantic Computer Leasing p.l.c. (‘Atlantic‘). Atlantic, a United Kingdom (‘U.K.‘) corporation, was a large, reputable supplier of configured computer systems consisting of IBM central processors, IBM operating systems, and IBM and IBM-compatible peripherals. Atlantic supplied such equipment mainly through ‘arranged leases,‘ i.e., transactions in which Atlantic arranged financing for its customers by transferring title to the equipment to financial institutions or corporate leasing subsidiaries and arranging leases between these parties as lessors and the customer- users as lessees. To a lesser extent, Atlantic utilized direct leases and outright sales to its customers. Leopard had known Davies for approximately 2 years, and had done several deals with him, by the time of their meeting regarding the Colemans' transaction. Their negotiations centered on certain computer equipment (the ‘Equipment ‘) financed through leases ‘arranged‘ between seven lessors (the ‘Lenders‘) and six end users and having the terms set forth in the chart on pages 180-181. 2
+-----------------------------------------------------------------------------+
¦ ¦ ¦ ¦ ¦ ¦Monthly rental ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦ ¦ ¦Initial ¦(exclusive of ¦
¦User-lessee ¦Lender-lessor¦Quantity¦Equipment ¦lease ¦VAT)2 ¦
¦ ¦ ¦ ¦ ¦term1 ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦(1) Reuters, ¦Mansfield ¦ ¦3138-J ¦Dec. 28, ¦ ¦
¦Ltd. ¦Hosery Mills,¦1 ¦Processor ¦1979-June¦£ 5,298 ¦
¦ ¦Ltd. ¦ ¦ ¦28, 1982 ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦ ¦3046-1 ¦ ¦ ¦
¦ ¦ ¦ ¦Power unit ¦ ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦(2) ¦Beaverline ¦ ¦3138-J ¦Nov. 5, ¦£ 5,550 for first¦
¦Northumberland¦Leasing, Ltd.¦1 ¦Processor ¦1979-Nov.¦2 years£>>>>>> ¦
¦County Council¦ ¦ ¦ ¦5, 1982 ¦4,000 thereafter.¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦1 ¦3046-1 ¦ ¦ ¦
¦ ¦ ¦ ¦Power Unit ¦ ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦(3) Thomson ¦Thompson, ¦ ¦3330-1 Disk¦Feb. 27, ¦ ¦
¦Travel, Ltd. ¦Lloyd & ¦1 ¦storage ¦1978 ¦£ 587 ¦
¦ ¦Ewart, Ltd. ¦ ¦ ¦ ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦ ¦ ¦Feb. 27, ¦ ¦
¦ ¦ ¦ ¦ ¦1982 ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦ ¦ ¦Mar.1, ¦ ¦
¦(4) Torrington¦Anochrome, ¦1 ¦3135-1 ¦1979-Mar.¦£ 2,500 ¦
¦Co., Ltd. ¦Ltd. ¦ ¦Processor ¦1, ¦ ¦
¦ ¦ ¦ ¦ ¦19843 ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦1 ¦3046-1 ¦ ¦ ¦
¦ ¦ ¦ ¦Power Unit ¦ ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦ ¦3215-1 ¦ ¦ ¦
¦ ¦ ¦1 ¦Console ¦ ¦ ¦
¦ ¦ ¦ ¦printer ¦ ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦ ¦1403-N1 ¦ ¦ ¦
¦ ¦ ¦ ¦Printer ¦ ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦1 ¦ ¦ ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦ ¦3350-B2 ¦June 29, ¦ ¦
¦(5) Chesire ¦A. Beckman, ¦2 ¦Direct ¦1979-Dec.¦£ 1,490 ¦
¦County Council¦Ltd. ¦ ¦access ¦29,1985 ¦ ¦
¦ ¦ ¦ ¦storage ¦ ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦ ¦3350-A2 ¦ ¦ ¦
¦ ¦ ¦1 ¦Direct ¦ ¦ ¦
¦ ¦ ¦ ¦access ¦ ¦ ¦
¦ ¦ ¦ ¦storage ¦ ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦ ¦3350-C2 ¦ ¦ ¦
¦ ¦ ¦1 ¦Direct ¦ ¦ ¦
¦ ¦ ¦ ¦access ¦ ¦ ¦
¦ ¦ ¦ ¦storage ¦ ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦(6) Cheshire ¦Noble ¦ ¦333-11 Disk¦July 13, ¦ ¦
¦County Council¦Grossart, ¦1 ¦storage and¦1979-Jan.¦£ 860 ¦
¦ ¦Ltd. ¦ ¦control ¦13, 1986 ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦ ¦3330-11 ¦ ¦ ¦
¦ ¦ ¦1 ¦Disk ¦ ¦ ¦
¦ ¦ ¦ ¦storage ¦ ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦(7) Cheshire ¦Noble ¦ ¦3830-2 ¦Sept. 28,¦ ¦
¦County Council¦Grossart, ¦2 ¦Storage ¦1979-Mar.¦£ 3,200 ¦
¦ ¦Ltd. ¦ ¦control ¦28, 1986 ¦ ¦
+--------------+-------------+--------+-----------+---------+-----------------¦
¦ ¦ ¦ ¦3350-2 ¦ ¦ ¦
¦ ¦ ¦1 ¦Direct ¦ ¦ ¦
¦ ¦ ¦ ¦access ¦...To continue reading
Request your trial
-
Durkin v. Comm'r of Internal Revenue (In re Estate of Durkin)
...71 T.C. 1017 (1979); Connery v. United States, 460 F.2d 1130, 1134 (3d Cir.1972); Commissioner v. Danielson, supra; Coleman v. Commissioner, 87 T.C. 178, 201–204 (1986), affd. without published opinion 833 F.2d 303 (3d Cir.1987). In Commissioner v. Danielson, supra, the taxpayers allocated ......
-
Investment Research Associates, Ltd. v. Commissioner, Docket No. 43966-85.
...title at a cost of 2 percent of the original purchase price. Future interests are not currently depreciable. See Coleman v. Commissioner [Dec. 43,193], 87 T.C. 178 (1986), affd. without published opinion 833 F.2d 303 (3d Cir. 1987). That case involved Atlantic Computer Leasing and a lease s......
-
Nestle Holdings, Inc. v. Commissioner
...purchase price, cannot now urge the Court to recharacterize the transaction. Citing the following language from Coleman v. Commissioner [Dec. 43,193], 87 T.C. 178, 203 (1986), affd. without published opinion 833 F.2d 303 (3d Cir. 1987), respondent contends that cross-border transactions, li......
-
Cma Consolidated, Inc. v. Commissioner, Dkt. No. 12746-01.
...in cases involving computer equipment. See Nicole Rose Corp. v. Commissioner [Dec. 54,578], 117 T.C. at 338; Coleman v. Commissioner [Dec. 43,193], 87 T.C. 178, 199 (1986), affd. without published opinion 833 F.2d 303 (3d Cir. 1987); Smoot v. Commissioner [Dec. 47,405(M)], T.C. Memo. 1991-2......