Cooper v. Comm'r of Internal Revenue

• Decision Date: 13 January 1987
• Docket Number: 25826-84.,529-84,Docket Nos. 5317-83,6450-83,9677-83,8352-83,8798-83,29230-83,34818- 83
• Citation: 88 T.C. No. 6,88 T.C. 84
• Parties: RICHARD G. COOPER and JUNE A. COOPER, ET AL. 1, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent
• Court: U.S. Tax Court

88 T.C. 84

88 T.C. No. 6

RICHARD G. COOPER and JUNE A. COOPER, ET AL. 1, Petitioners

v.COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 5317-83

6450-83

8352-83

8798-83

9677-83

29230-83

34818- 83

529-84

25826-84.

United States Tax Court

Filed January 13, 1987.

Ps purchased solar water heating systems, on a leveraged basis, from Bliss; thereafter, pursuant to a prearranged agreement, Ps leased the systems to Coordinated for a term of 7 years. Coordinated subleased the systems to homeowners. Included in Ps' lease agreement with Coordinated was an option whereby Ps could require Coordinated to purchase the systems upon the expiration of the lease for an amount not less than the balance still owed on the notes to Bliss. Bliss guaranteed Coordinated's obligations under the leases. HELD: Ps entered into the transactions with a bona fide objective to make a profit. The sales from Bliss to Ps were bona fide, as were Ps' debts to Bliss, and Ps' leases with Coordinated. HELD FURTHER: Ps purchased a package from Bliss which consisted of solar water heating equipment (for which Ps are entitled to both depreciation deductions and investment and energy tax credits), contract rights, and a potential stream of income; the value of the equipment is determined to be $1,000 per system. The balance paid by Ps to Bliss were for other parts of the package. HELD FURTHER. Through the put options, Ps were protected against economic risk on their notes to Bliss; accordingly, Ps are not at risk for purpose of section 465, IRC 1954, with respect to the amount owed to Bliss in excess of the amount recoverable through the put options. Thomas O'Grady, for the petitioners in all dockets.

Marvin C. Gutter and Richard A. Josepher, for the petitioners in docket 34818-83.

Lawrence A. Schechterman, for the petitioner in docket 8352-83.

Bonnie L. Rosner and W. Robert Abramitis, for the respondent.JACOBS, JUDGE:

Each of these consolidated cases involves the disallowance of deductions and tax credits claimed by petitioners ² in connection with their purchases of solar water heating systems from A.T. Bliss & Company, Inc. (A.T. Bliss). Appendix A lists petitioners by name, the tax years involved, the deficiencies and additions to tax for each year, the place of residence for each individual petitioner, and the principal place of business for each corporate petitioner at the time their respective petitions were filed. Other issues unrelated to the aforementioned issue common to all petitioners are presented with respect to several petitioners; those issues and the petitioners concerned with such issues are set forth in Appendix B.

FINDINGS OF FACT

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

During 1979 and 1980, each petitioner entered into an agreement with A. T. Bliss for the purchase, on a leveraged basis, of solar water heating systems. ³ A.T. Bliss sold such systems to petitioners pursuant to three separate sales programs; viz, the 1979 program, the first half 1980 program, and the second half 1980 program. Each system sold under the 1979 program and the first half 1980 program consisted of: (1) a 48‘ x 120‘ solar collector panel; (2) a heavy duty liquid flow control pump; (3) temperature and flow sensors; and (4) an electronic control panel. The solar water heating equipment sold under the second half 1980 program consisted of a 48‘ x 120‘ solar collector panel, ‘plus all other components, as needed, such as heavy duty liquid flow control pump, temperature and flow sensors, and electronic control panel.‘

The solar water heating systems were offered for sale either as a full lot consisting of 27 systems or as a half lot consisting of 13 systems. The purchase price of a full lot was $100,000 ($3,704 per system); the purchase price of a half lot was $50,000 ($3,846 per system). A. T. Bliss had purchased the various components comprising a system from November, 1979 through 1980 at an average cost per system of between $250 and $300.

Petitioners Nationwide Power Corp. (Nationwide), which was formerly Southeast Equity Management, Inc., North American, Arnone, and Cooper each purchased systems from A. T. Bliss under the 1979 program. Pursuant to the terms of the 1979 program, each purchaser made a down payment equal to 20 percent of the total purchase price and gave a note for the balance. The note bore interest at the rate of 6 percent per annum and was payable in equal monthly installments over thirty years. The purchasers had the option of deferring half the down payment until April 1, 1980; interest at the rate of 12 percent accrued on the deferred portion of the down payment.

The remaining petitioners (Brill, Dash, Jenny, Duncan, and McAndrews), as well as Arnone, purchased systems under the 1980 programs. The down payment under the 1980 programs was $25,000 for full lot purchases and $14,000 for half lot purchases. The balance of the purchase price (evidenced by the purchaser's note) was payable over 15 years with interest at the rate of 7- 1/2 percent per annum; for the first seven years, interest only was payable. The down payment could be paid in installments, with the entire down payment due by April 1, 1981; interest at the rate of 12 percent accrued on the unpaid balance of the down payment.

The purchaser's note under both the 1979 and 1980 programs could be full recourse or nonrecourse ⁴ at the purchaser's option. Some recourse notes bore the notation that they were not negotiable. Petitioners Cooper, Duncan, Jenny and Brill executed nonrecourse notes; petitioners Nationwide, McAndrews, Arnone (with respect to his 1979 purchase) and Dash executed recourse notes. No evidence was presented as to the nature of the notes of petitioners North American and Arnone (with respect to his 1980 purchase). All the notes, recourse as well as nonrecourse, were secured by the systems purchased from A.T. Bliss.

By prearrangement, the purchasers could lease their systems to Coordinated Marketing Programs, Inc. (Coordinated), a Florida corporation whose principal place of business was located in the same building as that of A.T. Bliss. ⁵ Edward Roy was the president and a director of Coordinated from its inception in 1977 until January 15, 1979; he was also the president and chairman of the board of directors of A.T. Bliss from November 9, 1979 until December 31, 1981. ⁶ Mr. Roy's successor as president of Coordinated was Victor Perella; from 1979 to 1981, Mr. Perella owned 182,500 of the 3,000,000 outstanding shares of A.T. Bliss. ⁷

Petitioners leased their systems to Coordinated and received a monthly rental of $19.25 per system. ⁸ The term of each lease was seven years. At the end of the seven year term, petitioners had the option (referred to herein as a put option) of requiring Coordinated to purchase the leased systems for $35,000 for a half lot, or $75,000 for a full lot. Thus, by exercising their put options, petitioners would receive an amount from Coordinated approximately equal to the outstanding balance on their notes to A.T. Bliss. The performance of Coordinated under the lease agreements (including its obligation to purchase the systems if petitioners exercised their put options) was unconditionally guaranteed by A.T. Bliss.

Since it was anticipated that each purchaser would lease the systems to Coordinated, and Coordinated would sublease and install the systems on the ultimate users' roofs, physical delivery of the solar water heating systems was not taken by purchasers. In this respect, petitioners' lease with Coordinated provided as follows:

Lessor is aware that the equipment covered by this lease will be installed in individual buildings. The Lessee agrees to hold the Lessor harmless for any claims by third parties, including liens for taxes, etc. The Lessor agrees that as long as the Lessee is not in default under the term of this lease, the Lessor shall have no right or equity in any leases made between Lessee and any third parties. The Lessor also grants to the Lessee the right to substitute equipment of equal or greater value when returning Lessor's property at the expiration of the lease, in order to avoid unnecessary installation or removal expenses.

The systems sold by A.T. Bliss to petitioners required additional parts not included in the package, such as a storage tank, miscellaneous piping, fitting, insulation, and other small devices, in order to be operational. Coordinated purchased and retained ownership of the storage tanks. The cost to obtain the additional components, as well as the cost of installation, was borne by the homeowner to whom the system was subleased.

In order to induce Coordinated to accept leases from the purchasers of solar water heating systems, A.T. Bliss paid Coordinated a promotional allowance of $200 for each system leased. On April 30, 1980, the amount of the promotional allowance was increased to $400 per system; on July 1, 1980, the allowance was further increased to $500 per system. A.T. Bliss lacked sufficient cash to make these promotional allowances; the source of funds for the allowances came from the purchasers' down payments.

By the end of 1979, Coordinated had not subleased or installed any of the systems which it had leased from petitioners. By the end of 1980, approximately 20 percent of the systems leased by Coordinated in 1979 had been installed. The systems leased by Coordinated in 1980 were subleased sometime during 1981 or 1982.

Petitioners were responsible for the repair and maintenance of the leased systems. They therefore entered into prearranged maintenance agreements with Alternative Energy Maintenance, Inc. (Alternative), a Florida corporation, whose principal place of business was in the same building as that of A.T. Bliss and Coordinated. The president of Alternative was Victor Perella; James Sharon, who was treasurer and a director of Coordinated, was...