Hildebrand v. C.I.R., Nos. 93-9010

• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)
• Writing for the Court: Before TACHA and BRORBY; TACHA
• Citation: 28 F.3d 1024
• Parties: -5189, 94-2 USTC P 50,305 R.A. HILDEBRAND and Dorothy A. Hildebrand Wahl, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Gary E. KRAUSE, Tax Matters Partner, Barton Enhanced Oil Production Income Fund, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Decision Date: 22 June 1994
• Docket Number: 93-9011,Nos. 93-9010

Page 1024

28 F.3d 1024 74 A.F.T.R.2d 94-5189, 94-2 USTC P 50,305 R.A. HILDEBRAND and Dorothy A. Hildebrand Wahl, Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
Gary E. KRAUSE, Tax Matters Partner, Barton Enhanced Oil
Production Income Fund, Petitioner-Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. Nos. 93-9010, 93-9011. United States Court of Appeals,
Tenth Circuit. June 22, 1994.

Page 1025

Michael R. Matthias (Jeffrey P. Berg and Stuart R. Singer of Matthias & Berg, Los Angeles, CA, with him on the briefs), of Matthias & Berg, Los Angeles, CA, for the petitioners-appellants R.A. Hildebrand and Dorothy A. Hildebrand Wahl.

Kenneth M. Barish of Reish & Luftman, Los Angeles, CA, for petitioner-appellant Gary E. Krause, Tax Matters Partner, Barton Enhanced Oil Production Income Fund.

Kenneth W. Rosenberg (Loretta C. Argrett, Asst. Atty. Gen., and Richard Farber, Attorney, Tax Div., Dept. of Justice, Washington, DC, with him on the brief), Atty., Tax Div., Dept. of Justice, Washington, DC, for respondent-appellee.

Before TACHA and BRORBY, Circuit Judges, and BROWN, ^* District Judge.

TACHA, Circuit Judge.

The taxpayers in these consolidated cases, R.A. Hildebrand and Dorothy A. Hildebrand Wahl (the "Hildebrands") and Gary E. Krause ("Krause"), tax matters partner of Barton Enhanced Oil Production Income Fund ("Barton Income Fund"), appeal the

Page 1026

Tax Court's disallowance under 26 U.S.C. Sec. 183 ¹ of deductions for losses resulting from investments in limited partnerships and the disallowance of 26 U.S.C. Sec. 163 interest deductions. The taxpayers also appeal the Tax Court's imposition of an increased interest rate on the tax underpayment attributable to tax-motivated transactions under 26 U.S.C. Secs. 6601 and 6621(c). Finally, Barton Income Fund alleges the Tax Court erred in rendering a consolidated opinion grouping Barton with the Hildebrands and in finding that certain license fee obligations incurred by Barton were not deductible under 26 U.S.C. Sec. 174 as research and development expenditures or under 26 U.S.C. Sec. 1253 as franchise fees.

I. BACKGROUND

The facts in this case are fully set forth in the Tax Court opinion, Krause v. Commissioner, 99 T.C. 132, 1992 WL 178601 (1992). We offer only a brief procedural summary for purposes of this appeal.

On their federal income tax returns the Hildebrands claimed losses resulting from their investment as limited partners in Technology Oil and Gas Associates 1980 ("Technology-1980"). The Commissioner of the Internal Revenue Service ("Commissioner") disallowed these losses and the Hildebrands petitioned the Tax Court for redetermination of resulting deficiencies in tax and additions to tax. The Commissioner issued Barton Income Fund a notice of final partnership administrative adjustment disallowing losses and amounts claimed as eligible for tax credits. Krause petitioned the Tax Court for redetermination of the adjustments. The Tax Court consolidated these cases for trial treating them as test cases for a number of related cases involving tax deductions by limited partnerships.

After a fifteen-week trial the Tax Court issued an opinion upholding substantially all of the Commissioner's determinations. The Tax Court disallowed under 26 U.S.C. Sec. 183 the taxpayers' deductions for losses resulting from investments in the limited partnerships because the partnerships did not have the requisite profit motive and imposed an increased interest rate on tax underpayment attributable to tax-motivated transactions under 26 U.S.C. Secs. 6601 and 6621(c). The Tax Court also disallowed under 26 U.S.C. Sec. 163 interest deductions because the partnerships' underlying debt obligations were not genuine. The taxpayers now appeal.

This court has jurisdiction to review the Tax Court's decision pursuant to 26 U.S.C. Sec. 7482(a). We affirm.

II. DISCUSSION

Whether Technology-1980 and Barton Income Fund had actual and honest profit objectives is a question of fact. Cannon v. Commissioner, 949 F.2d 345, 349 (10th Cir.1991), cert. denied, --- U.S. ----, 112 S.Ct. 3030, 120 L.Ed.2d 901 (1992). "The applicable standard of review is a stringent one: a finding of fact should not be disturbed unless it is clearly erroneous." Id. (citing Fed.R.Civ.P. 52(a)). "A finding is 'clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed." United States v. United States Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 542, 92 L.Ed. 746 (1948). "If the district court's account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been...