Hubert Enters., Inc. v. Comm'r of Internal Revenue
| Decision Date | 21 September 2005 |
| Docket Number | Nos. 4366–03,16798–03.,10669–03,s. 4366–03 |
| Citation | 125 T.C. No. 6,125 T.C. 72 |
| Parties | HUBERT ENTERPRISES, INC. AND SUBSIDIARIES, et al.,1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
A few individuals controlled a corporation (P1) and a limited liability company (ALSL). P1 transferred $2,440,684.38 to ALSL primarily to retransfer to a related limited partnership for use in the construction of a retirement community. The construction project was discontinued, and $2,397,266.32 of the transferred funds has not been repaid. P1 seeks to deduct those unrecovered funds as either a bad debt or a loss of capital/equity invested in ALSL. P2 had a subsidiary (S) that was a member of a limited liability company (L) that was involved in equipment leasing activities most of which arose in different years. Ps claim that the activities are aggregated under sec. 465(c)(2)(B)(i), I.R.C., into a single activity for the purpose of applying the at-risk rules of sec. 465, I.R.C. Ps also claim that S was at risk for portions of L's losses by virtue of a deficit account restoration provision that, Ps state, made S liable for portions of L's recourse obligations.
Held: P1 may not deduct the unrecovered funds as either a bad debt or a loss of equity.
Held, further, S may not aggregate all of L's equipment leasing activities in that sec. 465(c)(2)(B)(i), I.R.C., treats as a single activity only those activities for which the equipment is placed in service in the same taxable year.
Held, further, S may not increase its at-risk amounts on account of the deficit capital account restoration provision in that the provision was not operative in the relevant years.
William F. Russo and R. Daniel Fales, for petitioners.2
Gary R. Shuler, Jr., for respondent.
The Court has consolidated these cases for trial, briefing, and opinion. In docket Nos. 4366–03 and 10669–03, Hubert Enterprises, Inc. (HEI), and Subsidiaries petitioned the Court to redetermine respondent's determination of Federal income tax deficiencies of $974,805, $734,093, and $1,542,820 in its taxable years ended July 27, 1997, August 3, 1998, and July 31, 1999, respectively (HEI's 1997, 1998, and 1999 taxable years, respectively). Respondent reflected these determinations in notices of deficiency issued on December 17, 2002, and April 9, 2003, to HEI and its subsidiaries. Hubert Holding Co. (HHC), HEI's successor as parent of its affiliated group, petitioned the Court in docket No. 16798–03 to redetermine respondent's determination of Federal income tax deficiencies of $1,437,240 and $1,093,008 in its taxable years ended July 29, 2000, and July 28, 2001, respectively (HHC's 2000 and 2001 taxable years, respectively). Respondent reflected this determination in a notice of deficiency issued to HHC on June 30, 2003.
Following concessions by petitioners, we must decide the following issues:
1. For HEI's 1997 taxable year, whether HEI may deduct as either a bad debt or as a loss of capital (equity) $2,397,266.32 of unrecovered funds that it transferred to Arbor Lake of Sarasota Limited Liability Co. (ALSL), a limited liability company of which HEI was not an owner but which was owned primarily and controlled by a few individuals who also controlled HEI. We hold HEI may not deduct the funds as either a bad debt or a loss of capital; and
2. for HHC's 2000 and 2001 taxable years, whether HHC may deduct passthrough losses from leasing activities relating to equipment placed in service in different taxable years. As an issue of first impression, petitioners claim that section 465(c)(2)(B)(i) aggregates these activities into a single activity for purposes of applying the at-risk rules of section 465.3 Petitioners also claim that the members of the passthrough entity, a limited liability company named Leasing Co., LLC (LCL), were at risk for LCL's losses by virtue of a deficit account restoration provision that, petitioners state, made LCL's members liable for portions of LCL's recourse obligations. We hold that HHC may not deduct equipment leasing activity losses greater than those allowed by respondent in the notice of deficiency.
Some facts were stipulated. We incorporate herein by this reference the parties' stipulation of facts and the exhibits submitted therewith. We find the stipulated facts accordingly.
HEI was organized by the Hubert Family Trust (HFT) on or about October 8, 1992. HEI's only shareholder has always been HFT. When HEI's petitions were filed with the Court, its mailing address was in Cincinnati, Ohio.
For HEI's 1997, 1998, and 1999 taxable years, HEI was the parent corporation of an affiliated group of corporations that filed consolidated Federal corporate income tax returns. For HEI's 1997 and 1998 taxable years, the group's other members, each of which was wholly owned by HEI, were (1) Printgraphics, Inc. (Printgraphics), (2) HBW, Inc. (HBW) (also known as Weber Co.), (3) BES Manufacturing, d.b.a. Mr. Spray, (4) Vogt Warehouse, Inc. (Vogt), (5) HGT, Inc. (HGT), (6) Hubert Co., and (7) Graphic Forms and Labels, Inc. (Graphic). For HEI's 1999 taxable year, the affiliated group of corporations in addition to HEI consisted of the just-stated seven wholly owned subsidiaries and two other wholly owned subsidiaries; namely, Public Space Plus, Inc., and Hubert Development, Co.
From HEI's organization through at least 1998, Howard Thomas (Thomas) was HEI's president, Edward Hubert was chairman of HEI's board of directors, George Hubert, Jr., was an HEI vice president and secretary, Sharon Hubert was an HEI vice president, and J. Gregory Ollinger (Ollinger) was an HEI vice president. From its organization through August 1, 1998, HEI did not declare a dividend or formally distribute any of its earnings and profits. HEI's undistributed earnings as of July 25, 1995, July 26, 1996, August 2, 1997, and August 1, 1998, were $14,847,028, $19,878,907, $25,164,181, and $31,298,257, respectively.
In August 1999, HEI transferred the stock of its subsidiaries to HHC. For HHC's 2000 and 2001 taxable years, HHC was the parent corporation of an affiliated group of corporations that filed consolidated Federal corporate income tax returns. For HHC's 2000 taxable year, that affiliated group in addition to HHC consisted of the nine subsidiaries that were members of the HEI affiliated group in HEI's 1999 taxable year. For HHC's 2001 taxable year, the HHC affiliated group of corporations in addition to HHC consisted of (1) Printgraphics, (2) HBW, (3) Vogt, (4) HGT, and (5) Graphic. When HHC's petition was filed with the Court, its mailing address was in Cincinnati, Ohio.
Thomas and Stethem are unrelated by blood or marriage to any member of the Hubert family. Thomas and Stethem (sometimes collectively, trustees) were HFT's trustees. HFT'S settlors were Anthony Hubert, Benjamin Hubert, Brian Hubert, Christopher Hubert, Cynthia Hubert, Edward Hubert, George Hubert, Jr., Gregory Hubert, Joshua Hubert, Karen Hubert, Kathleen Hubert, Kimberly Hubert, Robert Hubert, Scott Hubert, Sharon Hubert, and Zachary Hubert (collectively, settlors). Edward Hubert, George Hubert, Jr., and Sharon Hubert (collectively, controlling settlors) have always held interests in HFT of 36.339 percent, 13.185 percent, and 16.488 percent, respectively. Anthony Hubert, Benjamin Hubert, Christopher Hubert, Joshua Hubert, Karen Hubert, Kathleen Hubert, Kimberly Hubert, Robert Hubert, Scott Hubert, and Zachary Hubert have each always held interests in HFT of 3.095 percent. Brian Hubert, Cynthia Hubert, and Gregory Hubert have each always held interests in HFT of 1.012 percent. During their lives, the controlling settlors were to receive annually all income attributable to their respective percentage interests in the trust estate. Each of the other settlors was to receive annually the income attributable to his or her trust interest commencing as follows: (1) one-third at age 25, (2) two-thirds at age 30, and (3) 100 percent at age 35.
Stethem died in 2003. He had been legal counsel for the Hubert family and their companies. He drafted the trust agreement (trust agreement) underlying HFT, and the settlors and trustees executed the trust agreement on June 6, 1988. Under the trust agreement, the trustees had the absolute discretion to distribute HFT's money, securities, or other property, either pro rata or otherwise. The trust agreement also allowed the controlling settlors, generally upon majority consent, to alter, amend, or revoke the trust agreement. By amendments dated December 30, 1988, and January 1, 1991, the settlors and the trustees modified the trust agreement. Through the earlier amendment, the Howard Thomas Trust acquired the rights and privileges of a controlling settlor. Through the later amendment, the Katherine Hubert Trust acquired the rights and privileges of a controlling settlor.
ALSL, also known as Seasons of Sarasota Limited Liability Co., is a Wyoming limited liability company organized on January 18, 1995. ALSL was organized to provide funds to a limited partnership, Arbor Lake Development, Ltd. (ALD), to use to construct a retirement condominium community in Sarasota, Florida, to be known as the Seasons of Sarasota Retirement Community (Seasons of Sarasota). For ALSL's taxable years ended December 31, 1995, 1996, and 1997, ALSL filed Federal partnership returns of income. ALSL reported and had no revenue for those years.
From January 18, 1995, through December 31, 1997, ALSL's units were owned as follows:
+-----------------------------+
¦Member ¦Units¦
+-----------------------+-----¦
¦ ¦ ¦
+-----------------------+-----¦
¦Edward Hubert ¦20 ¦
+-----------------------+-----¦
¦George Hubert, Jr. ¦20 ¦
+-----------------------+-----¦
¦Sharon Hubert ¦20 ¦
+-----------------------+-----¦
¦Ollinger ¦5 ¦...To continue reading
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