Investment Research Associates, Ltd. v. Commissioner

• Decision Date: 15 December 1999
• Docket Number: Docket No. 25875-90.,Docket No. 30830-88.,Docket No. 31301-87.,Docket No. 26918-92.,Docket No. 26251-90.,Docket No. 22884-93.,Docket No. 33557-87.,Docket No. 21555-91.,Docket No. 7557-93.,Docket No. 23178-91.,Docket No. 19314-92.,Docket No. 24002-91.,Docket No. 712-86.,Docket No. 3456-88.,Docket No. 16421-90.,Docket No. 20219-91.,Docket No. 43966-85.,Docket No. 1984-92.,Docket No. 45273-86.,Docket No. 32103-88.,Docket No. 23743-92.,Docket No. 16164-92.,Docket No. 25981-93.,Docket No. 20211-91.,Docket No. 21616-91.,Docket No. 1350-87.,Docket No. 25976-93.,Docket No. 27444-89.
• Citation: Investment Research Associates, Ltd. v. Commissioner, 78 T.C.M. 951 (T.C. 1999)
• Parties: Investment Research Associates, Ltd., and Subsidiaries, et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner.
• Court: U.S. Tax Court

78 T.C.M. 951

T.C. Memo. 1999-407

Investment Research Associates, Ltd., and Subsidiaries, et al.¹ v. Commissioner.

Docket No. 43966-85.

Docket No. 712-86.

Docket No. 45273-86.

Docket No. 1350-87.

Docket No. 31301-87.

Docket No. 33557-87.

Docket No. 3456-88.

Docket No. 30830-88.

Docket No. 32103-88.

Docket No. 27444-89.

Docket No. 16421-90.

Docket No. 25875-90.

Docket No. 26251-90.

Docket No. 20211-91.

Docket No. 20219-91.

Docket No. 21555-91.

Docket No. 21616-91.

Docket No. 23178-91.

Docket No. 24002-91.

Docket No. 1984-92.

Docket No. 16164-92.

Docket No. 19314-92.

Docket No. 23743-92.

Docket No. 26918-92.

Docket No. 7557-93.

Docket No. 22884-93.

Docket No. 25976-93.

Docket No. 25981-93.

United States Tax Court.

Filed December 15, 1999.

Randall G. Dick and Jeffrey I. Margolis, for the petitioners in Docket Nos. 43966-85, 712-86, 45273-86, 1350-87, 31301-87, 33557-87, 3456-88, 30830-88, 32103-88, 27444-89, 25875-90, 26251-90, 23178-91, 24002-91, 19314-92, 26918-92, 25976-93, and 25981-93. Royal B. Martin and Steven S. Brown, for the petitioners in Docket Nos. 16421-90, 20211-91, 20219-91, 21555-91, 21616-91, 1984-92, 16164-92, 23743-92, 7557-93, and 22884-93. Mark E. O'Leary, John J. Comeau, James M. Cascino, Jonathan P. Decatorsmith, James M. Klein, G. Roger Markley, and Pamela V. Gibson, for the respondent.

CONTENTS

Issue 1. Whether Payments Made By the Five in the Prudential, Travelers, and Kanter Transactions
                   During the Years at Issue Are Properly Taxable to Kanter, Ballad, and Lisle, and, if so, whether they
                   are liable for the fraud additions to tax and penalty with respect to such income ........................    968
                FINDINGS OF FACT ............................................................................................    968
                  I.  Background ............................................................................................    968
                      A.  Petitioners' Residences and Principal Place of Business ...........................................    968
                      B.  Kanter ............................................................................................    969
                      C.  Ballard ...........................................................................................    969
                      D.  Lisle .............................................................................................    969
                 II.  The Kanter Enterprise .................................................................................    970
                      A.  Overview ..........................................................................................    970
                      B.  Investment Research Associates, Inc., and Its Subsidiaries ........................................    971
                          1.  IRA Stock .....................................................................................    971
                          2.  IRA Stockholders ..............................................................................    972
                              a.  Mildred Schott and Delores Keating ........................................................    972
                              b.  The Bea Ritch Trusts ......................................................................    972
                          3.  IRA Officers and Directors ....................................................................    974
                          4.  IRA Subsidiaries ..............................................................................    974
                      C.  Holding Co. .......................................................................................    974
                      D.  Administration Co. and Principal Services: The Banking Corporation ................................    975
                      E.  The Other Lending Corporations ....................................................................    975
                          1.  HELO ..........................................................................................    976
                          2.  Int'l Films ...................................................................................    976
                III.  Transactions Involving the Five .......................................................................    976
                      A.  The Weaver Arrangement: Hyatt Corp.'s Embarcadero Hotel Management Contract .......................    976
                      B.  The Frey Arrangement: Condominium Conversions .....................................................    979
                      C.  The Schaffel Arrangement: Essex Hotel Management Co. ..............................................    983
                          1.  Schaffel/Prudential Transactions ..............................................................    984
                          2.  Schaffel/Travelers Transactions ...............................................................    984
                          3.  FPC Subventure Associates Partnership .........................................................    985
                      D.  The Schnitzer Arrangement: Sale and Repurchase of Property Management Systems Stock ...............    985
                      E.  The Eulich Arrangement: Essex Hotel Management Co. ................................................    989
                          1.  Eulich's Background ...........................................................................    989
                          2.  Prudential's Gateway Hotel ....................................................................    989
                      F.  Diagram: Summary of Payments From the Five 1977 Through 1989 ......................................    993
                      G.  Changes in IRA and Subsidiaries Corporate Structure From 1974 Through 1988 ........................    994
                      H.  Changes in Holding Co. & Subsidiaries Corporate Structure 12/76 Through 8/87 ......................   1009
                      I.  Holding Co. & Subsidiaries Returns ................................................................   1014
                      J.  HELO 1979 Through 1983 ............................................................................   1019
                 IV.  Flow of Money .........................................................................................   1019
                      A.  Payments to IRA and Subsidiaries: The Prudential Transactions .....................................   1019
                          1.  Overview ......................................................................................   1019
                          2.  Flow of the Funds 1977 Through 1983 ...........................................................   1020
                              a.  Flow of Money From KWJ Corp. to IRA: 1978 Through 1983 ....................................   1020
                              b.  Flow of Money From Zeus: 1979 Through 1983 ................................................   1022
                              c.  Payments From Schnitzer-PMS, Essex, and Schaffel 1979 Through 1983 ........................   1023
                              d.  Funds Accumulated in IRA at Close of 1983 .................................................   1023
                          3.  1984 Distributions to Carlco, TMT, and BWK, Inc. ..............................................   1024
                              a.  1984 Distributions of Cash From IRA to Carlo, TMT, and BWK, Inc. ..........................   1024
                

              b.  1984 Distributions of Essex Partnership Interest to Carlo, TMT, and BMK, Inc. .............   1025
                              c.  Transfer of Sherwood Partnership Interest From IRA to Carlco, TMT, and BMK, Inc. ..........   1025
                              d.  1984 Distributions to Carlco, TMT, and BMK, Inc. as Reflected on the Books of the
                                  Corporations ..............................................................................   1025
                          4.  Flow of Payments by the Five 1985 Through 1989 ................................................   1026
                              a.  Zeus 1984 Through 1988 ....................................................................   1026
                              b.  Distributions of Schnitzer-PMS and Essex Payments Made During 1985 Through 1989 ...........   1026
                              c.  Loans From IRA to KWJ Partnership Through 1989 ............................................   1030
                              d.  Balance Sheets of Carlco, TMT, and BWK, Inc. 1983 Through 1989 ............................   1030
                      B.  Flow of the Funds Paid By the Five Through IRA and Its Subsidiaries to Kanter, Ballard, and
                          Lisle .............................................................................................   1032
                          1.  Overview ......................................................................................   1032
                          2.  Payments from IRA, KWJ Corp., and KWJ Co. Partnership .........................................   1032
                              a.  1982: IRA Payments to Ballard and Lisle ...................................................   1032
                              b.  Consulting Fees Paid to Ballard's and Lisle's Children ....................................   1032
                              c.  KWJ Partnership 1989 Payments to Lisle and Ballard ........................................   1032
                          3.  Disposition of Funds out of Carlco, TMT, and BWK, to Kanter ...................................   1033
                              a.  Creation of Carlco, TMT, and BWK, Inc. ....................................................   1033
                              b.  Control and Management of Carlco, TMT, and BWK, Inc. ......................................   1033
                              c.  Ballard: Disposition of Funds out of TMT ..................................................   1034
                              d.  Lisle: Disposition of Funds out of Carlco .................................................   1036
                              e.  Kanter: Disposition of Funds out of BWK, Inc. .............................................   1036
                          4.  Loans .........................................................................................   1037
                              a.  IRA Loans to Kanter .......................................................................   1037
                              b.  Loans to Ballard, Lisle, Their Family members and Trusts ..................................   1037
                          5.  Writeoff of Loans and Losses

...