James v. Comm'r of Internal Revenue, Docket Nos. 27360-83
| Citation | 87 T.C. 905,87 T.C. No. 60 |
| Decision Date | 29 October 1986 |
| Docket Number | 40636-84.,24045-84,30508-84,33287-83,40635-84,29714-84,Docket Nos. 27360-83 |
| Parties | JACK S. JAMES and CAROL N. JAMES, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
Ps are members of a joint venture (JV). JV purported to purchase from one of a group of related companies (the ‘Communications Group‘) certain computer equipment subject to existing leases. The Communications Group had purchased the computer equipment at issue from the manufacturers, arranged third-party lender financing for the equipment and leased the equipment. After selling the equipment subject to the leases to JV, the Communications Group managed the leases as JV's ‘agent‘ and charged JV implementation, management and performance fees. By virtue of agreements between JV and the Communications Group, cash flow during the terms of the leases was negative despite unexplained rental income allocated to JV by the Communications Group that was greater than the amount of rent due under the leases. Under the most optimistic expectations of residual value, JV could not anticipate a profit from the transactions. HELD: The transactions between JV and the Communications Group were independent of and unaffected by the underlying lease transactions between the Communications Group and third-party lenders and lessees and were without economic substance; JV acquired no interest in the computer equipment. HELD FURTHER: The investment tax credits and business expense deductions claimed by Ps as members of JV were properly disallowed. Tom G. Parrott and Charles N. Woodward, for the petitioners.
Osmun R. Latrobe, for the respondent.
In these consolidated cases, the Commissioner determined deficiencies in petitioners' Federal income taxes and additions to tax for the taxable years 1979, 1980 and 1981 in the following amounts:
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¦ ¦ ¦ ¦ ¦Sec. 6653 ¦
¦ ¦ ¦ ¦ ¦(a) ¦
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¦Docket ¦ ¦ ¦ ¦additions ¦
+--------+----------------------------------------+----+-----------+----------¦
¦No. ¦Petitioner ¦Year¦Deficiency ¦to tax ¦
+--------+----------------------------------------+----+-----------+----------¦
¦27360-83¦Jack S. and Carol N. James ¦1979¦$349,785.90¦--- ¦
+--------+----------------------------------------+----+-----------+----------¦
¦29714-84¦Jack S. and Carol N. James ¦1980¦397,201.90 ¦--- ¦
+--------+----------------------------------------+----+-----------+----------¦
¦ ¦ ¦1981¦269,325.97 ¦--- ¦
+--------+----------------------------------------+----+-----------+----------¦
¦33287-83¦Glen E. and Sybil H. Michael ¦1979¦211,680.00 ¦--- ¦
+--------+----------------------------------------+----+-----------+----------¦
¦ ¦ ¦1980¦297,691.00 ¦--- ¦
+--------+----------------------------------------+----+-----------+----------¦
¦ ¦ ¦1981¦230,108.50 ¦--- ¦
+--------+----------------------------------------+----+-----------+----------¦
¦24045-84¦David G. and Kathleen Ownby ¦1980¦12,214.00 ¦--- ¦
+--------+----------------------------------------+----+-----------+----------¦
¦ ¦ ¦1981¦10,798.00 ¦--- ¦
+--------+----------------------------------------+----+-----------+----------¦
¦30508-84¦A. F. Boudreau, Jr., and Katherine F. ¦1980¦639,054.27 ¦--- ¦
¦ ¦Boudreau ¦ ¦ ¦ ¦
+--------+----------------------------------------+----+-----------+----------¦
¦40635-84¦Jeffrey H. and Mary E. Cope ¦1980¦132,314.00 ¦$6,615.70 ¦
+--------+----------------------------------------+----+-----------+----------¦
¦ ¦ ¦1981¦86,069.00 ¦4,303.45 ¦
+--------+----------------------------------------+----+-----------+----------¦
¦40636-84¦Robert S. and Phyllis H. Cope ¦1980¦175,125.00 ¦8,756.25 ¦
+--------+----------------------------------------+----+-----------+----------¦
¦ ¦ ¦1981¦148,978.00 ¦7,448.90 ¦
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After concessions by the parties, the issues which this Court must decide are whether petitioners, as members of a joint venture, are entitled (1) to investment tax credits pursuant to section 46(e)(3) 2 on certain computer equipment purportedly acquired by the joint venture; and (2) to deductions for management fees pursuant to section 162.
Some of the facts have been stipulated and are so found. Petitioners Jack S. and Carol N. James resided in Tulsa, Oklahoma at the time their petition in docket No. 27360-83 was filed, and in Santa Barbara, California at the time their petition in docket No. 29714-84 was filed. The remaining petitioners each resided in Tulsa, Oklahoma at the time their respective petitions were filed.
The principal actors in these cases are three related companies, each of which performs substantially the same functions: Communications Associates, Inc. (CAI), Communications Associates Leasing, Inc. (CALI) and Communications Leasing International, Inc. (CLI). Petitioner claims that these three companies (collectively, the ‘Communications Group‘) analyzed and configured computer systems for large-scale users, purchased the computer equipment for these systems, then leased the equipment to the users.
In the transactions at issue in these cases, the Communications Group purchased and leased computer equipment and initially administered the leases covering the equipment. The Communications Group neither analyzed the needs of the users in the transactions at issue in these cases nor configured the computer equipment chosen by the lessees.
Jack James (James) was the president of CAI and CLI in 1979 and 1980. Glen E. Michael (Michael) was senior vice-president of CALI in 1979 and president of CALI in 1980. The Communications Group employed an administrative staff of approximately 15 persons and used experienced independent contractors for professional assistance. In 1981 Mentco Corporation (Mentco) took over the administration and management of the portfolios of leases in which the Communications Group had continuing responsibilities.
The record does not reveal what common ownership, if any, there was between Mentco and the Communications Group. James' son is an officer of Mentco. Mentco and the Communications Group have the same address.
CLI purchased from the Amdahl Corporation (Amdahl) an Amdahl 470V/7 computer system, serial number 10055 (‘Amdahl 10055‘), on June 19, 1979 for $3,211,000.00, which CLI financed by executing an installment note in favor of Amdahl. The first eighteen monthly payments due under the note were $56,000.00 each; the remaining 44 payments were $69,000.00 each. A final payment of $258,917.00 was due on March 1, 1985. CAI and Amdahl executed a security agreement covering the equipment to secure CLI's obligation to Amdahl.
CAI leased the Amdahl 10055 to Massey-Ferguson, Inc. (Massey-Ferguson) for a term of 62 months, commencing January 1, 1980. The rental rate was $56,000.00 per month for the first 18 months of the lease and $69,000.00 per month for the remainder of the lease term. Massey-Ferguson remitted the rent directly to Amdahl which satisfied CLI's monthly payments due Amdahl under CLI's installment note.
By letter dated October 24, 1983, Massey-Ferguson canceled the lease as of December 31, 1984. The parties stipulated that on November 1, 1983, Massey-Ferguson subleased the Amdahl 10055 to Major Computer, Inc. The record has only a draft sublease dated November 1, 1983 between Massey-Ferguson and Major Computer, Inc. for the sublease of the Amdahl 10055, for a term of 15 months, at a monthly rate of $7,000.00.
Another lease of the Amdahl 10055 was executed between Mentco Corporation (on behalf of CAI) as lessor and Major Computer as lessee on November 1, 1983 for a term of nine months, at a monthly rate of $7,000.00. Attached to the lease in the record is an undated, unexecuted certificate of acceptance. The commencement date of the lease is not in the record. An addendum to the lease provided that the lessee could purchase the equipment at the conclusion of the lease by paying its then fair market value.
Each lease of the Amdahl 10055 was a net-net-net lease, under which the lessee was responsible for all costs relating to the installation, maintenance, taxes and insurance of the computer equipment. The lease provided that ‘LESSOR IS NOT A MANUFACTURER OR VENDOR OF THE EQUIPMENT.‘ The Communications Group played no role in the selection or configuration of computer equipment by the lessees. The lease was negotiated at arm's length and reflected competitive terms and rates. We find, based on the parties' agreement, that the residual value of the computer equipment at the end of the lease term would not exceed 35% of the manufacturer's original sale price.
CAI purchased from Amdahl a second 470V/7 computer system, serial number 70078 (‘Amdahl 70078‘), at a cost of $2,550,000.00 on December 28, 1979, financed by a loan from the State Street Bank. CAI leased the equipment to Amdahl for a term of three months, commencing January 1, 1980, then sold it to Northern Illinois University (NIU) pursuant to a ‘lease‘ that was, in fact, a conditional sales contract.
CAI transferred its interest in the Amdahl lease and the NIU...
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