Laidlaw Transportation, Inc. v. Commissioner, Docket No. 9361-94.
| Decision Date | 30 June 1998 |
| Docket Number | Docket No. 9362-94.,Docket No. 9361-94. |
| Citation | 75 T.C.M. 2598 |
| Parties | Laidlaw Transportation, Inc. and Subsidiaries v. Commissioner. Laidlaw Industries, Inc. & Subsidiaries v. Commissioner. |
| Court | U.S. Tax Court |
Robert H. Aland, Chicago, Ill., Gregg D. Lemein, Mark A. Oates, Jeffrey M. O'Donnell, John D. McDonald, and Taylor S. Reid, for the petitioners. Thomas R. Lamons, C. Glenn McLoughlin, and Brigham J.L. Sanders, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in and overpayments of petitioners' Federal income tax as follows:
Laidlaw Transportation, Inc. (LTI) and Subsidiaries
Year Deficiency Overpayment
1984 ........................................... $ 108,575 $ 8,333
1985 ........................................... 3,178,717 0
1987 ........................................... 7,983,733 0
1988 ........................................... 17,747,370 181,801
Laidlaw Industries, Inc. (LII) and Subsidiaries
Year Deficiency Overpayment
1986 ........................................... $ 96,383 0
Aug. 1987 ...................................... 19,746,061 0
Dec. 1987 ...................................... 6,828,291 0
Petitioners received $975,153,806 from a related Dutch corporation, Laidlaw International Investments B.V. (LIIBV), during the years in issue. Petitioners transferred $133,515,4591 to LIIBV in payments denominated as interest2 during those years. The issue for decision is whether the LIIBV advances to petitioners were debt or equity, and thus whether petitioners may deduct' the $133,515,459 as interest for the years in issue. We hold that the LIIBV advances to petitioners were equity, and that petitioners may not deduct the $133,515,459 as interest.3
We use the following abbreviations in this report:
BBC Barclays Bank of Canada LIIBV Curacao Laidlaw International Investments
B.V., Curacao Branch
BFI Browning Ferris Industries, Inc. LIL Laidlaw Investment Ltd
Chase Chase Lincoln First Bank LTI Laidlaw Transportation, Inc
CP Canadian Pacific Ltd. LTL Laidlaw Transportation Ltd. or
Laidlaw, Inc
FNBC First National Bank of Chicago LWSI Laidlaw Waste Systems, Inc
GGCL Grey Goose Corporation Ltd. LWSL Laidlaw Waste Systems, Ltd
Goose Grey Gosse Holdings, Inc. Monroe Monroe Tree and Lawntender, Inc.
GSX GSX Corporation RBC Royal Bank of Canada
LAC Laidlaw Acquisition Corp. TDB Toronto Dominion Bank
LESCAL Laidlaw Environmental Services Transit Travelway, Inc., Laidlaw Transit,
(California), Inc. Inc., or Laidlaw Transit (West)
Inc.
LESI Laidlaw Environmental Services, Inc. Transit Ltd. Laidlaw Transit Ltd.
LHI Laidlaw Holdings, Inc. Tree Laidlaw Tree Service, Inc.
LIBL Laidlaw Investments (Barbados) Ltd. Waste Quebec Laidlaw Waste Systems Quebec Ltd.
LII Laidlaw Industries, Inc. WMI Waste Management, Inc.
LIIBV Laidlaw International Investments
B.V.
Unless otherwise indicated, section references are to the Internal Revenue Code in effect for the years in issue and Rule references are to the Tax Court Rules of Practice and Procedure.
TABLE OF CONTENTS
[CCH Pages]
I. FINDINGS OF FACT ....................................................... 2599
A. Petitioners ........................................................ 2599
B. LTL ................................................................ 2600
C. Growth of Petitioners and Their Subsidiaries ....................... 2601
D. LIIBV .............................................................. 2602
E. LTL's Purchase of GSX .............................................. 2604
F. LTL's Centralized Cash Management Program (CCMP) ................... 2605
G. The Advances at Issue .............................................. 2605
H. Petitioners' Financial Condition ................................... 2613
I. Bank Loans ......................................................... 2614
J. Comparison of Terms Governing Advances from LIIBV and Bank Loans ... 2615
K. Audit of LTL by Canadian Tax Authorities .......................... 2615
II. OPINION ................................................................ 2616
A. Contentions of the Parties ......................................... 2616
B. Loans vs. Capital Contributions .................................... 2616
C. Substance vs. Form ................................................. 2616
D. The Mixon Factors .................................................. 2617
E. Other Factors ...................................................... 2624
F. Conclusion ......................................................... 2624
Some of the facts have been stipulated and are so found.
Petitioners LTI and LII are U.S. corporations the principal places of business of which were in Hurst, Texas, when they filed their petitions.
LTL, a Canadian corporation, owned all of the stock of LTI during the years in issue. LTI was a holding company for U.S. companies in the passenger and school bus transportation businesses. LTI's consolidated group included Transit and Tree.
LTI owned 76 to 79 percent of the stock of LII during the years in issue and before December 16, 1987. The other LII stock was publicly held. LII bought the publicly held stock on December 16, 1987. After that date, LTI was the parent of the U.S. consolidated group that included LII. LII was a holding company for U.S. companies in the solid and (after October 1986) hazardous waste services business, including LWSI.
DeGroote and his family moved from Belgium to Canada in 1948 when he was 14. In the 1950's, DeGroote started a construction business in Elliot Lake, Canada. In 1959, he moved his business to Sault Sainte Marie, Canada, and built sewers, roads, and highways.
In 1959, DeGroote bought all of the stock of Laidlaw Motor Sales, Ltd., an Ontario, Canada, trucking corporation; Laidlaw Motors, a retail truck parts business; and Hepburn Transport Ltd., a Canadian trucking company. In 1966, Hepburn Transport Ltd. merged with Laidlaw Motor Sales, Ltd., which later became LTL.4 DeGroote was president and chairman of LTL from the time it was formed until August 1, 1990.
As discussed in more detail in pars. I-B-3 and 4 and I-C, below, LTL and its subsidiaries were organized as follows during the years in issue:
From 1959 to 1969, LTL and its predecessors bought trucking businesses in the United States and Canada. LTL bought Superior Sanitation in 1969. LTL began to buy passenger bus service businesses in Canada in 1973. LTL's subsidiaries entered the solid waste services business in the United States in January 1978. LTL bought the largest operator of school buses in Canada in 1979. In October 1980, LTL bought all of the stock of Theta Systems, Inc. (TSI), which operated solid waste services businesses in Indiana, Illinois, and Ohio. TSI changed its name to LWSI. LWSI had subsidiaries active in the solid waste business in North America.
LTL's subsidiaries entered the passenger bus business in the United States in September 1983. LTL sold its trucking business in 1984. By the end of 1988, LTL and its subsidiaries were the third largest solid and hazardous waste management services company and the largest provider of school bus transportation services in North America.
LTL financed its expansion in the United States by lending money and contributing capital to its subsidiaries in the United States. Before 1969, LTL financed its growth primarily with its own earnings and loans from banks and finance companies. LTL first made a public offering of its stock in 1969. LTL raised C$1.5 million6 in 1969, which it used to repay bank debts and buy more businesses. LTL stock was traded on stock exchanges in Canada and the United States by August 31, 1988 (the end of LTL's 1988 tax year).
LTL and its subsidiaries grew rapidly before and during the years in issue. DeGroote acquired businesses that provided trucking, solid waste services, and passenger and school bus services. These businesses used heavy vehicles to transport materials or people and needed governmental licenses or permits to operate. DeGroote believed that the fastest way to expand in these businesses was to buy small privately-held businesses which had existing licenses and permits.
The core management team of the Laidlaw entities during the years in issue consisted of DeGroote, Leslie W. Haworth (Haworth), and Ivan R. Cairns (Cairns). Haworth became LTL's senior financial officer in 1972 and later became senior vice president for finance. Cairns became LTL's vice president, general...
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