Lukens v. C.I.R.

• Decision Date: 07 October 1991
• Docket Number: No. 91-4027,91-4027
• Citation: 945 F.2d 92
• Parties: -5754, 91-2 USTC P 50,517 Howard I. LUKENS, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 92

945 F.2d 92

68 A.F.T.R.2d 91-5754, 91-2 USTC P 50,517

Howard I. LUKENS, Petitioner-Appellant, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.

No. 91-4027.

United States Court of Appeals Fifth Circuit.

Oct. 7, 1991.

Edward G. Lavery, Larry K. Hercules, Hercules, & Hampton, Dallas, Tex., for petitioner-appellant.

Kevin M. Brown, Gary Allen, Chief Appellate, U.S. Dept. of Justice, David E. Carmack, Shirley D. Peterson, Asst. Atty. Gen., Tax Div., Washington, D.C., for respondent-appellee.

Appeal from a Decision of the United States Tax Court.

Before KING, JOHNSON and EMILIO M. GARZA, Circuit Judges.

KING, Circuit Judge:

Taxpayer Howard I. Lukens appeals from a ruling by the tax court disallowing interest deductions based on its finding that Lukens' investment in timeshare units did not constitute genuine indebtedness. Lukens' contentions with regard to this finding focus on the tax court's method of valuation of the property. Lukens also contests the tax court's ruling that he is liable for penalty interest payments under 26 U.S.C. § 6621(c) because his tax deficiency was a substantial underpayment attributable to the timeshare purchase transaction. Finding no error in the judgment of the tax court, we affirm.

I. FACTS AND PROCEDURAL HISTORY

The facts in the instant case are discussed in full in the opinion of the tax court, at Ames v. Commissioner, 58 T.C.M. (CCH) 1470 (1990). In Ames, this case was consolidated for trial, briefing, and opinion with six other cases involving similar issues. ¹ For the sake of economy we will set forth only those facts necessary to the determination of Lukens' appeal.

On December 21, 1981, Lukens and seventeen other individuals formed Univestors in Utah, a Utah partnership ("Univestors" or "partnership"). The purpose of Univestors, in which Lukens had a 4.6% interest, was to purchase timeshare units in vacation homes in Park City, Utah. ² On December 29, 1981, Univestors purchased twenty-seven timeshare units in a tri-level house, identified as Lot # 1033, Jeremy Ranch Plat B ("House # 30"). The purchase price of each timeshare unit was $3,600. For each unit, the partnership paid a down payment of $800, which left an unpaid principal balance of $2,800. The partnership was to pay $570 per unit per year for ten years, which payments were to be applied to interest. No further principal or interest payments were required until thirty years from the purchase date. At that time, because the debt was nonrecourse, the partnership could either forfeit its interest in the unit or make a balloon payment of approximately $86,700 to become the owner. ³

On his federal income tax return for 1981, Lukens claimed a $7,179.54 deduction, as his proportional share of the partnership's loss, for his $993.60 (4.6% of the $21,600 total down payment for the 27 units) expenditure on December 29, 1981. ⁴ On June 17, 1985, the Commissioner issued a statutory deficiency notice to Lukens determining a $2,953 deficiency in Lukens' federal income taxes for 1981 and completely disallowing the deduction. The Commissioner determined also that Lukens was liable for an increased rate of interest under 26 U.S.C. § 6621(c).

On September 19, 1985, October 15, 1985, and January 23, 1986, Lukens filed a petition, amended petition, and second amended petition, respectively, in the tax court challenging the Commissioner's findings. He argued that the timeshare units were worth the purchase price, and because the value of the units would appreciate during the life of the contract, purchase of them was a sound business investment. At trial, the parties proffered the testimony of experts to aid the tax court in its determination of the fair market value of the timeshare units purchased by Univestors. Lukens elicited the testimony of two expert witnesses: Clyde E. Williams concluded that the appraised value for each timeshare unit in House # 30 was $3,950; Kathleen Conroy appraised each unit at $2,920. The Commissioner's expert, Michael Greene, testified that the value of each timeshare unit in House # 30 was $1,200. ⁵ At trial, Lukens also sought to elicit the testimony of Francis Longstaff as an expert witness. Longstaff was to testify as to the expected appreciation in value of each timeshare unit. The tax court, however, concluded that Longstaff did not qualify as an expert, but allowed him to testify as a fact witness and admitted his written reports into evidence.

The tax court, after hearing the expert testimony, selected from the various methods of valuing the timeshare units proffered by all of the experts to arrive at its conclusion that each timeshare unit in House # 30 had a fair market value of $919, far lower than the purchase price of $3,600. The tax court further found each unit would not appreciate to the point where its market value would equal or exceed the balloon payment due in the thirtieth year after purchase, and that, because the financing was nonrecourse, Lukens would forfeit his interest in each unit in lieu of making the balloon payment.

Based on these findings, the tax court determined that the nonrecourse debt incurred by the partnership in the acquisition of the units did not constitute genuine debt and, consequently, did not give rise to interest deductions. The court also imposed an increased rate of interest, with respect to the transaction, under section 6621(c) of the Internal Revenue Code based on Lukens' "substantial underpayment" of tax attributable to a tax motivated transaction. 26 U.S.C. § 6621(c).

II. DISCUSSION

Lukens contends that the tax court erred by (i) valuing the timeshare units lower than any of the three expert witnesses; (ii) refusing to allow, or disregarding, all expert witness testimony as to likely appreciation rates; (iii) finding that the nonrecourse debt lacked economic substance; (iv) completely disallowing the claimed interest deduction; and (v) imposing an increased rate of interest under 26 U.S.C. § 6621(c). We will address these issues seriatim.

A. Expert Testimony as to Value of Timeshare Units

Lukens contends that the tax court improperly ignored all expert testimony proffered by both parties in valuing the timeshare units. The valuation of the units by the tax court, complains Lukens, was lower than expert valuations, including that of the Commissioner's expert.

The tax court's determination of the fair market value of the timeshare units is a finding of fact reviewable under the clearly erroneous standard. Morris v. Commissioner, 761 F.2d 1195, 1200 (6th Cir.1985) ("determination of the fair market value of certain property ... is a factual one and should not be reversed on appeal unless clearly erroneous"); see also Masat v. Commissioner, 784 F.2d 573, 575 (5th Cir.1986); Curtis v. Commissioner, 623 F.2d 1047, 1050-51 (5th Cir.1980). The court is free either to accept or reject expert testimony in accordance with its own judgment. See Helvering v. National Grocery Co., 304 U.S. 282, 295, 58 S.Ct. 932, 938, 82 L.Ed. 1346 (1938); Tripp v. Commissioner, 337 F.2d 432 (7th Cir.1964); Estate of Kreis v. Commissioner, 227 F.2d 753, 755 (6th Cir.1955); Parker v. Commissioner, 86 T.C. 547, 562 (1986) (the tax court need not accept any expert testimony that does not withstand careful analysis). In fact, the court is not in any way bound by the opinions or formulas proffered by experts, and may reach a determination of value based upon its own evaluation of the evidence in the record. Silverman v. Commissioner, 538 F.2d 927, 933 (2d Cir.1976), cert. denied, 431 U.S. 938, 97 S.Ct. 2649, 53 L.Ed.2d 255 (1977); In re Williams' Estate, 256 F.2d 217, 219 (9th Cir.1958) ("the trier of fact ... may disregard [expert opinion] altogether in decision"). As this court has noted, "[v]aluation is ... necessarily an approximation.... It is not necessary that the value arrived at by the trial court be a figure as to which there is specific testimony, if it is within the range of figures that may properly be deduced from the evidence." Anderson v. Commissioner, 250 F.2d 242, 249 (5th Cir.1957), cert. denied, 356 U.S. 950, 78 S.Ct. 915, 2 L.Ed.2d 844 (1958); see also Archer v. Commissioner, 227 F.2d 270, 273 (5th Cir.1955).

The tax court had the opportunity to hear and evaluate the credibility of both parties' expert witnesses. The tax court devoted a considerable portion of its opinion to in-depth discussion of each expert's valuation methods. The tax court found most of the testimony suspect, and fashioned its own valuation from what credible testimony was proffered. The tax court's valuation of $919 for each timeshare unit was "within the range of figures that may properly be deduced from the evidence," Anderson, 250 F.2d at 249, and was therefore not clearly erroneous.

B. Expert Testimony as to Appreciation

Lukens also contends that the tax court erred in refusing to allow expert testimony from Longstaff regarding appreciation. This contention is without merit. Longstaff was allowed to testify as a fact witness, and two reports he prepared concerning appreciation of the timeshare units were admitted into evidence. Inasmuch as Longstaff was pursuing a B.A. in accounting and studying for his C.P.A. examination during the time he was writing the two reports, the tax court did not abuse its discretion in refusing to admit his testimony as expert.

Lukens also argues that the tax court erred in disregarding "admissions" by the government's expert witness, Dr. Hoag, regarding the inflation rate, when it found that the timeshares would never appreciate to a value comparable to the final balloon payment. As we noted above, the tax court is free to accept or reject expert testimony in accordance with its own judgment. Helvering, 304 U.S. at 295, 58 S.Ct. at 938; Estate of Kreis, 227 F.2d at 755. The tax court committed no clear error in disregarding Dr. Hoag's testimony.

C. "Sham" Transaction

The tax court's determination that the transaction...