Martuccio v. Commissioner, Docket No. 27528-88.
| Citation | 63 T.C.M. 3082 |
| Decision Date | 01 June 1992 |
| Docket Number | Docket No. 27528-88. |
| Parties | James V. and Louise A. Martuccio v. Commissioner. |
| Court | United States Tax Court |
Respondent determined deficiencies in and additions to petitioners' Federal income tax as follows:
Additons to Tax
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Year Deficiency Sec. 6653(a)(1) Sec. 6653(a)(2) Sec. 6661
1981* ........................ 1$34,722.47 $2,042.01 2 ---
1982 ......................... 62,199.00 3,105.95 3 $15,529.75
1983 ......................... 452,379.02 2,653.53 5 13,094.88
1984 ......................... 46,276.00 2,313.80 6 11,569.00
1 Prior to the issuance of the notice of deficiency in the
instant case, petitioners executed a Waiver of Restrictions
on Assessment with respect to a deficiency in the amount of
$6,117.82, which respondent has assessed. Petitioners have
placed such amount in issue by alleging in their petition
that respondent erred in determining such deficiency
2 Fifty percent of the interest due on $40,840.29
3 Fifty percent of the interest due on $62,199
4 Prior to the issuance of the notice of deficiency, petitioners
executed a Waiver of Restrictions on Assessment with respect
to a deficiency of $691.48, and respondent has assessed such
amount. Petitioners have placed such amount in issue by alleging
in their petition that respondent erred in making such determination
5 Fifty percent of the interest due on $53,070.50
6 Fifty percent of the interest due on $46,276.
Respondent also determined for the taxable years in issue that petitioners are liable for increased interest under section 6621(c). Unless otherwise noted, all section references are to the Internal Revenue Code as in effect for the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.
The issues to be decided in the instant case are as follows: (1) Whether petitioner James V. Martuccio was "at risk" with respect to debt incurred as part of a computer leasing transaction he entered into during 1981; (2) whether a separate computer leasing transaction entered into during 1984 by petitioner James V. Martuccio is to be recognized for Federal income tax purposes; (3) whether petitioners are entitled to deduct partnership losses of $14,301 claimed on their 1981 return in connection with National Drilling Program Ltd. #4; (4) whether petitioners failed to properly report taxable interest income of $592 on their 1981 return; (5) whether petitioners failed to properly report taxable dividends of $1,440 on their 1983 return; (6) whether petitioners are liable for the negligence addition under section 6653(a) for each of the years in issue; (7) whether petitioners are liable for the substantial understatement addition under section 6661 for taxable years 1982, 1983, and 1984; and (8) whether petitioners are liable for increased interest on underpayments of tax attributable to tax-motivated transactions under section 6621(c) for each of the taxable years in issue.
At the time the petition in the instant case was filed, petitioners resided in Warren, Ohio. Petitioner1 is a self-employed orthodontist. During the years in issue, petitioner's net worth rose from $1 million to $1,250,000. Petitioner Louise A. Martuccio was employed as a secretary and bookkeeper in petitioner's practice during the years in issue.
During 1981, Elmco, Inc., (Elmco) was a corporation which raised equity for leasing companies by arranging equipment leasing transactions with investors seeking "tax deferral benefits". During the years in issue, Elmco arranged equipment leasing transactions with leasing companies and, working through stockbrokers and registered securities dealers, Elmco circulated offering memoranda to investors explaining the terms of such transactions.
If a client was interested, the broker contacted Elmco to put together an investment package. When advised of a prospective investor, Elmco identified particular equipment to include in the investor's transaction and negotiated with a leasing company to buy such equipment, which had an estimated market value equal to the amount the investor wanted to invest. To determine the value of such equipment Elmco hired an appraiser. Elmco also used such appraiser to assist it in negotiating overall sale terms with leasing companies, and, consequently, often knew in advance what the appraiser's valuation of particular equipment was likely to be. Elmco also consulted the Computer Price Guide and other trade publications for assistance in valuing the equipment. In addition to assembling the equipment package, Elmco figured the amount and terms of the investor's notes and the lease, including the amount of supplemental rents to be paid to the investor.
One of the brokers contacted by Elmco was Butcher & Singer. During 1981, Butcher & Singer provided petitioner with a Preliminary Private Offering Memorandum concerning the computer leasing transaction in issue (the 1981 transaction). Petitioner consulted with his advisers at Butcher & Singer, his accountant, his wife, and his father as to whether the 1981 transaction presented a good investment opportunity. Petitioner's accountant reviewed the offering memorandum and considered the return it was expected to produce from tax savings and earnings from the lease of the equipment. After concluding that the 1981 transaction was sound, the accountant advised petitioner to invest in it.
Petitioner also consulted with his attorney, who reviewed the documents connected with the 1981 transaction. Petitioner's attorney advised petitioner that he would be "at risk" on the promissory notes involved in the 1981 transaction. The attorney provided no advice concerning the financial merits of the 1981 transaction. Both petitioner's accountant and his attorney advised him that he would be personally liable on the notes executed as part of the 1981 transaction. In deciding to invest, petitioner relied upon the advice he received from Butcher & Singer, his accountant, and the others with whom he consulted. Petitioner had no understanding of Elmco's financial status at the time of the 1981 transaction and had no contact with Tiger Computer (Tiger) prior to such time.
The IBM computer equipment, which is the subject of the 1981 transaction, was originally owned by Tiger, which had rented it to Consolidated Edison Company of New York, Inc., (ConEd) under a net lease for a term of 48 months. Tiger was a division of National Equipment Rental, Ltd. (NER), a corporation engaged in the business of leasing computer equipment and providing related services. NER financed the acquisition of such equipment by borrowing funds from Manufacturers Hanover Leasing Corp. (MHLC) under a Loan and Security Agreement dated June 3, 1981. The debt was payable in 48 consecutive monthly installments, and was nonrecourse, except that MHLC was authorized to proceed directly against NER, without initially or exclusively proceeding against the collateral, in the event that
any warranty, representation, covenant or agreement made by the Borrower [NER] to MHLC under this Agreement relating either to the Lease or any related document or this [Loan and Security] Agreement proves to be incorrect or untrue in any material respect at the time when made or is not performed as agreed to.
Pursuant to the Loan and Security Agreement, MHLC obtained a continuing first priority interest in the equipment and an assignment of the lease between Tiger and ConEd, and all rents and other amounts due thereunder. All such rents and other amounts due NER under such lease were to be paid directly to MHLC.
By a Purchase Agreement dated December 21, 1981, Tiger sold a portion of the computer equipment (the equipment) acquired with the loan from MHLC to Elmco. Under the terms of the purchase agreement with Tiger, Elmco paid $472,000 for the equipment in the following manner: $8,375 in cash, three nonnegotiable, nonrecourse purchase money promissory notes totaling $64,125, and a nonnegotiable, nonrecourse promissory note of $400,000. The $400,000 note carried an interest rate of 17 percent per annum and was payable over a term of 108 months, commencing January 31, 1982, and ending December 31, 1990. Payments 1 through 36 were $5,666.67 each, and payments 37 through 108 were $8,898.45 each. An interim payment of $1,889 was due December 31, 1981.
Tiger gave Elmco the following indemnity as part of the purchase agreement:
Seller, [Tiger] will indemnify Purchaser [Elmco] and protect, defend and hold it harmless from and against any and all loss, cost, damage, injury or expenses, including, without limitation, reasonable attorneys' fees, wherever and however arising which Purchaser may incur by reason of any material breach by Seller of any of the representations, warranties and covenants or obligations set forth herein, or by reason of the bulk transfer laws of any jurisdiction.
Under the note, Tiger was prohibited, even in the event of default by Elmco, from accelerating or otherwise changing the timing or amount of the payments due under the note without the express written consent of Elmco. Furthermore, Tiger agreed to indemnify Elmco for any loss or expense which Elmco might incur because of material breach by Tiger of any of the warranties, covenants, or obligations set forth in the purchase agreement.
By letters dated December 1, 1981, MHLC agreed that Elmco would have no personal liability for payment of the amounts due MHLC under the Loan and Security Agreement...
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