Medical Resources, Ltd. v. C.I.R., 011692 FEDTAX, 8952-89

Docket Nº:8952-89, 10109-89.
Opinion Judge:RUWE, JUDGE:
Party Name:MEDICAL RESOURCES, LTD., ROBERT F. PLUMMER, TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent MED-SCIENCES, LTD.-I, SCIENCE & INDUSTRY RESOURCES, INC., TAX MATTERS PARTNER, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Attorney:Rick Drake, for petitioners. J. Scott Broome, for respondent.
Case Date:January 16, 1992
Court:United States Tax Court

63 T.C.M. (CCH) 1833

MEDICAL RESOURCES, LTD., ROBERT F. PLUMMER, TAX MATTERS PARTNER, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

MED-SCIENCES, LTD.-I, SCIENCE & INDUSTRY RESOURCES, INC., TAX MATTERS PARTNER, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Nos. 8952-89, 10109-89.

United States Tax Court

January 16, 1992

Rick Drake, for petitioners.

J. Scott Broome, for respondent.

MEMORANDUM FINDINGS OF FACT AND OPINION

RUWE, JUDGE:

Respondent determined adjustments of partnership items for the 1983 taxable year as follows:

Medical Resources, LTD., Amount
Item Claimed Amount as Adjusted
Rent/equipment lease $ 30,000 -0-
Other deductions-management fee 3,000 -0-
Property eligible for
investment tax credit 254,800 -0-
Med-Sciences, LTD.-I Amount
Item Claimed Amount as Adjusted
Rent/equipment lease $120,000 -0-
Other deductions 15,135 -0-
Property eligible for
investment tax credit 792,400 -0-
The issues for decision are: (1) Whether Medical Resources, Ltd. and Med-Sciences, Ltd.-I (sometimes referred to as " the partnerships" ) were engaged in an activity with a profit objective; and, if so (2) whether the partnerships are entitled to investment tax credits with respect to the computer systems; (3) whether the partnerships must amortize the prepaid lease payment over the life of the lease; and (4) whether the partnerships are entitled to a deduction for management fees and other expenses as claimed on the partnerships' Federal income tax returns. FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts, supplemental stipulation of facts, and attached exhibits are incorporated herein by this reference. At the time the petitions were filed, the partnerships' principal place of business was in Stow, Ohio. Medical Resources, Ltd., and Med-Sciences, Ltd.-I, reported income on an accrual basis. The issues in these cases arise out of claimed investment tax credits and expense deductions related to the partnerships' purported computer system leasing activities. The partnerships were ostensibly formed for the purpose of subleasing computer systems to doctors. The partnerships initially entered into agreements to lease the systems from a company called Charta Financial Group, Inc. [1] The computer system was called " The Perfect You" . The Perfect You consisted of a software package combined with a Hewlett-Packard computer, printer, disk drive, graphics tablet, desk, and accessories. The software was designed to assist in treating a particular patient by providing a nutritionally balanced diet and exercise program. The software in the Perfect You system was developed by Jeffrey Kogan. In the course of its development, the program was employed at the medical practice of Mr. Kogan's brother. Mr. Kogan transferred the software to his solely owned corporation, Data-Ease, Inc. (Data- Ease). Data-Ease received an offer to purchase the Perfect You software from Di-Med Computer Systems, Inc. (Di-Med). Mr. Kogan agreed to a sales price of $5,000 per software package, $2,000 in cash, and the rest in promissory notes payable at $100 per month per software package. Mr. Kogan also arranged for Di-Med to purchase the systems Hewlett-Packard hardware through Data-Ease for $5,860 per unit. The total system cost to Di-Med was $10,860. Di-Med then entered into an agreement to sell Perfect You systems to Charta Financial Group, Inc. (Charta), for $198,000 each. Charta entered into agreements to purchase 5 systems. These agreements provided for a payment of $30,000 for each system upon execution of the sale agreements. The balance of the purchase price was represented by recourse notes payable over 8 years for the remaining $168,000 cost of each system purchased. It was these systems that were leased to the partnerships. Medical Resources, Ltd., and Med-Sciences, Ltd.-I, were formed and promoted by Robert F. Plummer (petitioner). Prior to serving as promoter and general partner in the partnerships, petitioner had worked as a registered investment representative and as a mutual fund advisor. During the years at issue, petitioner promoted various tax shelter investments including: Structured Shelters, Inc., Cambridge Corporation's Children's Classics (a master recording shelter), and Century Concepts Video Game Masters (a video cartridge shelter). [2] In his involvement with the last two of these promotions, petitioner worked for Leo Roussell, who was a promoter. Mr. Roussell was also president of Di-Med from whom Charta purchased the Perfect You systems. Petitioner also participated in an organization called Compow'r, International which was a Charta representative for Structured Shelters, Inc. Petitioner had no expertise in the fields of computers, medicine, or nutrition. Petitioner solicited and sold interests in Medical Resources and Med-Sciences. Documents prepared with respect to the solicitation and sales of partnership interests included a " Private Placement Memorandum", " Subscription Agreement, Signature Page and Power of Attorney", " Offeree Questionnaire", " Offeree Representative Questionnaire and Investor Acknowledgement", " Limited Partner Signature Page", and some additional promotional material. The Private Placement Memorandum for each partnership was 52 pages long, of which 14 pages dealt solely with tax aspects of the investment. The additional promotional material stressed the tax advantages, stating that additions to the tax would be avoided, that a $5,000 investment would generate an investment tax credit of $2,800, and an operating loss of $4,835 in the first year. This material also stated that there were no preference items for alternative minimum tax purposes, and that there were no promissory notes, letters of credit, or debt. Seventeen...

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