Owens v. US, Civ. No. 3-91-0117
| Decision Date | 21 January 1993 |
| Docket Number | 3-91-0232.,Civ. No. 3-91-0117 |
| Citation | 818 F. Supp. 1089 |
| Parties | Curtis and Patsy OWENS, Plaintiffs, v. UNITED STATES of America, Defendant. Bobby A. LEACH, Plaintiff, v. UNITED STATES of America, Defendant. |
| Court | U.S. District Court — Eastern District of Tennessee |
Robert J. Marquis, J. Christopher Kirk, Gregory Erickson, McCampbell & Young, P.C., Knoxville, TN, for plaintiffs.
Michael J. Martineau, Tax Div., U.S. Dept. of Justice, Washington, DC, for defendant.
These are two tax refund cases brought pursuant to 28 U.S.C. §§ 1346(a)(1). The facts are stipulated and cross-motions for summary judgment are pending. The relevant facts are identical and raise the same issue: whether the plaintiff taxpayers were "at risk" within the meaning of § 465 of the Internal Revenue Code with respect to their pro rata share of a partial recourse promissory note. Because I conclude that they were not, defendant's motions for summary judgment will be granted, plaintiffs' motions denied, and these actions dismissed.
1. This is a tax refund action in which the plaintiffs, Curtis and Patsy Owens, and the plaintiff, Bobby Leach, seek a refund of federal income taxes and interest allegedly erroneously assessed and collected by the Internal Revenue Service from the plaintiffs.
2. The plaintiffs, Curtis Owens and Patsy Owens, seek a refund of federal income taxes and interest in the amount of $154,115 allegedly erroneously assessed and collected by the Internal Revenue Service (IRS) arising out of the IRS' disallowance of losses claimed by plaintiffs on their joint federal income tax return for the year 1977 generated by their participation in the Picasso and Beta partnerships.
3. The plaintiff, Bobby Leach, seeks a refund of federal income taxes and interest in the amounts of $47,004, and $25,000, or a total amount of $72,004, allegedly erroneously assessed and collected by the IRS arising out of the IRS' disallowance of losses claimed by plaintiff on his federal income tax returns for the years 1976 and 1977, respectively, generated by his participation in the Picasso and Beta partnerships.
4. Plaintiffs became limited partners in two (2) equipment leasing partnerships, Picasso Equipment Associates and Beta Leasing Associates, in 1976. Each partnership was involved in a series of transactions designed to finance the acquisitions of IBM 370/158 computers which were ultimately leased, on a long-term basis, to non-profit insurance companies unrelated to the partnerships.
5. Both of the partnerships were activities engaged in for profit within the meaning of § 183 of the Internal Revenue Code of 1954, as amended (the "Code") (The 1954 Code, rather than the 1986 Code is controlling for purposes of this case). The plaintiffs had both a subjectively and objectively reasonable expectation of profit from their involvement with the partnerships.
6. All of the transactions related to the purchase and lease of the computers did, in fact, occur, and all payments required pursuant to the respective terms of these transactions were made in a timely manner.
7. For purposes of this action, the parties stipulate and agree that, inasmuch as the structure of the transactions involving the Picasso partnership is identical in all material respects to the structure of the transactions involving the Beta partnership, except for the amounts involved in such transactions, the court's ruling regarding the transactions involving the Picasso partnership is binding upon the transactions involving the Beta partnership.
8. On May 11, 1976, OPM Leasing Service, Inc. (OPM), an equipment leasing corporation organized under the laws of the State of New York, acquired an International Business Machines (IBM) 370/158 computer and certain related computer equipment (hereinafter collectively referred to as the "computer equipment").
9. Simultaneous with its acquisition of the computer equipment, OPM leased the computer equipment to Blue Cross Hospital Services, Inc. of Missouri, a non-profit insurance company organized under the laws of the State of Maryland to furnish medical and hospital insurance to subscribers (the "Blue Cross Lease") for a term of seven (7) years.
10. OPM financed its acquisition of the computer equipment in part through the First Jersey National Bank ("First Jersey"), executing a seven (7) year promissory note (the "First Jersey Note") also dated May 11, 1976, payable in monthly installments approximately equal to the rental payments under the Blue Cross Lease.
11. On December 15, 1976, OPM secured additional financing through National Bank of North America, executing a six (6) year promissory note (the "NBNA Note") and granting NBNA a security interest (the "NBNA Security Agreement") to the extent of the value of the NBNA Note, in the computer equipment and the Blue Cross Lease.
12. On December 31, 1976, there were three (3) additional and essentially simultaneous transactions involving the computer equipment and the Blue Cross Lease which had the net effect of transferring the ownership of the computer equipment and assigning the Blue Cross Lease to Picasso Equipment Associates ("Picasso"), the equipment leasing partnership in which the plaintiffs invested and through which the plaintiffs claim the losses at issue in this case.
13. First, OPM sold the computer equipment and assigned its interest in the Blue Cross Lease to OPM Leasing Services, Inc./ Picwun ("Picwun"), a wholly owned subsidiary of OPM. The "sale" of the computer equipment by OPM to Picwun was, in reality, a capital contribution within the meaning of § 318 of the Code. Picwun also assumed the obligations of OPM with respect to the NBNA Security Agreement.
14. The sale of the computer equipment and assignment of the Blue Cross Lease to Picwun was followed by the immediate resale of the computer equipment and reassignment of the Blue Cross Lease to OPM Leasing Services, Inc./Pictoo ("Pictoo"), also a wholly owned subsidiary of OPM, for an amount approximately equal to the original purchase price of the computer equipment. The purchase price was paid in part in a small cash payment, with the balance in a non-recourse promissory note. In addition, Pictoo assumed the obligations which Picwun had previously assumed under the NBNA Security Agreement and granted Picwun a security interest, to the extent of the value of the Pictoo Note, in the computer equipment and the Blue Cross Lease.
15. The sale of the computer equipment and reassignment of the Blue Cross Lease to Pictoo was followed immediately by the resale of the computer equipment and reassignment of the Blue Cross Lease to Picasso, for an amount approximately equal to Pictoo's purchase price for the computer equipment. The purchase price was paid in part in a small cash payment, with the balance in a limited recourse promissory note. In addition, Picasso assumed the obligations of Pictoo under the NBNA Security Agreement and granted Pictoo a security agreement to the extent of the value of the Picasso Note in the computer equipment and the Blue Cross Lease.
16. In a pre-arranged transaction, Picasso then leased the computer equipment back to Picwun (the "Picasso Lease") for a term of ten (10) years and one (1) day. Under the terms of the Picasso Lease, Picwun was to make monthly rental payments to Picasso in an amount approximately equal to Picasso's obligation to Pictoo under the Picasso Note.
17. In order to induce Picasso to enter into the purchase and lease transactions with Pictoo and Picwun, respectively, both Pictoo and OPM unconditionally, and on a full recourse basis, guaranteed Picasso and its limited partners the full performance of all obligations of Picwun under the Picasso Lease.
18. A chart depicting the transactions at issue is as follows:
D. Investments in Picasso and Losses Claimed
19. Picasso was an equipment leasing limited partnership organized under the laws of the District of Columbia. Its general partners and one percent (1%) owners, respectively, were Topspin Data Corporation and Kent M. Klineman. The plaintiffs became limited partners on December 31, 1976 upon the execution of Subscription Agreements obligating them to contribute $60,000.00 to Picasso. The plaintiffs each immediately contributed $24,000.00 and executed promissory notes to Picasso payable on July 1, 1977 for the remaining balance, or $36,000.00, together with interest thereon at the rate of 8% per annum.
20. Under the terms of the Picasso partnership agreement, each limited partner was personally and on a limited recourse basis liable on the Picasso Note to Pictoo to the extent of 267% of the limited partners' total capital contribution to the partnership. Under this provision, limited partners such as the plaintiffs were subject to a potential liability of $160,200.00 in the event that the other parties to this series of transactions were to default on their obligations. The extent of the personal liability of the limited partners on the Picasso Note to Pictoo was subject to a temporal limitation defined in the Picasso partnership agreement as the "User Rent Achievement Date." The User Rent Achievement Date is described as either the date by which the Blue Cross Lease rental payment received by Picasso exceeded $595,970.00, or February 28, 1978, whichever occurred first. After such date, the recourse liability of the Picasso limited partners on the Picasso Note would be extinguished.
21. The plaintiffs, Curtis Owens and Patsy Owens, claimed losses from the Picasso and Beta partnerships in the amounts of $97,318.00 and $64,879.00, respectively, on their joint federal income tax return for the year 1977. The IRS disallowed the losses claimed by the plaintiffs from the Picasso and Beta partnerships. The plaintiffs...
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