Pledger v. U.S.A., s. 99-4254

• Decision Date: 13 September 2000
• Docket Number: Nos. 99-4254,99-4276,s. 99-4254
• Citation: 236 F.3d 315
• Parties: (6th Cir. 2000) Stephen Pledger (99-4254); Marcia G. Pledger(99-4276), Plaintiffs-Appellants, v. United States of America, Defendant-Appellee Argued:
• Court: U.S. Court of Appeals — Sixth Circuit

Page 315

236 F.3d 315 (6th Cir. 2000)

Stephen Pledger (99-4254); Marcia G. Pledger(99-4276), Plaintiffs-Appellants, v. United States of America, Defendant-Appellee

Nos. 99-4254, 99-4276

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

Argued: September 13, 2000

Decided and Filed: December 29, 2000

Appeal from the United States District Court for the Southern District of Ohio at Cincinnati. No. 97-00291, Jack Sherman, Jr., Magistrate Judge.

James H. Stethem, ROSENBERG, HERFEL, STETHEM & BENDER, Cincinnati, Ohio, for Appellants.

Marion E.M. Erickson, Bruce R. Ellisen, Joan I. Oppenheimer, U.S. DEPARTMENT OF JUSTICE, APPELLATE SECTION, Washington, D.C., for Appellee.

Before: GUY and MOORE, Circuit Judges; DOWD, District Judge^*.

OPINION

KAREN NELSON MOORE, Circuit Judge.

This case involves the question of whether individual taxpayers were "at risk," as defined in 26 U.S.C. §a465(b), with regard to a three-party sale-leaseback transaction between a parent company and two of its subsidiaries and could therefore deduct losses from an investment in a trust formed by one of the subsidiaries. In the tax years ending in 1985, 1986, 1987, and 1988, Plaintiffs-Appellants, Stephen ("Pledger") and Marcia Pledger ("Mrs. Pledger") (collectively referred to as "the Pledgers"), claimed losses deriving from Pledger's investment in a trust under §a465. The Internal Revenue Service ("IRS"), however, disallowed the Pledgers' loss deductions and instead assessed an amount totaling approximately $135,226 in taxes, penalties, and interest against the Pledgers. The Pledgers paid the assessed amount and then filed claims for refunds and amended individual income tax returns for each of the aforementioned tax years, but the IRS denied their claims.

The Pledgers then filed this lawsuit against the IRS in the United States District Court for the Southern District of Ohio, which was transferred to a United States Magistrate Judge. After holding a bench trial pursuant to the parties' consent, the magistrate judge issued an opinion which held that the Pledgers were not at risk under §465 and entered judgment in favor of the IRS.

The Pledgers now appeal the magistrate judge's decision, claiming that the magistrate judge erred in determining that they were not at risk under §465 and that the magistrate judge's decision from the bench trial was inconsistent with his previous rulings on the IRS's motions for summary judgment. For the reasons that follow, we AFFIRM.

I. BACKGROUND¹

In August of 1982, American Broadcasting Companies, Inc. ("ABC") acquired two satellite transponders from RCA American Communications, Inc. Transponders are electronic devices that receive, select, amplify, and re-transmit voice, data, and video signals. In May of 1983, ABC assigned all of its rights, benefits, responsibilities and liabilities with respect to the two transponders to its wholly owned subsidiary, ABC Video Enterprises, Inc. ("ABC Video").

On October 30 and 31, 1984, Integrated Equipment Leasing Corporation ("IELC"), a wholly owned subsidiary of Integrated Resources, Inc. ("Integrated"), acquired the two transponders from ABC Video for a purchase price of $9,774,701 each. Then, on October 31, 1984, the very same day that IELC had completed its purchase of the transponders, IELC entered into two identical lease agreements with ABC Video.

On December 31, 1984, IELC sold the two transponders to Investors Credit Corporation ("ICC"), another wholly owned subsidiary of Integrated. ICC paid the purchase price for the transponders with a cash down-payment and a promissory note payable to IELC. Also, on December 31, 1984, ICC agreed to lease the transponders back to IELC². This agreement required IELC to pay ICC fixed rent that approximately equaled, in both time and amount, the payments that ICC owed to IELC. As an incentive for ICC to enter into this master lease agreement with IELC, Integrated agreed to guarantee unconditionally IELC's rental payments under the master lease agreement.

On the very same day in which it had both bought and leased the two transponders, ICC formed Satellite Equipment Trust A ("the Trust") as a grantor trust, transferred the transponders to the Trust, and assigned all of its rights and liabilities with respect to the transponders to the Trust. Prior to the formation of the Trust, a confidential memorandum offering forty units of beneficial interest in the Trust for sale to private investors was released. According to the Trust documents, New York law governed the interpretation of the agreement.

Following the release of the confidential memorandum, Pledger acquired one unit of beneficial interest in the Trust by paying $18,646 in cash to ICC and issuing promissory notes in the amounts of $86,936 and $390,988 to another wholly owned subsidiary of Integrated and to ICC, respectively. The payments that Pledger was obligated to make to ICC equaled his share of the payments that IELC was obligated to pay the Trust under the master lease agreement with ICC. The fixed rental payments that the Trust received from IELC were applied to satisfy the payments Pledger was required to pay ICC.

When the Pledgers filed their joint tax returns for the taxable years ending in 1985, 1986, 1987, and 1988, they claimed loss deductions with respect to Pledger's investment in the Trust for that part of the investment attributable to his promissory note to ICC. The IRS, however, determined that the Pledgers were not at risk under §465 with respect to the note to ICC and assessed additional taxes, penalties, and interest against the Pledgers. The Pledgers then fully paid these amounts and filed claims for refunds, but their claims were denied.

The Pledgers then filed this lawsuit in the United States District Court for the Southern District of Ohio. On June 1, 1998, the IRS filed a motion for summary judgment, asserting that the Pledgers were not at risk under §465 because ICC, to which Pledger was required to make payments, was merely an instrumentality of Integrated and therefore Integrated was both the payee and guarantor in the three-party sale-leaseback arrangement. The magistrate judge denied the IRS's motion for summary judgment on the ground that there were genuine issues of material fact regarding the relationship between Integrated and ICC.

The IRS then deposed Benjamin Jung, who formerly was the General Counsel of Integrated's equipment leasing division and a Senior Vice President of Integrated. In his deposition, Jung testified that Bill Adair, who formerly was the head of Integrated's equipment leasing group, decided to create the Trust to provide financing to investors. Jung also testified that Integrated's marketing staff developed the underlying equipment leasing transaction for the Trust; that Integrated's equipment leasing group originated the transaction involving the Trust; and that Integrated's equity marketing group analyzed the proposed transaction to determine how it could be structured into one of the company's products. Additionally, Jung testified that Integrated's equipment leasing group and equity sales group were involved in negotiating the terms of the investors' promissory notes to ICC and that the promissory notes issued by the investors to ICC were based upon standard form notes created by employees of Integrated. Jung further testified that he was involved in the process of drafting the confidential memorandum that offered forty units of beneficial interest in the Trust to private investors and that he, "[a]s counsel ... would review and supervise the drafting of that memorandum which was drafted by outside counsel, and ... [had] input on a lot of factual matters and just reviewing the development of the document." Joint Appendix ("J.A.") at 456 (Jung Dep. at 20).

With regard to the operation of ICC, Jung testified that ICC's day-to-day operations consisted of billing, collecting, and accounting for transactions between investors and ICC but that Integrated's accounting department handled the recording and reporting functions for ICC. Jung further explained that ICC's offices were located at the offices of Integrated, and while he testified that ICC's officers and directors controlled the day-to-day operations of ICC, he did not identify the daily tasks they performed for ICC. Jung also stated that, with one exception, all of the officers and directors of ICC were also officers of Integrated. Jung further stated that he was "fairly certain" that all monies that were remitted from investors to ICC went to Integrated. J.A. at 455 (Jung Dep. at 19). With all this said, though, in response to a question by the Pledgers' counsel regarding whether Jung believed that "ICC was a separate entity in the legal sense," Jung asserted "I do." J.A. at 470 (Jung Dep. at 34) (emphasis added).

Using the testimony from Jung's deposition as its support, the IRS then filed a renewed motion for summary judgment. Again, the magistrate judge denied this motion due to the existence of genuine issues of material fact. After holding a bench trial on the merits of the case, the magistrate judge issued an opinion, finding that the Pledgers were not at risk under §465 because ICC was a mere instrumentality of Integrated.

II. ANALYSIS

On appeal, the Pledgers argue that the magistrate judge erred in finding that ICC was a mere instrumentality of Integrated and therefore erred in holding that they were not at risk as defined in §465(b). We hold that the magistrate judge did not err in determining that the Pledgers were not "at risk" under §465 because ICC was a mere instrumentality of Integrated. The record supports the magistrate judge's conclusion that Integrated exercised such control and dominion over ICC that ICC was a dummy corporation for Integrated, thereby making Integrated both the guarantor and payee in the three-party sale-leaseback transaction at issue. In sum, we believe that the magistrate judge was correct in...