Seligman v. Comm'r of Internal Revenue
| Decision Date | 12 February 1985 |
| Docket Number | Docket Nos. 16854-82,17467-82. |
| Citation | 84 T.C. 191,84 T.C. No. 15 |
| Parties | MILTON J. SELIGMAN and ESTATE OF FRANCINE SELIGMAN, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, RespondentFAYE S. HUTTON and ESTATE OF C. HERBERT HUTTON, DECEASED, FAYE S. HUTTON, EXECUTRIX, 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Petitioners purchased computer equipment packages for lease. The leases required petitioners to pay $225 each month for the first 12 months for lease administration services to be performed over the entire 41 months of the leases. HELD, petitioners cannot deduct the payments to M pursuant to section 162, I.R.C. 1954. Petitioners must capitalize these expenditures and amortize their cost over the entire lives of the leases. Commissioner v. Lincoln Savings & Loan Assn., 403 U.S. 345 (1971), followed. JOHN W. DIERKER, for the respondent.
O. JAN TYLER and CARL ABRAMSON, for the petitioners.
The Commissioner determined deficiencies in the petitioners' Federal income tax for the taxable years as follows:
+---------------------------------+
¦Docket Nos.¦1978 ¦1979 ¦
+-----------+----------+----------¦
¦16854-82 ¦$21,583.14¦$14,130.78¦
+-----------+----------+----------¦
¦17467-82 ¦11,842.85 ¦ ¦
+---------------------------------+
After concessions by the parties, the issue for decision is whether petitioners 2 are entitled to deduct under section 162 3 certain administrative leasing expenses paid in connection with their computer leasing activities.
Some of the facts have been stipulated. The stipulation of facts and accompanying exhibits are so found and incorporated herein by reference.
Petitioners Milton Seligman and Faye Hutton resided in Texas when they filed their petitions. Each of these petitioners is the executor/executrix of their respective spouse's estate. For the taxable years 1978 and 1979, the Seligmans filed joint Federal income tax returns with the Internal Revenue Service Center in Austin, Texas. For the taxable year 1978, the Huttons filed a joint Federal income tax return with the Internal Revenue Service Center in Austin, Texas.
During the taxable years 1978 and 1979, petitioner Milton Seligman was employed as a manufacturer's representative. Francine Seligman, his wife, did not work during these years. During the taxable year 1978, C. Herbert Hutton was retired. Petitioner Faye Hutton, his wife, worked as a secretary/bookkeeper for the law firm of Sands and Tyler.
In 1976, Financial Marketing Services, Inc. (FMS), whose principal place of business is in Norcross, Georgia, was organized to engage in the business of buying and leasing computer equipment and selling equipment lease packages to investors. Jack Camarda (Camarda) is FMS's sole stockholder and previously was a financial marketing manager for Honeywell Information Systems, Inc. (Honeywell). In late 1977, FMS entered into negotiations with Best Products (Best) of Richmond, Virginia, concerning Best's use of Honeywell computer equipment. At that time, Best was leasing Honeywell computer equipment from FNC Leasing Company (FNC), a wholly owned subsidiary of Fulton National Bank of Atlanta, and Citco Leasing Corp. (Citco), a wholly owned subsidiary of Citicorp Bank of New York. Best desired to upgrade its computer system and FMS wanted to purchase new Honeywell equipment and lease it to Best. Best, however, also desired to have FMS remove the unwanted Honeywell computer equipment and terminate Best's financial responsibility with respect to it.
During Camarda's employment with Honeywell, he became acquainted with 0. Jan Tyler (Tyler), who is currently with the law firm of Sands and Tyler, because of Tyler's purchase and lease of Honeywell computer equipment to third parties. In 1976 and 1977, Tyler and Camarda worked together on several leveraged computer leasing transactions.
Omega Leasing Company (Omega) is a Texas corporation which was initially organized as a partnership in 1971 and subsequently incorporated in 1973. During its partnership stage, it comprised five corporations, each having a 20-percent interest therein. Upon incorporation, each of the five corporations acquired a 20-percent equity interest in Omega. Since incorporation, Tyler served as Omega's only president. Omega's business activities included the purchase of Honeywell equipment and its leasing to third-party users. Prior to 1978, Omega also sold equipment lease packages.
Manmark Company (Manmark), a corporation, was organized in 1975 to engage in the marketing and management of computer equipment leases. Tyler served as its president and acts as trustee for the beneficial owner of its stock, but he does not have or claim any beneficial ownership in any of its stock.
In early 1978, FMS began negotiating with Continental Trailways Bus System (Trailways) of Dallas, Texas, concerning its use of Honeywell computer equipment. Camarda desired to lease Best's unwanted Honeywell computer equipment to Trailways until Trailways acquired new equipment. Camarda contacted Tyler and proposed that an investor be found to purchase the computer equipment currently leased by Best from the two leasing companies and to lease the equipment to Trailways. The proposed sales price was approximately $2,000,000. Tyler felt difficulties would be encountered in locating a single investor who could purchase the $2,000,000 package. Camarda then suggested that the equipment be divided into smaller packages for sale to numerous owners who would, in turn, lease the equipment to Trailways with FMS acting as an intermediary.
FMS eventually entered into contracts to purchase the Honeywell computer equipment currently leased by Best from FNC and Citco for a total purchase price of approximately $1,700,000. FMS then sold this equipment to Omega for $1,955,000, payable $255,000 in cash and $1,700,000 in nonrecourse promissory notes. The $1,700,000 indebtedness consisted of 17 notes of $85,000 each and one note of $255,000. FMS also divided the Honeywell computer equipment into 17 packages having a value determined by FMS of approximately $100,000 each and one package having a value of approximately $300,000.
Omega sold each $100,000 package to individual purchasers (including the Seligmans and Huttons) for a $15,000 cash downpayment and subject to $85,000 of the nonrecourse indebtedness to FMS. The $300,000 package was sold for a $45,000 cash downpayment and subject to $255,000 of the nonrecourse indebtedness to FMS. Monthly payments on each of the nonrecourse notes of $85,000 did not exceed $1,380.
Each equipment package purchaser entered into a 41-month equipment lease with FMS. Monthly lease payments of $1,460 were specified for each $100,000 equipment package. Further, according to the terms of the master equipment lease, each lessor also agreed ‘to pay Manmark Company a leasing commission and administrative handling fee in the amount of $225 a month for the first twelve (12) months of this lease * * *.‘
The ‘leasing commission and administrative handling fee(s)‘ paid to Manmark by petitioners entitled them to miscellaneous administrative leasing services over the 41-month terms of the leases. Each month Manmark collected the lease payments and remitted the payments on the nonrecourse notes to FMS. 4 Each quarter Manmark remitted to petitioners the excess of the lease payments over the payments on the notes. Annually Manmark prepared and mailed tax information statements to petitioners indicating the total lease payments received, interest paid, administrative expenses incurred and relevant depreciation information.
Petitioners reported these computer leasing activities on their joint Federal income tax returns as follows:
+-------------------------------------------------------------+
¦ ¦ ¦ ¦ ¦ ¦Administrative¦
+-----------+----+------+------------+---------+--------------¦
¦Petitioners¦Year¦Income¦Depreciation¦Interest ¦expense ¦
+-----------+----+------+------------+---------+--------------¦
¦Seligman ¦1978¦$8,760¦$21,248.00 ¦$3,862.00¦$1,350 ¦
+-----------+----+------+------------+---------+--------------¦
¦ ¦1979¦17,520¦17,732.58 ¦7,087.04 ¦1,350 ¦
+-----------+----+------+------------+---------+--------------¦
¦Hutton ¦1978¦8,760 ¦7,142.85 ¦3,862.19 ¦1,350 ¦
+-------------------------------------------------------------+
For the taxable years 1978, the Seligmans and Huttons claimed $8,873.94 and $10,000, respectively, of investment tax credit concerning their respective $100,000 computer equipment packages that they purchased from Omega.
For the taxable year 1978, the Commissioner disallowed $954.90 of the $1,350 of administrative expense deductions claimed by the Huttons with respect to the $100,000 computer equipment package purchased from Omega. The Commissioner determined that such administrative fees ‘represent a capital expenditure and must be allocated over the 41 (month) term of the lease‘; hence, only $395.10 of the deductions were permitted. The Commissioner also disallowed the $10,000 investment tax credit claimed by the Huttons because, as noncorporate lessors, they failed to satisfy the 15-percent test of section 1.46-4(d)(3), Income Tax Regs.
For the taxable years 1978 and 1979, the Commissioner disallowed the $1,350 of administrative expense deductions claimed by the Seligmans for each year because ‘it has not been established that any amount in excess of that allowed is an ordinary and necessary expense incurred or paid in the production of income, was expended, or was expended for the designated purpose. ‘ 5 The Commissioner also disallowed the investment tax credit claimed by the Seligmans with respect to their $100,000 computer equipment package due to their failure to establish ‘any basis in any qualifying Section 38 property acquired and placed in service...
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