54 T.C.M. (CCH) 1422
JAMES A. SHRIVER, Petitioner
COMMISSIONER OF INTERNAL REVENUE, Respondent
Tax Ct. Docket No. 31104-83
United States Tax Court
December 30, 1987
Thomas F. Topel, J. Marguis Eastwood, Kenneth L. Cutler, and Maureen H. Parkinson, for the petitioners.
Randall G. Durfee and Joel A. Lopata, for the respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
Respondent determined deficiencies in petitioner's Federal income tax liability as follows:
The primary issues for our determination are whether petitioner's transactions with respect to certain computer equipment were transactions structured as a tax-avoidance scheme devoid of economic substance which should be disregarded for Federal income tax purposes and whether petitioner acquired the benefits or burdens of ownership. Subsidiary issues for our determination are (1) whether the ownership acquired, if any, was a future interest; (2) whether petitioner was entitled to deduct certain interest paid with respect to a nonrecourse installment note; (3) whether petitioner was at risk within the meaning of section 465 
with respect to a recourse promissory, a limited recourse note, and an assumption agreement; (4) whether the ownership interest acquired, if any, was acquired during 1980; (5) whether petitioner was entitled to claim depreciation pursuant to the half-year convention method of depreciation; and (6) whether petitioner is liable for an additional interest amount determined pursuant to section 6621(c). 
FINDINGS OF FACT Some of the facts have been stipulated and are so found. The stipulation of facts and attached exhibits are incorporated herein by this reference. Petitioner resided within the State of South Dakota at the time the petition herein was filed. Petitioner owns an automotive parts business. In December of 1980, in a transaction that is the subject of this action, petitioner purchased 
from Finalco, Incorporated (‘ Finalco‘ ), certain computer equipment manufactured by Burroughs Corporation (‘ Burroughs‘ ). Petitioner and Finalco simultaneously entered into a Lease Agreement which provided that petitioner would lease the acquired computer equipment back to Finalco for a period of 96 months commencing December 1, 1980. FINALCO Finalco is the principal subsidiary of Finalco Group, Inc., formerly Financial Analytics Corporation, a publicly-held corporation, the stock of which is traded over-the-counter and reported in NASDAQ quotations. The principal offices of Finalco and Finalco Group, Inc., are located in McLean, Virginia. During the years in issue, Finalco was a closely-held company. During the years in issue, Finalco typically engaged in leasing transactions involving electronic data processing equipment in which Finalco negotiated and entered into a lease with an end-user, purchased the equipment, financed the purchase with a lending institution, and resold the equipment in a sale and leaseback transaction with an independent third party. The resale of the equipment provided Finalco with much of the capital necessary to generate additional lease transactions. In addition to generating transactions through its own marketing programs, Finalco also acquired equipment subject to existing end-user leases from other leasing companies. During its fiscal year ending June 30, 1979, Finalco entered into lease transactions of approximately $129,000,000 based on the original cost of equipment. John F. Olmstead (‘ Olmstead‘ ) was president of Finalco at the time petitioner entered into the transaction. LEASE PRO, INC. Lease Pro, Inc., (‘ Lease Pro‘ ) is a Montana corporation engaged in the purchase, sale and leasing of computer equipment. Lease Pro has served as a general partner in a partnership that leases personal property, other than computer equipment, and owns an interest in a leased building. Lease Pro was owned by J. L. Dubois (‘ Dubois‘ ) and Dean Schennum (‘ Schennum‘ ). Dubois acted as the sales agent at Lease Pro. Schennum acted as business manager and administrator. Dubois and Schennum are also the principals in Dubois-Schennum Assoc., Ltd., a Montana corporation organized in August of 1980, and registered with the National Association of Securities Dealers (‘ NASD‘ ) for the purpose of acting as a broker-dealer because leveraged computer investments were clarified as a security under Montana law. Lease Pro acted as sales agent for Finalco in the pursuit to locate investors. Lease Pro received a commission in the amount of ten percent of the equity investment, including cash and any recourse note. During 1979 and 1980, Lease Pro's revenue attributable to Finalco arranged computer investments approximated 90 percent of all revenue it earned. Lease Pro had no shareholders, officers, directors, or employees in common with Finalco Group, Inc., its affiliates, or subsidiaries. In 1980, Finalco changed the structure of Finalco arranged leveraged lease transactions to insert an intermediary purchaser into the chain of title between Finalco and the investor. Lease Pro acted as such an intermediary. The record indicates that the compensation earned by Lease Pro remained ten percent of the equity investment. Finalco prepared all documents and controlled the practice of dating documents. Lease Pro did not appraise computer equipment. Lease Pro relied on Finalco to structure and value all transactions. BACKGROUND AND THE END USER LEASE On October 2, 1980, Burroughs signed a Bill of Sale transferring certain computer systems to Utilities Leasing Corporation (‘ Utilities Leasing‘ ) for a total purchase price of $8,505,123. The effective date of the Bill of Sale was June 27, 1980. A portion of such equipment (the ‘ Equipment‘ ) was sold for the gross amount of $462,118 less received credits and allowances of $167,887. The Philadelphia Saving Fund Society (the ‘ Bank‘ ) loaned Utilities Leasing $7,490,671.99 to purchase the equipment from Burroughs. The loan was evidenced by a Note and Security Agreement (the ‘ Bank Note‘ ), dated November 3, 1980, in the amount of $7,490,671.99, with interest at the rate of 11.75 percent per annum, issued by Utilities Leasing in favor of the Bank. Utilities Leasing granted the Bank, as provided in the Bank Note, a security interest in and lien (the ‘ Lien‘ ) on the equipment owned by Utilities Leasing and leased to the End User. In an equipment lease agreement (the ‘ End User Lease‘ ), dated as of June 15, 1980, and amended November 10, 1980, Utilities Leasing agreed to lease all equipment included in the Burroughs Bill of Sale, a portion of which included the Equipment, to Pacific Telephone & Telegraph Company (the ‘ End User‘ ). The equipment was to be installed on the End User's premises at various geographic locations. The End User Lease was a typical commercial triple net lease which had a term of five years, commencing June 27, 1980, and terminating June 26, 1985, concerning the Equipment. The End User Lease required four annual rental payments of $78,518.36 commencing January 1, 1982, and one payment of $39,259.18 due July 1, 1985 which covered the six- month period during 1985. The End User Lease contained a provision by which the End User could terminate the lease after three years. The End User had the option to renew the lease. During the first one year of the renewal period the End User was not required to pay rent; thereafter, the rent would be based on the fair market value of the equipment. The End User Lease did not have an option to purchase the equipment. PURCHASE BY FINALCO In a Purchase Agreement dated October 27, 1980, Utilities Leasing sold all the computer equipment which was subject to the End User Lease to Finalco for a total purchase price of $8,681,389.21 (the ‘ Utilities Leasing Purchase Agreement‘ ). Finalco made a cash payment and assumed the Bank Note. Utilities Leasing warranted that the Bank Note would be fully amortized by proceeds from the End User Lease. Utilities Leasing is unrelated to Finalco and is a competing equipment leasing company that buys and sells computer equipment and arranges leases of such equipment. Finalco acquired the Equipment from Utilities Leasing on November 10, 1980, as evidenced by a Bill of Sale of such date. The portion of the total purchase price allocable to the Equipment was $369,694.00, as set forth in the schedule attached to the Utilities Leasing Purchase Agreement. On November 10, 1980, Utilities Leasing assigned the End User Lease to Finalco. INQUIRY BY PETITIONER In the fall of 1980, petitioner contacted Mr. Albert Schweiss (‘ Schweiss‘ ), a certified public accountant with the firm of McGladrey Hendrickson & Company (‘ McGladrey‘ ), to discuss possible investments. Schweiss suggested that petitioner consider an investment involving the purchase of computer equipment. Schweiss performed an economic analysis of a typical leveraged lease computer transaction with respect to petitioner's projected tax liability in future years. Schweiss concluded that the residual value of equipment subject to a leveraged computer lease was critical to economic profit. Sometime between December 5, 1980, and December 26, 1980, Schweiss received a complete description of the Equipment that petitioner ultimately purchased. Schweiss gave Michael Miller (‘ Miller‘ ), a CPA and partner at McGladrey who specialized in computers and computer systems, the Equipment description. Schweiss asked Miller to evaluate the probable residual value of the Equipment Schweiss considered residual value to include both resale value and the value of a renewed lease. According to Schweiss, Miller advised that if the Equipment was to be used for accounting functions, there was a high probability of residual value. Miller told Schweiss that if the Equipment was used for telecommunications purposes that it might be obsolete in five years because of...