Stiebling v. C.I.R.
| Decision Date | 14 May 1997 |
| Docket Number | No. 95-70391,95-70391 |
| Citation | 113 F.3d 1242 |
| Parties | -2856, 97-1 USTC P 50,467 NOTICE: Ninth Circuit Rule 36-3 provides that dispositions other than opinions or orders designated for publication are not precedential and should not be cited except when relevant under the doctrines of law of the case, res judicata, or collateral estoppel. Mary Lou STIEBLING, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Before FLETCHER and TROTT, Circuit Judges, and JENKINS, * District Judge.
Mary Lou Stiebling ("Stiebling"), a taxpayer, appeals from the decision of the United States Tax Court disallowing income tax deductions she had claimed in 1984 and 1985 for depreciation and net operating loss carryovers based upon her agreement to purchase 105 mobile homes for $1.4 million with a down payment of $1, and for legal fees she incurred in connection with two civil lawsuits involving a disgruntled heir of a decedent for whose estate Stiebling had served as executrix. She also appeals from the Tax Court's approval of statutory additions to tax for negligence and substantial understatement and its imposition of increased interest on her deficiency based upon her participation in a "tax-motivated" sham transaction. Stiebling v. Commissioner, 67 T.C.M. (CCH) 3006 (1994). We have jurisdiction of this appeal from the United States Tax Court pursuant to 26 U.S.C. § 7482(a), and we affirm.
We review tax court decisions on the same basis as civil bench trials held in federal district court. Ball, Ball, & Brosamer, Inc. v. Commissioner, 964 F.2d 890, 891 (9th Cir.1992). We review the Tax Court's findings of fact and inferences drawn from facts under the clearly erroneous standard, Allen v. Commissioner, 925 F.2d 348, 351 (9th Cir.1991), including whether a transaction is lacking in economic substance, Erhard v. Commissioner, 46 F.3d 1470, 1476 (9th Cir.1995); Thompson v. Commissioner, 631 F.2d 642, 646 (9th Cir.1980), cert. denied, 452 U.S. 961 (1981). 1 We review the Tax Court's legal conclusions de novo for correctness, including both the correctness of the legal standards applied by the Tax Court and the application of the legal standards to the facts found. Sacks v. Commissioner, 69 F.3d 982, 986 (9th Cir.1995).
In taking deductions for depreciation, a taxpayer makes adjustments to the basis of the property, 2 yielding an adjusted basis. See 26 U.S.C. §§ 167, 168, 1012, 1016. Computing the adjusted basis starts with the property's cost, including the portion of the purchase price represented by debt, unless the debt is unlikely to be paid. To be included in the adjusted basis, the indebtedness must be genuine. 3
Stiebling asserts that her January 1, 1981 agreement to pay $1.4 million on January 1, 1988 for 105 mobile homes located in the Sierra Grande Mobile Home Community in Arizona represented a genuine indebtedness because it was based upon the fair market value of the units as of January 1, 1981--the date Stiebling made her $1 down payment. She submits that it would have been imprudent for her to abandon the transaction at the time the agreement was made, the substance of the transaction being evidenced by the direct correspondence between purchase price and fair market value at that time. The cost of the property reflected in the unpaid purchase price provided a proper basis for depreciation, Stiebling argues, notwithstanding the fact that she never actually paid the purchase price, took possession of the mobile homes, or otherwise sought to enforce the purchase agreement after 1983.
Indeed, after making "interest-only" payments in 1981, 1982 and 1983, Stiebling ceased paying anything towards the purchase of the mobile homes. Nevertheless, she claimed a $280,000 deduction for depreciation on the mobile homes each year from 1981 through 1985, totalling $1,400,000. 4
In Estate of Franklin v. Commissioner, 544 F.2d 1045 (9th Cir.1976), we affirmed the Tax Court's disallowance of deductions for depreciation and interest arising from the purported sale and leaseback of an Arizona motel, the Thunderbird Inn. We observed that Id. at 1048. In contrast, where "the purchaser by abandoning the transaction can lose no more than a mere chance to acquire an equity in the future should the value of the acquired property increase," this chance "fails to supply the substance necessary to justify treating transaction as a sale ab initio." Id. In Estate of Franklin, the taxpayer failed to demonstrate that "the purchase price was at least approximately equivalent to the fair market value of the property," and thus failed to establish the genuineness of the debt incurred as the basis for the depreciation. Id. Lack of genuine indebtedness also justified disallowance of deductions for interest paid on the purchase. "For debt to exist," we explained, "the purchaser, in the absence of personal liability, must confront a situation in which it is presently reasonable from an economic point of view for him to make a capital investment in the amount of the unpaid purchase price." Id. at 1049. "[D]uring the taxable years in question," the taxpayer in Estate of Franklin "confronted no such situation." Id.
Relying on Estate of Franklin, Stiebling asserts that an indebtedness created under a sale-leaseback agreement should be recognized for depreciation purposes where the purchase price "is at least approximately equivalent to the fair market value of the property at the time of purchase," which Stiebling deems to be January 1, 1981. See also Hudspeth v. Commissioner, 509 F.2d 1224 (9th Cir.1975) (). She argues that it would have been imprudent for her to abandon the purchase agreement given the close parity between fair market value and purchase price in 1981, and that the reasonableness of making the $1,400,000 capital investment in 1981 establishes the genuineness of the debt represented by her 1981 promise to pay the purchase price seven years later on January 1, 1988.
Stiebling measures the equivalence of market value and purchase price as of the date the agreement was made. Yet nothing in Estate of Franklin requires the Tax Court to measure equivalence as of the date of the agreement. Indeed, where a purchase agreement contemplates the making of a large balloon payment years after initial entry into the agreement, cases following Estate of Franklin have compared market value and purchase price at the time the balloon payment would have been made rather than on the date of the agreement itself.
For example, in Hildebrand v. Commissioner, 967 F.2d 350, 351-53 (9th Cir.1992), we relied upon Estate of Franklin in affirming the Tax Court's determination that purchases of timeshare resort housing lacked economic substance where the value of the timeshares was significantly lower than the amount of the balloon payments at the time that the balloon payments became due, that is, thirty years from the date of purchase. In Hildebrand, the taxpayers conceded the obvious: " '[n]aturally, if the value of the timeshare in year 30 was less than the amount due at that time the purchaser would forfeit his timeshare units rather than make the full balloon payment.' " Id. at 351. See also Hilton v. Commissioner, 671 F.2d 316 (9th Cir.1982) (per curiam), affirming 74 T.C. 305 (1980), cert. denied, 459 U.S. 907 (1982); Lukens v. Commissioner, 945 F.2d 92, 96-97 (5th Cir.1991); Coleman v. Commissioner, 16 F.3d 821, 827-31 (7th Cir.1994) ().
Likewise, it seems equally obvious that a significant disparity between the unpaid purchase price and the residual value of the 105 mobile homes on January 1, 1988--the time Stiebling's $1,399,999 balloon payment was to be made--supports an inference that Stiebling would abandon the transaction and that the entire transaction lacked economic substance from the beginning. 5
In affirming the disallowance of her deductions, the Tax Court pointed to Stiebling's failure to present evidence concerning the residual value of the mobile homes as of January 1, 1988. The Tax Court inferred that the 105 mobile home units would be worth significantly less after seven years, buttressed by Stiebling's own depreciation of their total cost over a mere five years. When Stiebling was confronted in 1988 with making a capital investment in the amount of the unpaid purchase price of $1,399,999, the 1981 equivalence of market value and purchase price would largely have vanished. Stiebling's course of conduct following her entry into the agreement, particularly her apparent abandonment of the transaction after receiving substantial tax benefits, further corroborated the transaction's lack of economic substance. 6
As we explained in Estate of Franklin, depreciation is "predicated ... upon an investment in property" and no investment exists "when payments of the purchase price in accordance with the design of the parties yield no equity to the purchaser." 544 F.2d at 1049. Stiebling's one-dollar down payment and the "interest-only" payments made pursuant to her agreement in 1981, 1982, and 1983 yielded no equity to her as the purchaser. She made no other payments against the unpaid purchase price whatsoever. By abandoning the transaction, Stiebling lost "no more than a mere chance to...
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