Taiyo Hawaii Co. v. Comm'r of Internal Revenue
| Decision Date | 25 June 1997 |
| Docket Number | No. 10159–95.,10159–95. |
| Citation | 108 T.C. 590,108 T.C. No. 27 |
| Parties | TAIYO HAWAII COMPANY, LTD., Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Michael Rosenthal and Thomas E. Busch, for petitioner.
Jonathan J. Ono, for respondent.
For the taxable years ended September 30, 1989, 1990, and 1991,1 respondent determined deficiencies in petitioner's Federal income taxes in the amounts of $35,529, $71,692, and $84,331, respectively. Respondent also determined an $8,433 addition to tax under section 6651(a)(1) 2 for 1991.
The issues for our consideration are: (1) Whether petitioner is liable for excess interest tax under section 884(f)(1)(B) for 1989, 1990, and 1991; (2) if petitioner is liable for the excess interest tax, whether certain assets should be included in the taxable base; and (3) whether petitioner is liable under section 6651(a)(1) for failure to timely file a return for 1991.
At the time its petition was filed, petitioner, Taiyo Hawaii Co., Ltd. (Taiyo Hawaii), had its principal place of business in Honolulu, Hawaii. Petitioner was a Japanese corporation engaged in real estate activity in Hawaii. Petitioner was incorporated on October 30, 1985, with its outstanding capital stock held by Taiyo Fudosan Kogyo Co. (Fudosan), a Japanese corporation. Pursuant to an October 31, 1985, merger agreement, Fudosan transferred its Hawaiian assets to petitioner and its Japanese assets to another related company.
Fudosan and another Japanese corporation were merged into the Seiyo Corp. (Seiyo), a Japanese corporation, as of January 1, 1986. As part of the merger, Seiyo acquired (and retained throughout the years in issue) petitioner's issued and outstanding capital stock. Seiyo was part of the real estate and tourism group of a Japanese conglomerate, Seibu Saison Group.
On October 1, 1988, petitioner's assets included: Cash; certain receivables; a condominium in Waikiki, Hawaii; a 50–percent interest in a Hawaiian partnership, T–3 Wailea Joint Venture; and certain unimproved real property on the island of Hawaii. The Hawaiian realty had been held by petitioner since 1986, having been acquired by Fudosan between 1973 and 1980. One portion of the realty was known as the “Ginter Property” and the other as the “Gomes Property”.
Petitioner initially continued Fudosan's lead and sought to develop the realty. An architect was retained to prepare development plans that were submitted to the local county planning commission responsible for land development. Petitioner proposed that the Ginter property, which was zoned for single-family residences, be subdivided into 7,500– and 15,000–square–foot residential lots with houses. Subsequently, petitioner commissioned a feasibility study concerning development of a 9 or 18–hole golf course in proximity with the Ginter subdivision. Petitioner sought to develop the Gomes property into approximately 300 subdivided residential units and a botanical garden.
Prior to the taxable years before the Court, petitioner encountered significant impediments that ultimately proved fatal to its development plans. On several occasions, the County of Hawaii proposed the construction of a major highway through the Ginter property, which would have provided the necessary access for development. The proposed highway was never constructed. Also, the Gomes property was located in a flood plain, and substantial drainage work would have been required prior to further development. Petitioner determined that the cost (several millions of dollars) to improve the Ginter and Gomes properties was too large to warrant development. Petitioner did not receive any revenue from either the Gomes or Ginter properties during the years at issue. Petitioner did not advertise the properties for sale, and no bona fide purchase offers were received until 1995.
On May 2, 1995, an unrelated company, Towne Development of Hawaii, Inc., made an offer to purchase and did eventually purchase the Ginter and Gomes properties. The purchase price was to be approximately $3 million. A possible cloud on the title, however, caused the price to be reduced to $2.4 million.
With respect to the joint venture, T–3 Wailea partnership, petitioner owned a 50–percent interest and was also the managing partner. The joint venture owned approximately 600 acres of land immediately above Wailea, Hawaii. In 1990, petitioner liquidated its interest in the T–3 Wailea partnership in exchange for a $5,963,431 distribution, resulting in a $2,450,722 profit.
Sometime in 1990, petitioner acquired a 50–percent interest in Pines Plaza Associates, a Hawaiian general partnership engaged in real property construction. Petitioner utilized certain portions of advances from Seiyo and Taiyo Development Co. (Taiyo Development) to develop the Pines Plaza project.
Petitioner obtained financing from unrelated financial institutions including Mitsubishi Trust & Banking (Mitsubishi Trust), Bank of Tokyo, and Dai–Ichi Bank in order to conduct its real property business activity in Hawaii. Petitioner also received advances from its parent corporation, Seiyo, as well as another related company, Taiyo Development, a Japanese corporation. The advances received from Seiyo and Taiyo Development were reflected on petitioner's books, records, and tax returns as payables to affiliates. These advances were utilized for working capital to develop projects, to pay outstanding debts owed to financial institutions, and to exploit, maintain, and hold the Ginter and Gomes properties.
During the taxable year 1988, Taiyo Development made advances to petitioner which were not evidenced by promissory notes or other written instruments. Although the records in which the 1988 advances were shown did not expressly reflect a stated rate of interest, Seiyo had instructed petitioner to accrue interest at a certain rate on its books.
At the end of the 1988, 1989, 1990, and 1991 fiscal years, petitioner had outstanding bank loans with third-party banks, in the aggregate amounts of $12,722,465, $15,440,132, $13,479,595, and $5,548,809, respectively. During the period under consideration, petitioner paid down several of the loans due to third-party banks. The loans were evidenced by promissory notes executed by petitioner.
During the taxable years 1989, 1990, and 1991, Seiyo and Taiyo Development advanced the following amounts to petitioner:
+------------------------------------+
¦Year¦¦Seiyo ¦¦Taiyo Development¦¦
+----++----------++-----------------+¦
¦1989¦¦$5,000,000¦¦$3,604,746 ¦¦
+----++----------++-----------------+¦
¦1990¦¦191,755 ¦¦— ¦¦
+----++----------++-----------------+¦
¦1991¦¦2,194,378 ¦¦— ¦¦
+------------------------------------+
The advances were not evidenced by promissory notes, had no fixed maturity date, and were unsecured. The advances were not repaid during the years in issue. During the years 1993 and 1994, petitioner repaid approximately $5 million and $400,000 of the related party debt, respectively. There was no stated rate of interest, and no interest was paid by petitioner on the advances. Seiyo and Taiyo Development did not demand payment or take legal action against petitioner regarding the advances.
At the end of the 1990 and 1991 fiscal years, petitioner's outstanding liabilities (including advances from Seiyo and Taiyo Development, bank indebtedness, and miscellaneous liabilities) and the tax basis of its assets were as follows:
+--------------------------------------------+
¦¦Fiscal ¦¦ ¦¦ ¦¦
++----------++-----------------++-----------+¦
¦¦Year Ended¦¦Outstanding Total¦¦Tax Basis ¦¦
++----------++-----------------++-----------+¦
¦¦Sept. 30 ¦¦Liabilities ¦¦of Assets ¦¦
++----------++-----------------++-----------+¦
¦¦1990 ¦¦$27,680,245 ¦¦$20,858,967¦¦
++----------++-----------------++-----------+¦
¦¦1991 ¦¦21,955,602 ¦¦16,907,976 ¦¦
+--------------------------------------------+
As of September 30, 1995, the outstanding advances (including principal and accrued interest) totaled $23,875,036.82.
On its Federal income tax returns, petitioner generally reported that it was engaged in real estate development and property investment and real estate investment and development. On its 1989, 1990, and 1991 tax returns, petitioner reported “Land Development Costs” of $13,800,857, $13,830,400, and $11,481,780, respectively.
Petitioner, on originally filed returns, claimed the following amounts of interest as deductions related to its effectively connected income (ECI) from the conduct of a trade or business in the United States:
+---------------------------------+
¦¦Fiscal Year¦¦ ¦¦
++-----------++------------------+¦
¦¦Ended ¦¦Interest Deducted ¦¦
++-----------++------------------+¦
¦¦9/30/89 ¦¦$ 887,324 ¦¦
++-----------++------------------+¦
¦¦9/30/90 ¦¦1,837,751 ¦¦
++-----------++------------------+¦
¦¦9/30/91 ¦¦1,346,795 ¦¦
+---------------------------------+
On its original income tax returns for the taxable years 1989 through 1991, petitioner reported that it had no excess interest tax liability by means of the following reported information:
+------------------------------------------+
¦¦Fiscal Year¦¦ ¦
++-----------++----------------------------¦
¦¦Ended ¦¦Excess Interest Computed ¦
++-----------++----------------------------¦
¦¦9/30/89 ¦¦Designated as N/A ¦
++-----------++----------------------------¦
¦¦9/30/90 ¦¦$1,837,751—$1,837,751 = None¦
++-----------++----------------------------¦
¦¦9/30/91 ¦¦$1,346,795—$1,346,795 = None¦
+------------------------------------------+
Petitioner, for the years 1989 through 1991, withheld and paid tax to respondent in an amount equivalent to 10 percent of the interest paid to third-party foreign banks (Mitsubishi Trust and Bank of Tokyo), in...
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