Thomas v. Comm'r of Internal Revenue (In re Estate of Thomas) , Docket Nos. 17715-81
| Court | United States Tax Court |
| Writing for the Court | WHITAKER |
| Citation | 84 T.C. 412,84 T.C. No. 32 |
| Parties | ESTATE OF JERRY THOMAS (DECEASED), IMOGENE THOMAS, ADMINISTRATRIX, AND IMOGENE THOMAS, ET AL., 1 Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Docket Number | 512-83 1466-83,1496-83,1499-83,1502-83,1472-83,1500-83,Docket Nos. 17715-81,1498-83,16415-82,1497-83,9698-83.,5073-83,1475-83 |
| Decision Date | 14 March 1985 |
84 T.C. 412
84 T.C. No. 32
ESTATE OF JERRY THOMAS (DECEASED), IMOGENE THOMAS, ADMINISTRATRIX, AND IMOGENE THOMAS, ET AL., 1 Petitioners
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 17715-81
16415-82
512-83 1466-83
1472-83
1475-83
1496-83
1497-83
1498-83
1499-83
1500-83
1502-83
5073-83
9698-83.
United States Tax Court
Filed March 14, 1985.
HELD: Lessor Partnership is true owner of computer equipment for tax purposes; petitioners may not amortize equity placement fee over life of Partnership.
[84 T.C. 412]
EDWARD D. FICKESS, for the respondent.
SCOTT F. CRISTMAN, WILLIAM D. EGGERS, PATRICK D. MARTIN, and PAUL PINEO, for the petitioners.
WHITAKER, JUDGE:This case was submitted fully stipulated pursuant to Rule 122; 2 the stipulation of facts and exhibits attached thereto are incorporated herein by this reference. However, many of the facts set forth herein are based upon our examination of the exhibits and were not set out in the stipulation.
[84 T.C. 413]
Respondent determined the following Federal income tax deficiencies:
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¦Docket No.¦Petitioner ¦Year(s)¦Deficiency¦
+----------+-----------------------------------+-------+----------¦
¦17715-81 ¦Estate of Jerry Thomas (deceased) ¦1976 ¦$20,449.99¦
+----------+-----------------------------------+-------+----------¦
¦ ¦Imogene Thomas, administratrix, ¦1977 ¦35,831.08 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦and Imogene Thomas ¦1978 ¦23,117.88 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦(The years 1978 and 1979 do not ¦1979 ¦8,761.27 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦involve the issues here tried.) ¦ ¦ ¦
+----------+-----------------------------------+-------+----------¦
¦16415-82 ¦Raymond and Nettie Leven ¦1976 ¦37,874.77 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1977 ¦25,995.20 ¦
+----------+-----------------------------------+-------+----------¦
¦512-83 ¦Robert P. and Janice K. Kuhn ¦1976 ¦4,570.62 ¦
+----------+-----------------------------------+-------+----------¦
¦1466-83 ¦Henry F. and Margaret K. Goller ¦1976 ¦9,141.00 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1977 ¦4,925.00 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1978 ¦2,325.00 ¦
+----------+-----------------------------------+-------+----------¦
¦1472-83 ¦Robert C. and Jeanne T. Baesel ¦1976 ¦4,570.62 ¦
+----------+-----------------------------------+-------+----------¦
¦1475-83 ¦Warren J. and Alice M. Welling ¦1976 ¦2,072.90 ¦
+----------+-----------------------------------+-------+----------¦
¦1496-83 ¦George E. and Irene L. Schultz ¦1976 ¦4,570.80 ¦
+----------+-----------------------------------+-------+----------¦
¦1497-83 ¦Roy B. and Dorothy P. Culler ¦1976 ¦19,042.33 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1977 ¦10,913.36 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1978 ¦4,504.82 ¦
+----------+-----------------------------------+-------+----------¦
¦1498-83 ¦Neil C. and Marilyn M. Schauf ¦1976 ¦28,509.00 ¦
+----------+-----------------------------------+-------+----------¦
¦1499-83 ¦James W. and Annie J. Powell ¦1976 ¦19,862.73 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1977 ¦10,123.14 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1978 ¦5,611.00 ¦
+----------+-----------------------------------+-------+----------¦
¦1500-83 ¦Elbert W. and Elizabeth C. Phillips¦1976 ¦9,142.00 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1977 ¦5,549.00 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1978 ¦2,374.00 ¦
+----------+-----------------------------------+-------+----------¦
¦1502-83 ¦William L. and Mary S. Albritton ¦1976 ¦41,978.00 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1977 ¦26,505.00 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1978 ¦11,678.00 ¦
+----------+-----------------------------------+-------+----------¦
¦5073-83 ¦Edward and Jane C. Waters ¦1976 ¦428.00 ¦
+----------+-----------------------------------+-------+----------¦
¦9698-83 ¦Bayard C. and Teresa Tullar ¦1976 ¦19,792.00 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1977 ¦10,417.00 ¦
+----------+-----------------------------------+-------+----------¦
¦ ¦ ¦1978 ¦4,029.00 ¦
+-----------------------------------------------------------------+
The petitioners in this consolidated proceeding are among the 32 limited partners in a partnership known as 1975 Equipment Investors (Partnership), a limited partnership formed to acquire equipment for lease and/or sale. The pretrial order, dated May 26, 1983, severed for trial in this proceeding solely [84 T.C. 414]
all tax issues arising out of the investment by petitioners in the Partnership. By stipulation, the parties submitted for our consideration only the following: (1) Whether the Partnership is the owner of various items of computer equipment for Federal income tax purposes; and (2) whether amounts paid by the Partnership to E.F. Hutton & Co., Inc. (E.F. Hutton), as an equity placement fee may be amortized over the life of the Partnership.
In Appendix A at the end of this opinion, we set forth the residences of the various petitioners in this proceeding when their petitions were filed and the number of Partnership units owned by them at all material times. Petitioners all were partners in the Partnership, which was formed by the well-known investment firm E.F. Hutton, a subsidiary of the E.F. Hutton Group, Inc. Prior to the activities at issue herein, E.F. Hutton had organized three other limited partnerships which had purchased IBM Systems 370 and 360 computer equipment for lease to a number of corporate lessees and had organized one limited partnership which had purchased a McDonnell Douglas DC-9 aircraft for lease to a commercial airline. E.F. Hutton also had participated as a broker in bringing together prospective lessors and lessees of computer equipment.
On January 15, 1975, E.F. Hutton formed 1975 Equipment Manager, Inc. (Equipment Manager or the general partner), a Delaware corporation, the sole function of which was to act as general partner of the Partnership. During all material times Equipment Manager was a wholly-owned subsidiary of E.F. Hutton.
The Partnership, a New York limited partnership, also was formed on January 15, 1975, pursuant to Article 8 of the New York Partnership law. As set forth in the Amended and Restated Articles of Limited Partnership (Partnership Agreement), The Partnership was to acquire computer central processing units and related equipment (collectively referred to as ‘equipment‘), to lease or sell the equipment to others and
[84 T.C. 415]
to perform any acts to accomplish those purposes. 3 The Partnership Agreement provided for a general partner, one Class B limited partner, 4 and for the issuance of up to 52 Class A limited partnership units. The general partner was to receive a commencement fee of $25,000 in consideration for its services, in addition to a management fee of 2.1 percent of Partnership gross income. 5 The overhead of the general partner was not considered to be an expense of the Partnership. Under the terms of the Partnership Agreement, all items of income or loss were to be allocated, and all distributions of cash made, in accordance with each partner's pro rata share. All net cash flow of the Partnership was to be distributed, first to the general partner to the extent of outstanding advances (plus interest), and thereafter to all partners in accordance with their pro rata shares at the time of distribution. The Partnership life was to commence on the day on which its certificate was filed and to end no later than December 31, 1983.
In July and August 1975, the Partnership prepared a private placement memorandum (Memorandum) to be used for offering limited Partnership interests to selected E.F. Hutton customers. As described in the Memorandum, the instant transaction was to be structured as follows: Upon receipt of sufficient capital from prospective investors, the Partnership was to purchase IBM System 370 computers for approximately $9 million by borrowing a substantial portion of the cost of each computer, and immediately thereafter it was to lease the
[84 T.C. 416]
computers to financially sound lessees for a period of time sufficient to repay fully the borrowings. In order to borrow funds at commercially reasonable interest rates, the Partnership was to pledge both the equipment and the leases as security to the lenders. The Memorandum indicated that the Partnership tentatively had arranged to purchase three IBM System 370 computers and lease them to three separate lessees: Sterling Drug Company (Sterling), Borg-Warner Corporation (Borg-Warner), and Exxon Corporation (Exxon). All of these purchases and leases were arranged through the efforts of equipment brokers, who specialized in IBM computer equipment. The parties have stipulated that, at the time the Memorandum was prepared, the Partnership anticipated purchasing and leasing a fourth IBM 370 System, depending on the degree of success of the offering, and the Memorandum so indicated. According to the Memorandum, during the terms of the initial leases the Partnership was expected to realize sufficient cash flow to cover Partnership expenses and to permit modest cash distributions to the limited partners beginning in 1976. It further indicated that, upon expiration of the initial lease terms, the Partnership planned either to re-lease or sell the computers on a basis which would result in the largest possible gain to the Partnership.
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