Wood v. Commissioner
| Decision Date | 14 May 1991 |
| Docket Number | Docket No. 11980-85.,Docket No. 21483-84.,Docket No. 11979-85. |
| Citation | 61 T.C.M. 2571 |
| Parties | Marva Hayes Wood and Robert Collin Wood, Sr., et al.<SMALL><SUP>1</SUP></SMALL> v. Commissioner. |
| Court | U.S. Tax Court |
Respondent in his notices of deficiency determined the following deficiencies in petitioners' Federal income taxes and additions to tax:
Petitioners Marva Hayes Wood and Robert Collin Wood, Sr
Year Deficiency
1980 ...................... $6,458
1981 ...................... 6,652
1982 ...................... 6,496
Petitioners Thomas C. and Janice G. Walker
Additions to Tax or Interest, Sec.2
------------------------------------------------------------------------
Year Deficiency 6651(a)(1) 6653(a) 6653(a)(1) 6653(a)(2) 6659 6661 6621(c)
1980 ...... $4,414 $221 $221 -- -- -- -- **
1981 ...... 7,305 -- -- $365 * $2,192 -- **
1982 ...... 9,461 -- -- 473 * 2,838 $946 **
* 50 percent of the interest payable under sec. 6601 with rest to the portion of the underpayment
attributable to negligence
** 120 percent of the interest due on the total amounts of the deficiencies
Petitioners Robert E. and Frances C. Stephenson
Additions to Tax or Interest, Secs
------------------------------------------
Year Deficiency 653(A)(1) 6653(a)(2) 6659 6621(c)
1981 ................................ $11,969 $598 * $3,591 **
* 50 percent of the interest payable under sec. 6601 with rest to the portion of the underpayment
attributable to negligence.
** 120 percent of the interest due on the total amounts of the deficiency.
In his amended answer, respondent asserted additions to tax and increased interest under sections 6653(a)(1) and (2), 6659, and 6621(c) against petitioners Marva Hayes Wood and Robert Collin Wood, Sr., for 1981 and 1982. Also by amendment to answer, respondent asserted an addition to tax under section 6661 against the Woods for 1982.
The primary issues for decision are: (1) Whether petitioners' purchases of solar water-heating equipment were sham transactions, lacking in economic substance and profit objective; (2) whether promissory notes executed by petitioners with respect to the solar water-heating equipment are too contingent to be included in petitioners' cost basis with respect to the equipment; (3) whether the solar water-heating equipment qualifies as section 38 property with respect to which investment credits are allowable; (4) whether the solar water-heating equipment allegedly purchased by petitioners was placed in service in 1981 and 1982; (5) whether the leases in question satisfy the noncorporate lessor rules of section 46(e)(3); and (6) whether the additions to tax and increased interest determined and asserted by respondent should be sustained.
Findings of Fact
Some of the facts have been stipulated and are so found. At the time of filing their respective petitions herein, petitioners Marva Hayes Wood and Robert Collin Wood, Sr., resided in Orem, Utah, petitioners Thomas C. and Janice G. Walker resided in Clearfield, Utah, and petitioners Robert E. and Frances C. Stephenson resided in Salt Lake City, Utah.
In 1981 and 1982, the Woods, the Walkers, and the Stephensons entered into separate and individual transactions for the stated purpose of purchasing3 solar water-heating equipment. The initial transactions did not involve partnerships. After the purchase of the solar water-heating equipment by petitioners, the equipment was to be leased by leasing companies on petitioners' behalf to various end users such as owners of single and multi-family residences and owners of commercial buildings. For a fee, the leasing companies were to be responsible for finding and contracting with end users for the lease of petitioners' solar water-heating equipment and for the installation, maintenance, repair, and re-lease of the equipment, all on petitioners' behalf. Under leases to be entered into with end users of the equipment, end-user lease payments with respect to the equipment were to be based either on fixed monthly rates to be negotiated by the leasing companies and the end users, or on negotiated percentages of the dollar savings each month in the end users' gas and electric heating bills attributable to the use of the solar water-heating equipment.
Petitioner Robert Collin Wood, Sr. (Wood), is a professor and has a background in aeronautical engineering. Petitioner Thomas C. Walker (Walker) is an electrical engineer. Petitioner Robert E. Stephenson (Stephenson) is a professor of engineering.
In late 1980, Wood became concerned about his family's future financial situation. A colleague who was a financial planner recommended the solar water-heating equipment leasing program offered by Southwest Solar Products, Inc. (Southwest Solar), as an investment program that offered a hedge against inflation, an investment in an environmentally clean industry, and a type of investment that during the early 1980's was being promoted heavily by State and Federal Governments through various tax and other incentives. In December of 1981, the Woods traveled to Oceanside, California, where they inspected equipment involved in the solar water-heating equipment leasing program offered by Southwest Solar.
Prior to 1981, Walker had become particularly interested in solar water heating systems. Walker and Stephenson were clients of a financial planner who, for reasons similar to those given to Wood, recommended the solar water-heating equipment investment and leasing program offered by Southwest Solar.
Southwest Solar is a California corporation. Its president and sole shareholder was Paul Mills (Mills). Other key individuals involved in developing and promoting the solar water-heating equipment investment program of Southwest Solar during 1980 through 1983 were Roger Bergerson (Bergerson), a stockbroker, and Randolph Shipley (Shipley), an attorney.
Shipley arranged to have Financial Planning Consultants, Inc. (FPCI), an investment counseling firm, market the investment program of Southwest Solar to other financial planners and to individual investors. Shipley also incorporated Lessors Management & Data Services, Inc. (LMDS), to act for 15 years as the primary leasing or management company with respect to the end-user leases of the solar water-heating equipment, and to be responsible for finding end users, for negotiating end-user leases, for installing the equipment on property of end users, and for maintaining the equipment. Lawrence Nielsen (Nielsen) was hired to manage LMDS from 1981 to April of 1985. At some point in time, Nielsen purchased the stock of LMDS from Shipley.
LMDS would contract with other leasing companies to assist in locating end users, and it would contract with various building contractors for installation of the equipment on the residential and commercial property of the end users. LMDS prepared quarterly reports and mailed to investors in the Southwest Solar program annual reports describing the extent of the leasing activities of the equipment and of the end-user lease proceeds received.
As suggested, the management agreement with LMDS was to have a 15-year term, but after the first 2 years, the management agreement could be terminated by the investors or by LMDS without cause upon a 60-day notice.
As compensation for its services in finding end users, in negotiating end-user leases of the equipment, and in installing the equipment on property of end users, LMDS was to receive from each investor a "location fee" of $1,400 with respect to each four pieces or components of equipment leased to end users on the investors' behalf. Half of the $1,400 location fee (or $700) was to be paid in cash by the investors at the time they invested in the Southwest Solar program, and the $700 balance of the location fee was to be paid out of lease payments received on the investors' behalf from end users under the end-user leases. If LMDS terminated the management agreement within the first 2 years of the agreement, LMDS would forfeit its right to the deferred $700 portion of the location fee. It is not clear from the record if the cash portion of the location fees that was paid by petitioners was refundable if no end users for the equipment were found, or if the investors' particular equipment was not installed under end-user leases. No interest accrued on that $700 deferred portion of the location fee.
As compensation for its services in maintaining the equipment and in collecting end-user lease payments, LMDS was to receive from each investor a management fee in the amount of 7 percent of actual lease payments received each year from end users under the end-user leases.
The investors also entered into agreements with other leasing companies labeled 12-month leases under which the other leasing companies were to be involved in finding end users and in installing and maintaining the equipment. As compensation for their services, the other leasing companies were to receive an additional fee of 3 percent of actual lease payments received each year from end users under the end-user leases.
If the equipment became available for release, LMDS, on behalf of the investors, was to attempt to release the equipment to additional end users.
With the exception of the water tanks, the solar water-heating equipment to be...
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