*1
suspected scheming
“wheeling
I would make no distinction on
facts
or
and deal-
ing” by
in this case from
situation
United
Tommasi.
(2d
States I, therefore, would dissent and reverse 1988), voluntary which involved a termi the convictions of defendants Lash and nation and that court’s conclusion that a Tommasi. effectually conspirator had withdrawn conspiracy by closing
from a fraudulent pur used in a fraudulent
account hitherto
pose. may That Lash have terminat been just effectively oppor
ed concluded his
tunity to further the and oil scheme pursued by
which continued to be the oth His known to ers. withdrawal was Smith, Dean B. and Irma SMITH any others involved without “formal no Petitioners-Appellants, upon tices of withdrawal to be served co- conspirators.” Id. at 974. COMMISSIONER OF INTERNAL I believe as to defendant Lash that the REVENUE, Respondent-Appellee. record reflects that he did no work for (USWOG OGP) operation either after No. 90-1007. 1983 and this indictment was returned in United Appeals, States Court of may That 1989. Lash have received checks Circuit. Sixth Mines, company
from Volcano also con- Adler, nected with for a months em- Argued few Oct. insufficient, view,
ployment my Decided June counter the clear fact that he was disasso- ciated with and all conspir- withdrawn from actively
ators who working had been
conspiracies subject which were the
1989 indictment. There is no evidence that
Lash received benefit from the “indict- conspiracy
ment” after 1983. I would con- acquittal
clude that Lash’s motion for granted
should have been on statute of grounds.
limitations Tommasi, regard
With again I believe
the record reflects that he did sever his
relationship (and OGP) OSWOG
1983. Tommasi had differences with
Adler, principal operator, and withdrew He, too,
from further association in 1983.
received no benefits from either operation, Adler,
or from after March more than years
six before this indictment was
brought. authority Under the of Nerling
er, I supra, would also conclude that a place
withdrawal took and that Tommasi acquitted
should have been these
charges. His subsequent activity with (and others)
Lenihan should be the subject indictment, separate
of a illegal. if I find long basis to “neutralize” the fact of a
past withdrawal reference to other later
1090 to a tax-motivated
payments attributed and that under I.R.C. transaction § additional as- petitioners were liable for an (in 6661). addition to Smith sessment § (1988). Commissioner, 91 On T.C. (1) appeal, we must decide: whether taxpay- correctly determined the Tax Court alloca- entitled to deduct their ers were not losses from ble shares (2) activities; and Koppelman Process correctly sustained whether the Tax Court petitioners’ tax under I.R.C. an addition a understatement of 6661 for substantial § interest under imposed tax and additional 6621(c) underpayments at- for substantial § to tax-motivated transactions. tributable appellants The Tax Court decided pro not entitled to deduct a rata share by Syn-Field incurred Associ of the losses ates, (SFA).1 The Tax deter Ltd. Court taxpayers were not liable mined that the pursuant to 6659. for an addition to tax § (argued), D. Brager N. Jackson Dennis 1989, supplemen In the Tax Court issued Lubitz, Hamilton, Horn, Jubas & Spensley, concerning the calculation of the opinion tal Cal., petitioners-appel- Angeles, Los subject underpayment to the amount of the lants. to tax under I.R.C. 6661. We addition I.R.S., Scott, K. Office Chief Peter appeal hear this under jurisdiction have Counsel, Allen, Chiеf, Mary Acting Gary R. 26 U.S.C. § Clark, (argued), I. Pincus Kenneth F. David 1981, limited the Smiths became Justice, Dept, Appel- Rosenberg, U.S. W. in SFA. In James Karr became ners D.C., Div., Washington, Tax late Section and Asso- partner a limited Peat Oil Gas respondent-appellee. (col- ciates, (POGA). Ltd. SFA and POGA NELSON, Judge, lectively “partnerships”) were formed Before Circuit (1) *, Judge, engaging and in the ex- purpose Circuit for the WELLFORD Senior **, gas Judge. development and of oil and ploration JOINER Senior District acquisition and prospects and the owner- WELLFORD, Judge. Senior Circuit interests; (2) owning, ship of and oil exploiting licensing Irma or otherwise technolo- Appellants, Dean B. and Smith Smith, relating production synthetic gy of the Unit- appeal from the decision (K-Fuel (K-Fuel) high heating fuel is a concerning ed deficiencies States coal, fuel, physically resembling penalties imposed upon their federal value solid wood, lignite and produced by placing peat, income tax for 1981 and 1982 the Com- Koppel- fuel grade The Tax other low fossil into missioner of Internal Revenue. temperatures pres- 1981 and 1982 man Reactor at Court determined that the sures) materials; peat from and other deficiencies substantial under- constituted * Appeals Harry United States Court of Circuit; for the Eleventh The Honorable W. Wellford assumed sen- January recently ior status on that court affirmed the Tax ** Court’s decision. Karr v. Joiner, The Honorable Charles W. Senior Unit- (11th Cir.1991). F.2d 1018 The Tax Court's Judge ed States District for the Eastern District Karrs, opinion Michigan, sitting by designation. refers to both the Smiths and the being Georgia the latter residents. 1. The Tax Court consolidated this case with appeal related was taken to the case in which with, (3) using, licensing At the end of experimenting partnerships in- the com- technology try to demonstrate volving Smith and Karr licensed from Sci- synthetic feasibility producing rights mercial Teck the exclusive within the State peat other cellulosic materi- fuel from of North Carolina to use *3 construction, als. The idea included wood, process respect peat with to and operation, management pilot plant of a and rights well as the nonexclusive to use the peat attempt that would to convert and Koppelman process in the remainder of the synthetic material into fuel other cellulosic respect United States with to material purposes. We sеt facts marketing for out bagasse. other than The essentially by undisputed that are found agreed pay to a license fee to Sci-Teck The entered Court. including payment by both cash and notes. own, op- joint agreement into a venture to The partnerships also entered into re- erate, manage pilot a and North Carolina search development agreements and with “Kop- plant. K-Fuel This is known as the Development Fuel-Tech Research and pelman process.” (FTRD), which was to conduct and coor- process, and Koppelman The reviewed dinate the development research and ef- extensively written about in various techni- Koppelman, Kearney, forts of A.T. and oth- industry journals, developed by cal and ers, and to oversee the construction 1980, In Koppelman. Edward the United Koppelman Stone & Webster of a process Department Energy of awarded States plant. partnerships agreed pay Koppelman grant study a substantial services, FTRD again through a fee for its feasibility process. of his Pursuant to this 1984, By cash and notes. a (SRI), grant, Koppelman, SRI International Koppelman process plant had been built in Maine, University large of investment North Carolina. banker, others, including Ekono, and Inc. Taxpayers purchased their one unit Company, and Central Maine Power a utili- $161,500, nership pursuant interest for firm, ty large engineering prepared and a following principal schedule of report concluding pro- that the Koppelman amounts: “technically, environmentally, cess was $10,000 payable upon subscription to economically 91 feasible.” T.C. at 735. SFA development is a orga- SRI research and 10,000 1, due Mar. 1982 provides nization that research and consult- 10,000 1, due Mar. 1983 ing government for business and clients 7,500 1, due Mar. 1984 worldwide. 24,000 1, due Mar. 1993 1981, In Koppelman, the summer of to- 30,000 1, due Mar. 1994 SRI, gether completed plant with a model 30,000 1, due Mar. 1995 capable producing quan- K-Fuel in small 1981, 30,000 1, tities. At the end of it was believed due Mar. completing
that the chances of
successful
1,
10,000 due Mar.
plant
high.
construction
a K-Fuel
Taxpayers’ obligations to
were in the
SFA
1981,
August
notes,
Corporation,
promissory
Ronodo
of full
form
recourse
(Ronodo)
they
timely
N.V.
from Koppelman
payments
principal
sublicensed
made
right
through
the exclusive
to use
Koрpelman
principal pay
1983. Their 1984
process within the
of North
ment
State
Carolina
was not made until 1985. With Mar
consent,
peat
refine and
Kaye’s2
taxpayers delayed
convert
and wood into
tin
un
granted
payments
K-Fuel.
Ronodo til 1986 the interest
due in
30, 1981,
rights,
certain additional
all of which were
and 1984. On December
wholly
taxpayers
agree
sublicensed
Ronodo to its
owned
entered
into
described
(Sci-
subsidiary
Licensing Corp.
whereby
Sci-Teck
FTRD
ments with Sci-Teck and
Teck).
they agreed
personal liability
to assume
for
SFA,
Kaye,
general partner
independent
2. Martin
is an
tax and financial consultant.
payments to
by partnership
represented
amounts
in the total
obligations
SFA’s
FTRD for
fees and to
for license
Sci-Teck
$24,800, respectively.
$99,200 and
There is no
development.
research
tax returns
disputed income
On their
losses to
that the claimed
dispute but
$40,392
deducted
taxpayers
incurred
an
have been
must
deducted
representing
$38,316, respectively,
engaged for
activity in which
partnership loss-
share
their distributive
to the research and
respect
and with
profit,
de-
these
disallowed
es.
Commissioner
losses must
expenses,
development
not been
that it had
ground
ductions on
in connection with
incurred
have been
actually
that the losses
established
trade or business.
incurred
connection
percent
that ten
The Tax Court noted
partnership was
which
*4
to the various related
funds
contributed
or busi-
a trade
respect to
or with
profit
working capital
go to
partnerships was to
determined
The Commissioner
ness.
go
“pro-
seventy
was to
percent
while
partner-
in the
taxpayers’ investment
that
motions,
entities.”
attorneys, or network
other than
economic
ship lacked
substance
memorandum, however, pro-
offering
The
of tax.
avoidance
partners’
the limited
that interest
vided
the Tax
petitioned
taxpayers then
The
added to work-
to be
short-term notes was
tax defi
proposed
to redetermine the
Court
1982,
$28,125 in
at
ing capital, estimated
one of
selected as
Their case
ciency.
was
$190,000 in
$140,625
1983,
and about
involving the SFA and
test cases
two
(one-half of the total
Only
1984.
125 units
Following a week-
partnerships.
POGA
Working capital was
proposed)
sold.
that
trial,
conceded
long
the Commissioner
$150,000.
opinion
The
maintained
to be
their distribu
taxpayers could deduct
“up
percent
to 85
net
that
also noted
losses attributa
partnership
shares
tive
gas
by the oil and
generated
cash flow
gas
and
to oil
investments.
ble
utilized to increase oil
activities would
review, addressed
opinion, which we
pay off the
gas holdings and to
losses
shares of
partners’ distributive
(the entity created
to FTRD
nerships notes
for
by payments to Sci-Teck
represented
construction) and Sci-Teck.”
to oversee
FTRD for research and
fees and to
license
POGA, the
prepared by SFA and
Analyses
held that the
development. The Tax Court
conceded,
indicated that
Tax Court
were not entitled
gas
oil and
drill-
from
“projected revenues
Citing Rose v. Com
deductions.
claimed
complete-
sufficient to
ing would have been
386,
(1987),
missioner,
aff'd,
88 T.C.
notes to
Sci-Teck
ly retire
Cir.1989),
(6th
the Tax Court
F.2d 851
offering memoran-
FTRD.” The same
shaped the
that tax motivations
determined
that
success
K-
warned
financial
dum
question
partnership
limited
transactions
unlikely”
“highly
development was
Fuel
Koppelman Process activities
that
reasons, in-
particularized
for a number
apart
from
lacked economic substance
capital,” “conflict
cluding “inadequate
Court,
The Tax
anticipated tax benefits.3
improved
interests,”
“commercially
moreover,
that such activities
determined
technology.”
partner
“in
with the
connection”
significant
firm found
An outside
174.
ships’
or
under I.R.C.
trade
business
§
paid to Sci-
license fees to be
amount of
taxpay-
The Commissioner conceded
range of nor-
within the
Teck to be “well
may
their
shares
practice.”
deduct
distributive
ers
This conclusion
mal commercial
to oil
upon
report by
purported
losses attributable
based
was
may use their distrib-
expert,
investments and
also indicated
academic
which
if
K-Fuel
profit
credits attributable
to investors
one
reactor
shares of
utive
issue,
successfully
and be-
constructed
tube
thereto.
deductions
attorney gave
operable. A
an
then,
patent
losses
came
shares of
are the distributive
portion
grounds
partner-
for
of a
disallowance
Because the Tax Court found that
deduction as
the Commissioner
ships’ Koppelman process
lacked eco-
asserted
activities
substance,
T.C. at
§
based on I.R.C.
465. 91
it
not reach the other
nomic
did
patents
dealing
Koppelman's
engaged
seemеd Code
with “activities not
opinion
Koppelman process
profit”
had in
valid and that the
is that “no deduction attribut
than
“technological underpinnings”
activity
better
able to such
shall be allowed” un
investigated.
attorney,
This
others he had
less otherwise allowable under
1624 or
§
Kurland,
po-
concluded that this
Lawrence
212(1)
(2).5
or
Under
§
§
process “involved a
tech-
tential
reasonable
if the
enter
nical risk” and was a “sound investment.”
honest,
tained an actual and
though
even
promoters
supervisors
One of the
“unrealistic”, profit
“unreasonable” or
ob
Oronson,
plant,
North Carolina
James
se-
jective by engaging
activity.
in the
Treas.
rights
Koppelman process
cured
to use the
1-183-2(a)
Reg.
Campbell
cited in
produce
“to
char for
...
charcoal bri- Commissioner,
(6th
868 F.2d
Cir.
firm,
quettes.”
purport-
A New York law
1989). Campbell instructs that nine rele
edly
legal
in “a
involved
work
number of vant factors are to
making
be examined in
opin-
similar transactions” rendered a tax
this determination.6 In disallowing ex
organizational
ion
structure of the penses
relating
or deductions
the Kop
partnership involved and described it as “a pelman process or
develоpment
K-Fuel
un
accomplish the desired
tax structure to
tax
section,
der this
the Tax Court relied heavi
end.”
*5
ly upon
Commissioner,
Rose v.
An
in
witness
the oil and
(1987),
(6th Cir.1989)
aff'd,
Rose “[t]he sum, Tax Court opment area.”7 objective and honest have an actual testimony Zukerman concluded from the packages, the Picasso acquiring provide partners limited “that the sub of economic devoid transactions were promоt the activities of cash to finance upheld the at 854. We stance.” Id. including no projects, their various ers for question findings that the Court tably Petrogene.” or business” a “trade constitute did not test in adopted the We I.R.C. 162. under fact struck The Tax Court was had transaction of “whether Rose arrange- in this of fees that the amount than the effect other economic practicable (for re- license and for ment for services the Tax Id. Since of tax losses.” creation dependent development) were search and clearly findings in Rose were sold, partnership units upon the number of “cor erroneous, “analysis” was and its trade or strange way to run a very “a holding rect,” we affirmed by the experts produced business.” The essentially a “sham” with transaction was the in- practice, and justified this Smiths citing Id. Ma profit motive.” “no honest price paid for the crease in F.2d honey v. license, carrying out of process because (6th Cir.1987). exceedingly risk- project “was the K-Fuel *6 oriented.” however, adopt not Rose, we did In test,” was dis- tax shelter which “generic the Tax impressed as as We are not by the Tax length at considerable
cussed
un-
purportedly
judge was with
Court
in
instant case. Id.
contingent
procedure, or
method of
usual
(1) empha-
were
of the Tax Court
many
promot-
concerns
times
arrangement, because
benefits; (2)
price negotia-
upon
no
ers,
professionals,
sis
tax
such as
salespersons, or
valuation; (4) pay-
tion; (3) difficulty
may
engineers,
re-
attorneys or
or
brokers
paid by
upon
the seller
price
greater
ment of twice
or lesser fee based
ceive a
process
undertaking in-
licensor for limited
venture or
success of the
(5)
payment.
interpret
deferral of
Zukerman’s testimo-
rights; and
volved. We
Rose,
emphasized
hand,
indicating that
ny,
Tax Court
addition to
on the other
Zukerman,
put up
tax European
promoters
Michael
testimony
investors or
capital” to
money
“pure
conceded
risk
The Tax Court
front end
or
counsel involved.
here,
do initial re-
partnership
acquire
unlike
the license and to
that the business
of a
entity,
feasibility “before a sale
did not
search on
purported
Rose business
a sale of
substance,
part.
single
place,”
in
unit took
and that
at least
lack economic
process to the
the license or
сomplex fi-
Zukerman testified
make the
call
an amount “to
would
accomplish
to
was utilized
nancial structure
the initial
project economically viable” for
European investors
favorable tax ends.
Koppel-
developers of the
promoters and
for a
over one million dollars
committed
original sub-
process,
man
who invested
project
for “the Peat
Petrogene
hope
in the
it would
stantial sums at risk
go
project” and another that did not
for-
satisfactory
produce a
return.
investors,
had a conflict
ward. These
who
extent,
opin
interest,
part-
conceded in its
to some
with the
The Tax Court
that,
involved, were,
despite
complex and unusual
nerships
according to Zuk-
ion
transaction,
erman,
nature of the over-all
“buying
[Koppelman]
license.”
Petrogene
revolutionary
“you
high
although
risk
not as
[as
7. Zukerman added that
had a
exciting
very, very
potential."
high
project,
project]
K-Fuel
had some
with a
reward....
[T]he
structuring
necessarily
was not
detrimental
1188. The notes
certainly
“almost
would
partnership,
Ferrell,
to the
because it was not re-
paid”
not be
in
whereas here the
in,
any more than it
quired
pаy
to
out
took
were,
fact,
recourse installment notes
in
characterizing
partnership
in
therefore
paid by investors over a
years.
course of
controversy
“capital
as a
investment
Ferrell,
Id. at 1186. In
assigned
leases
nership
an
rather than
active business to
were not
which
license fees and research and
for, but,
paid
addition,
the Ferrell inves-
development
fees
committed.” We
agreed
pay
tors
“multi-million-dollar
agree
do
that this is
correct charac-
“having
notes”
relationship
to eco-
terization;
conclude, rather,
we
reality.”
nomic
Id. at
(empha-
operations
were risk venture
added).
Ferrell,
sis
Like the situation in
carrying on a trade or business within the
the amount of the notes at
issue were
meaning of the tax laws.
keyed to the amount of cash to be invested
challenged
The Tax Court
the substance
partners
the limited
rather
than the
payments
of the fee and license
because
leases,
value of the
$80,-
but approximately
payments
contingent
size or 000,000 of notes were executed in Ferrell
obligation
pay
amount and because the
proposed
after
gas pro-
62%
oil and
long
obligation.
involved a
term
The Tax gram
abandoned,
had been
and interest on
Commissioner,
Court cited Ferrell v.
90 the notes was deferred
years.
for some 20
(1988)
support
holding
T.C. 1154
of its
entity
paid
to be
huge
amount of
payment
that such an extended
did “not money
clearly
experience
Ferrell
had no
standpoint.”
make sense from a business
give practical
means to
assistance in oil
Ferrell, however,
very large
involved
mul- operations.
persuaded
We are
that while
notes,
notes,
ti-million
not installment
due
there were some similarities between Fer-
in approximately twenty years
entity
controversy
rell and the instant
concerning
capital
which had “no
or other funds with tax
arrangements,
shelter
the substantial
which
acquisition
to finance the
of leases”
differences in the cases render Ferrell dis-
purportedly
put
needed
the oil and
tinguishable.
operation.
venture into
The notes involved
We deem the situation here to be more
many
Ferrell were
times more in
akin to that in
amount than
Pritchett v.
the actual cash value of leases
*7
(9th Cir.1987)
acquired,
and a
We are of mindful the considerable dif- to be needed at the outset. ferences between the Ferrell We thus view and Smith arrangement arrangements. promoters Ferrell, any as not devoid Two in of busi reality. “neither one of whom had ness rationale or economic oil and We conclude, therefore, experience,” siphoned payments business off that the 65% anticipated gross receipts entity part issue were of a in transaction $118,000,000 involved in the face amount hope profit, for ultimate in were long in term non-recourse in carrying notes. 90 T.C. at curred a partnership on trade
1096 “technically, envi- process was Koppelman I.R.C. meaning of within or business feasible;” a economically that ronmentally, and also conclude We and 162. 183 §§ by the payments taxpayers’ obligations showing that the and interest principal expenditures notes; intended recourse were form of full Smiths SFA took the meaning of within of income production indicating projected that analyses financial invest transaction 212.8 The I.R.C. § retire the sufficient to would be revenues recourse ment, execution including Sci-Teck; partnership’s notes to FTRD oth effects income notes, “practicable had testimony expert stat- and uncontradicted losses.” income tax thе creation er than a process did have ing that the 851, 853 Commissioner, 868 F.2d Rose v. generating profits. chance of reasonable Cir.1989). (6th sure, risky, to be These investments in applied to be of review The standard predictably con- the Tax Court of fact of findings review of ques- saving taxes —but cerned about errone findings clearly are such is whether whether, anticipated apart tion is from Commissioner, F.2d 865 v. ous. Ratliff taxpayers’ investment advantages, the tax Cir.1989); Edu 97, (6th Teamsters Ohio 98 the evidence the basis of was a On sham. Training Fund Safety Trust cational and to us that it seems obvious presented, (6th 432, F.2d was not a sham. investment hand, legal Cir.1982). the other On in our conclusion supported We are and its by the Tax Court applied standard decision in v. Commis Bryant our recent findings upon its based legal conclusions Cir., 1991), 745, (6th in sioner, 928 F.2d Ratliff, 865 de novo. are reviewed fact under reversed the Tax Court which we F.2d at 98. many respects similar circumstances Tax Court’s aspect, the factual In its involved Bryant here. present those question transactions conclusion a produced speculative venture which “with leaves us substance lacked economic investors, large tax losses claim of а mis- and firm conviction that the definite disallowing on the basis the Commissioner Anderson v. committed.” take has been it was 183 determination of a 564, (1985) § City, 470 U.S. Bessemer First considered we sham transaction. States (quoting v. United United States fully 364, 395, question as whether a 68 S.Ct. Co., Bryant 333 U.S. Gypsum (1948)). recog- contingent We recourse note 92 L.Ed. enforceable at odds that this is nize result of the venture was profitability (see decision Circuit’s Karr Eleventh under legitimate basis for deduction but under law supra), note (It was.) 616(a) We next of the Code. proper test “whether circuit review de Bryant “we concluded oth- any practicable effects has transaction in deter legal applied standard novo the *8 of income tax losses.” er than creation is a not a transaction mining whether or supplied). Rose, (emphasis F.2d at 853 868 748, citing Rose v. Commis sham.” Id. at moreover, crucial, inquiry be It is sioner, supra. vantage point of conducted from set out apply to then standard oc- time the transactions taxpayer of curred, than with benefit rather determining a transaction whether [I]n F.2d at 1554-56 hindsight. Hayden, 889 sham, not address the court should was a Reg. (Nelson, J., dissenting); Treas whether, hindsight, the light in the of 1.183-2(a). § investment, as did made a taxрayer wise Instead, the court trial court here. at trial included presented The evidence taxpayer made address whether the concluding that the must report following: a 1548, Cir.1989). sioner, (6th "Sec 162(a) F.2d 1552 profes 889 allows deductions for 8. "Section fees, expenses consulting and travel and other a for such and tion 212 allows deduction sional they expenses only ordi produc if are only they paid for the miscellaneous nary are or incurred if carry necessary expenses in incurred income." Id. tion of Hayden v. Commis ing business." on a trade or processes, products at all or whether new investment such as ener- a bona fide merely purchased gy development, taxpayers argue tax deductions. they he requirement fulfill this of this section. 749. Id. at provisions 174(a)(1) “apply section on the sham We reversed the Tax Court paid not costs or incurred history to 183: inquiry citing legislative § taxpayer experimentation for research or an determining whether losses from [1]n directly by undertaken him but also to allowed, activity the focus is to are to be expenditures paid or incurred for re- activity engaged in is be on whether experimentation sеarch or carried on in rather than whether it is car- profit person organiza- his behalf another expectation a reasonable ried with (such institute, tion as a research founda- the rule from profit. prevent This will tion, engineering company, or similar where being applicable to situations contractor).” 1.174-2(a)(2), Sec. Income that it not rea- many would consider is Regs. activity to result in expect sonable to an Commissioner, 667, Green v. 83 T.C. though the evidence avail- profit even (1984). actually that the is able indicates it profit. example, in for For engaged Commissioner, 500, 416 U.S. Snow not a
might
argued that
there was
be
1876,
(1974),
94 S.Ct.
1099 purposes” requires and that decision the same vated “no business result as to the 6621(e) controversy had “no eco- added the transaction assessment. § pos- nor “reasonable nomic substance” We REVERSE the decision of the Tax profit.” sibility of a Court, accordingly, and REMAND for con- and the Tax Court Commissioner sideration of the alternative I.R.C. § examining complex correct in ar- were contention of the Commissioner in this rangement carefully in this case and with case. skepticism given totality of circum- believe, however,
stances. We JOINER, Judge, Senior District deductions, interest, including claimed con- dissenting. each of the code sidered under sections analyzed, authorize a deduction as respectfully do I majority dissent from the subject claimed to further examination and opinion. Whether the We, limitation under I.R.C. 465. accord- engaged business, in a trade or § and wheth ingly, REVERSE the Tax Court’s disallow- er the entered into the transac ance under the above sections and its deci- motive, profit questions tion with a are “generic sion that SPA was a tax shelter” fact, on which the Tax Court must be sus “statutory rather than a tax shelter.” Id. tained holdings clearly unless its erro at 754. Commissioner, neous. Rose v. 868 F.2d (6th Cir.1989). Notwithstanding that the Tax “generic Court utilized the tax Section 6661 Considerations inquiry disapproved Rose, shelter” of in 6661(b)(1) Section defines a substantial here, Rose, as in its use of this test not is
understatement of income an un- tax as controlling. The Tax Court went on to exceeding greater derstatement of 10 appropriate questions address the for our percent required of the tax to be shown purposes, upon and its conclusions based $5,000.00. year on the return for the or inquiries clearly those are not erroneous.
The decision should be affirmed.1
date,
As of
its
effective
section
Commissioner,
In Campbell v.
868 F.2d
661(b)(2)(C)
category
creates one
of “stat-
(6th Cir.1989),
we noted that Trea
utory tax shelters”
referred to Rose v.
sury Regulations
1.183-2(b)(1)-(9)
section
Commissioner, 88
at 407 n. 2
T.C.
in evaluating
lists nine factors used
wheth
er a transaction has been entered into with
Smith,
733, 766,
91 T.C.
motive. These
are not
factors
ex
that,
primari-
The Tax Court found
based
They
prefaced
regula
clusive.
are
ly
testimony,
princi-
оn the Zukerman
“the
with:
tions
pal purpose
Process ar-
In determining
activity
whether an
is
rangements
partner-
between the limited
profit,
in for
all facts and cir-
ships and the other entities in the network
respect
cumstances with
was the avoidance of Federal income tax.”
are to be taken into account. No one
Taxpayers
Id. at 767-68.
they
claim that
making
factor
determinative in
faith,
this
good
acted in
although taking sub-
addition,
in-
was,
doubt,
determination.
it is not
stantial
tax deductions
part
tended
the factors described in
anticipated arrangement.
paragraph
Based on our
are to be taken into ac-
conclusion that the deduc-
determination,
disallowed,
making
count in
improperly
tions were
we need
pause
that a
further to discuss the
determination is to be made on the
§
(wheth-
penalty. Our conclusion on the basic de-
basis that the number of factors
ductibility
paragraph)
claims settles
er or not listed in this
indicat-
penalty may
it that no 6661
ing
profit objective
attach. Our
a lack of
exceeds the
(11th
Court,
1. Karr v.
HOI activity appears subject nerships’ to have been the appears activities. It they that study. part only one The Tax Court found that took no whatsoever. study, Compunetics study, this the was The fourth factor by regula- offered the by assumptions buttressed such as that the expectation tions is the that the assets of construction of a K-Fuel reactor tech was partnership may the appreciate in value. nically financially feasible. As for tax The record reveals that the partnership
payer’s experts, post-hoc while their tеsti virtually assets, was without true with the mony taxpayer’s is not relevant exception plant, of the small which is not preparations activity, for this their testimo argued to negligible have more than value. ny viability about the commercial of this The Tax regarded the principal as- negligible venture was also of value be sets of the technology as the- assumptions cause of its as to material licenses, and noted that the offering memo- testimony facts.2 The the centered on randum they impossible stated that were viability Koppelman pro technical of the addition, value. above, as discussed the However, cess. the fact that K-fuel exists validity underlying of the license to Ronodo produced point. and can be is beside the questionable best, is and the subsidiary offering The memorandum did not even licenses likewise. projections profit-making make as to the suggested The fifth factor by regula- the
potential Koppelman process of the activi tions is the success of the partnership in paucity ties. The of evidence demonstrat carrying on other similar or dissimilar ac- ing any preparation entry careful into tivities: exploitation Koppelman commercial of the The fact that the taxpayer has en- process scrutiny does not survive under gaged in similar in past activities this factor. converted unprofitable them from The third of the is factors the time and profitable enterprises may indicate that energy expended by partnership present he is activity carrying on activity. Treas.Reg. profit, though even activity pres- 2(b)(3). partnership’s The ently unprofitable. minimal § 1.183— activity goes directly more holding to a of Treas.Reg. 2(b)(5). As noted § 1.183— reach, the Tax Court we do not the issue of above, there prin- was evidence that the passive whether this was a activity. How- cipals of entrepreneurial this venture had ever, the part- economic substance of the expertise outside of the tax-oriented invest- nership abundantly is made clear from the partnership itself, ments field. As for the Aronson, fact that James who oversaw the Koppelman process did its activi- construction of the North physical Carolina losses, generate ties gas explora- its oil and contractor, plant by appears to have been tion activities did also. only employee partner- of either the The sixth and seventh factors cited ships corporate or the three set hierarchies regulations go to the existence and extent up by promoters, performed who actual long-term profitability, inappli- which is services for the rather than situation, present cable to the involving the being a mere figurehead. salaried The years initial partnerships. The general partners, Kaye, Goldman and eighth factor addresses extent to which accountants and financial consultants. the investment at issue involves a substan- They familiarity had no with the technical tial by taxpayer, investment which process, they did entrepreneurial nor have suggest would an emotional investment in backgrounds, offering and the memoranda (a profitability form of prospective partners informed they inquiry). Here, offering at-risk materi- going part to take little stipulated als partners have should reports by 2. slurry first of three offered product produced K-fuel rather than the Lam, taxpayers, that of plant. addressed the oil and the North Carolina The Plummer and projections third, revenue report, not the predicated Thomas was second, process Pomerantz, assumption activities. The authored would enter potential joint discussed the market utility. into venture with a con The Tax Court’s respects. incomes, utilize numerous order large outside per rested in “[ajctual- control partnerships. clusion that from the tax benefits part from these compensation this venture outlay for whose taxpayers’ sons *13 by taken the minimal, solely capital contri nerships depended the deductions promoters’ they realized the the butions, at issue had interests in while The projection. (em tax benefits competing four-to-one ventures” of profitability here, the tax- met since is not ninth factor uncontroverted original) is both phasis present the activi- engage in payers did not are other import. There and of undeniable or recreation. pleasure personal ties ven principals of the that the indications seriously pursuing of had no intention ture the nine factors list- related to facts The licensing arrangements. it, the particularly 1.183- Treasury Regulations section ined and non-re holding imperfect that the The documentatiоn support 2(b)(l)-(9) do not clearly in er- to Koppelman’s of license were Tax Court’s conclusions course nature totality the ror, the of of inquiry clearly into the sham nature show Ronodo the Tax that evidences circumstances The Tax Court found transaction. the error, clearly Court, being far from prices charged the that the trans- aspects of the A number of correct. licenses, ser as well as for other for their of sham. strong odor here emit action forces, vices, by market but not set were up by hierarchies set corporate The trio of a view satis with toward were formulated the “license” promoters provide to the promoters’ capital, factory return partnerships speak for to the “services” negot by partners the without accepted the “re- Particularly absurd is themselves. that argue I that the fact iation.3 would offered development” services search and sold the United States Koppelman later FTRD, the to “coordinate” by which was Koppelman process for more rights to the and others Koppelman himself of activities by price paid the Ronodo than 20 times FTRD, оr experience that with K-Fuel of generous construction under the most Aronson, employee, its sole active rather entrepre speaks not to the the “license” corpo- apparent that the It is did not have. the savvy promoters, of the but to neurial actually were formulated rate hierarchies partnerships were fact that the known channelling the thinly-veiled means of the purchasers the of Koppelman and investment back majority partners’ the of poten rather than rights to be tax-oriented through promoters’ promoters, the the competitors. tial corporations and in the equity interests positions purchasers as officers through perfectly apparent their salaried It was corporate entities. and directors of units that the partnership arrange- by economic substance of the corporations The controlled dealt ment, however, promoters is that the sold that none of the promoters, web partners. to the tax deductions partnership had of the been commitments length, princi- negotiated at arms’ that contemplate partners did had pals and contractors activities for not be partnerships as endeavors, in relevant experience Koppelman process itself lacks cause communicating facts the insubstan- other carefully validity was no doubt chosen —it enterprise. These nature of the tial it has by promoters expressly because ventures, they nerships not business were energy arguable potential as an alternative montages likely paper entity because the business source—but arguments. impracticable in up was set here was which promot- actually “justiffy] derived was from the taxpayers' experts fee was did not
3. The
expectations
merely
as to the return
practice."-
experts
ers’ client’s stated
concluded
range
on his
This method
charged
he wanted
setting
investment.
were within the
of rea-
fees
nothing
fees had
to do with the
The fact that the amount of
sonableness.
venture,
they
these fees
might
"success” of
since
have been reasonable if
had
fees
forces, however,
being paid
corporate entities
purportedly
to the
through
market
been arrived
services,
promoters
testimony
their
significance
for their
not to the
irrelevant
promotional expertise.
which the
in the Tax Court
method
H03
significance
placed.
It does not controvert the
The Bryant opinion states that an
say
the other facts at issue to
expectation
“unreasonable”
of profit
in-
income from the oil and
activities of
large
volves a “small chance for a
profit.”
partnership might
have covered the While
gold-
this definition fit the
and silver-
expenses
Koppelman process
activi- mining at issue in Bryant,
it does not de-
may
Koppelman pro-
ties.
It
be that the
addition,
scribe the situation here.
commercially
cess itself is
feasible. How- question of the
feasibility
commercial
ever,
out,
clearly pointed
as the Tax Court
the Koppelman process
outweighed
is far
venture,
it was the structure of this
aspects
transaction,
other
all of
interest,
sepa-
conflicts of
and other factors
*14
which are
totality-of-the-
relevant under the
viability
pro-
rate from
economic
of the
inquiry
by
circumstances
dictated
regu-
issue,
cesses
which demonstrate that the
lations.
profit
investors had no
motive. The ex-
Deduction of Interest
perts
by
taxрayers
offered
who found
reasonable,
gas projections
the oil and
ad-
The Tax Court should also be affirmed as
question
merely
dressed
surface
of the
to its disallowance of
deductions taken
potential
partnerships’
economic
of the
ac-
partners
for interest on
partner-
However,
tivities.
there was no serious
ships’ notes to FTRD and Sci-Teck. The
activities,
pursue
intent to
those
and the
taxpayers rely
World,
Toyota
Rice’s
units,
purchasers
of the
Inc.
(4th
The rules announced in Bryant support not be said to have economic substance as the conclusion opinion. reached taxpayers. properly The Tax Court evidence, ample There is pointed out concluded, under the “all events” test of above, support the conclusion of the Tax Treasury Regulatiоns 1.461-l(a)(2), section Court, independent de novo considera- were not entitled to evidence, above, tion of the also as outlined partnerships’ deduct the interest on the indicates that the transaction was a sham notes. possible in that it had little economic effect Penalties other than the creation of income tax loss-
es. I holdings would also affirm the penalty Court as to the for substantial majority’s Bryant reliance on understatement of proposition income tax under sec- profit that the likelihood of penalty does tion not control the determination and the for understate- whether motive, had is mis- ment of income tax due to a tax-oriented 6621(c), section under investment stated above.
reasons BECKWITH, Debtor. & re BELL McKENNY, the Es Executrix
Mary L. Mary McKenny; L. A.
tate of Charles Plaintiffs-Appel (90-3434), McKenny
lants, *15 Schedel, Es Executrix P.
Marie (90-3454), Joseph Schedel J. tate of
Intervenor-Appellant, Trustee; McGRAW, Securities A.
Patrick Corporation, Protection Investor
Defendants-Appellees. 90-3434, 90-3454.
Nos. Appeals, States
United Circuit. Sixth Wolff, Hattner, Spen- E. Richard J. Louis 9,May Argued Nathanson, McCarthy & Heyman, gler, July Ohio, Razza- Durfee, Toledo, Frank C. Decided Gould, Washington, (argued), Shea &
D.C., plaintiffs-appellants. for Henry, To- & Whipple, Mary Fuller Ann (ar- Ohio, P. Harbeck ledo, Stephen Focht, Washington, H. Theodore gued) and D.C., defendants-appellees. Brown, E. and Charles W. Rozic John Toledo, Craig, Brown, Baker, Schlageter & Ohio, intervenor-appellant. MARTIN, Before KENNEDY ENGEL, Senior Judges, and Circuit Judge. Circuit KENNEDY, Judge. Circuit MсKenny and the Es- L. Mary Plaintiffs McKenny appeal A. tate of Charles bank- affirmance Court’s District dismissing their judgment ruptcy court’s Investor the Securities complaints under seq. et Act, 78aaa 15 U.S.C. § Protection ap- (“SIPA”). Intervening plaintiff Schedel notes paid on the claimed interest payers’ potential] environ technology proven [with are deductible. and Sci-Teck to FTRD inade problems health mental and [and] Toyota Rice’s World Commissioner of Zukerman, who at 743. capital.” Id. quate (4th Revenue, Cir.752 F.2d 89 Internal trans arranging in paid as counsel was case of a sham 1985), that even held promoters connected by outside action for tax primarily entered into transaction agreements and SFA, formulated payment of taxpayers’ purposes, benefit tax de designed to maximize tax structure in connec made on a recourse note interest and investors such ductions SFA arrangement profit a no motive tion with Smith. note in the The recourse deductible. nature conclude, despite the deferred We World, case, Toyota as in instant Rice’s payments, de- partnership of license and and involved obligation, “genuine” awas going receipts spite high percentage Such re “something of economic value.” developers, attorneys, and promoters, even interest is deductible course notes problemati- contingent and despite and underly face of the sham nature high operation, cal nature of the agreement. ing involved, activi- risks sham, the as a a transaction To treat ties, agents and out- through number taxpayer was must find court consultants, suffi- managers and were side other purposes no business motivated consti- regular” ciently “substantial entering obtaining tax benefits than purposes a trade or business tute transaction, the transaction and that Green, at 83 T.C. 687. 174. See no because has economic substance hope and a risk-filled activities involved exists. possibility of reasonable energy develop a new design to source Id. Experts testified that oil process. it to have concluded We find error assumptions projections SFA moti- facts record Smiths experts pronounced it Other reasonable. that such testi- seems to original).” dissent concede (emphasis Diamond v. Commissioner The Cir.1991). Rev., (4th question mony F.2d 372 did address "the surface o Int. f potential partnerships’ activi- economic the Tax Court Snow in court