Slip opinions decided 1995 — Tax Court Memorandum

These cases involve two similar transactions: A leasing company purchased equipment with funds borrowed from a bank. The leasing company leased the equipment to an end-user. Rent payments to be received from the end-user were assigned to the bank as security for the loan. The leasing company then sold the equipment to a middle company, which, in turn, sold the equipment to P. With regard to both of those sales, substantially all of the purchase price was evidenced by a long-term note and the equipment was acquired subject to both the lease to the end-user and the security interest of the bank. P then leased the equipment back to the leasing company. Payments from the leasing company to P, from P to the middle company, and from the middle company to the leasing company were, with one small exception, identical. Sec. 465, I.R.C., limits deductions for losses from certain activities to the amount for which the taxpayer is "at risk". Sec. 465(b)(4), I.R.C., provides that a taxpayer shall not be considered at risk with respect to amounts protected against loss through nonrecourse financing, guarantees, stop-loss agreements, or other similar arrangements. 1. Held: The ultimate test for determining whether a taxpayer is at risk pursuant to sec. 465(b)(4), I.R.C., is whether there is a realistic possibility of economic loss. Based on the facts presented, P has not established that there was any realistic possibility that he would be subject to economic loss as a result of his long-term notes. 2. Held further, Ps are subject to additions to tax under sec. 6653(a), I.R.C., for negligence. 3. Held further, Ps are subject to additions to tax under sec. 6661, I.R.C., for substantial understatement of income tax liability. 4. Held further, Ps are liable for the increased rate of interest imposed under sec. 6621(c), I.R.C., for substantial underpayments attributable to tax-motivated transactions.

P exhibited exotic automobiles, state-of-the-art, high technology vehicles with unique design features or equipment, for a fee. Held: The exotic automobiles were subject to obsolescence and, thus, were depreciable under secs. 167 and 168, I.R.C. 2. Held, further, the expenditures made by P's wholly owned S corporation are nondeductible under sec. 162(a), I.R.C., on account of being preopening expenses not incurred in a trade or business of the corporation. 3.

P filed late returns for 1984, 1985, and 1986. Held: P is not entitled to an award of administrative costs under sec. 7430, I.R.C., because R did not issue a notice of deficiency and Appeals did not issue a notice of decision. Sec. 7430(c)(2), I.R.C.; Estate of Gillespie v. Commissioner, 103 T.C. 395, 397 (1994).

Petitioners filed no Federal tax returns for 1990 and 1991, and failed to produce books and records from which their taxable income could be determined. Held: respondent's application of Consumer Price Index (CPI) to petitioners' 1989 return information to determine their 1990 and 1991 income approved; Held, further, respondent's revised application of CPI to petitioners' 1989 return figures for the purpose of asserting increased deficiencies not approved; Held, further, petitioners are liable for additions to tax under secs. 6651(a)(1), I.R.C., and 6654, I.R.C.

Before trial, the parties negotiated a settlement specifying the manner of resolving all issues raised in R's notice of deficiency. During discussions regarding the proposed stipulated decision document, P sought to raise an issue as to its entitlement to use the special use valuation provisions of sec. 2032A, I.R.C. This issue was not covered in R's notice of deficiency, and was not raised or preserved by P in the pleadings or the stipulated settlement agreement. Held: The issue raised by P is a new issue that is not before the Court.