UNITED STATES TAX COURT
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T.C. Memo. 2012-327
UNITED STATES TAX COURT
G.D. PARKER, INC., Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket Nos. 20280-06L, 29268-09,
5020-10, 5044-10.
Filed November 27, 2012.
David M. Garvin, for petitioner.
Sergio Garcia-Pages and Timothy A. Sloane, for respondent.
MEMORANDUM FINDINGS OF FACT AND OPINION
HAINES, Judge: In these consolidated cases,1 respondent issued a notice of
determination and three notices of deficiency. After concessions2 the issues for
'These cases were consolidated for purposes of trial, briefing, and opinion.
2Respondent concedes that petitioner established that Vilanova, S.A., had a
(continued...)
SERVED Nov 27 2012
-2[*2] decision are: (1) whether G.D. Parker, Inc. (petitioner), is entitled to deduct a
capital loss of $12,624,219 from the sale of stock in 2004; and, as a result, whether
petitioner is entitled to a capital loss carryback of $3,089,131 for 2003 and a
capital loss carryover of $7Q22,827 for 2005; (2) whether respondent's Appeals
Office properly sustair ed respondent's filing of a notice of Federal tax lien with
respect to petitioner's self-assessed income tax liability for 2003; (3) whether
petitioner failed to report $1 million of income from the sale of partnership
interests in 2003, and lternatively, if the receipt of $1 million in 2003 is
determined to be a lo
, whether petitioner failed to include $1 million of
cancellation of indebt dness income for 2004; (4) whether petitioner is entitled to
deductions for depreci ion of $104,650, $85,610, and $84,089 for 2003, 2004,
and 2005, respectively; (5) whether petitioner is entitled to various deductions for
2(...continued)
basis of $12,746,730 in the BellSouth Peru, S.A. stock immediately before
petitioner allegedly ac uired the stock from Vilanova, S.A., on December 21,
2004. Respondent also concedes that petitioner reported its receipt of $7 million
from the sale of partnership interests in Miami Beach Marina Associates, Ltd., and
Conch Harbor Marina Associates, Ltd., including the $1 million it received during
2003, on its Federal income tax return for the taxable year 2004. Respondent
concedes that the amo nt of petitioner's withholding tax liability for constructive
dividends in 2003 is $80,100, not $87,300. Finally, respondent concedes that
petitioner is not liable for the additions to tax under secs. 6651(a)(1) and (2) and
6656 relating to unreported dividends.
-3[*31repair and maintenance expenses of $123,242, $50,000, and $9,623 for 2003,
2004, and 2005, respectively; (6) whether petitioner is entitled to miscellaneous
other deductions of $1,106,497, $468,938, and $304,718 for 2003, 2004, and
2005, respectively; (7) whether petitioner is liable for withholding tax under
sections 14423 and 1461 of $80,100, $90,000, and $90,000 for 2003, 2004, and
2005, respectively; and (8) whether petitioner is liable for accuracy-related
penalties under section 6662 for 2003, 2004, and 2005.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. Those exhibits
attached to the stipulations which were found relevant and admissible are
incorporated herein by this reference. At the time the petitions were filed,
petitioner was a Florida corporation with its principal place of business in Key
Biscayne, Florida.
1.
G.D. Parker, Inc., & Subsidiaries
Genaro Delgado Parker is a citizen and resident of the Republic of Peru. On
February 5, 1997, Mr. Parker incorporated petitioner under the laws of the State of
Unlëss otherwise indicated, all section references are to the Internal
Revenue Code (Code), as amended and in effect for the years at issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure. Amounts are
rounded to the nearest dollar.
-4[*4] Florida. Vilanova, S.A. (Vilanova), a corporation organized under the laws
of the Republic of Panama, held all of the stock of petitioner. During the years at
issue petitioner filed consolidated Federal income tax returns as the common
parent of an affiliated group (GD Parker affiliated group). The members of the
affiliated group included M. Vanini Investments, Inc. (Vanini), G. D. P.
Investments, Inc. (GDP), and Stella-Mar, Inc. (Stella-Mar).
A.
Vanini
Vanini was a co poration organized under the laws of the State of Florida on
May 28, 1996. Petitioner owned all of the stock of Vanini during the years at
issue. Vanini owned a home in Key Biscayne Florida (Key Biscayne home),
during the years at isst e and in January 2000 purchased a home in Valdemossa,
Spain (Valdemossa ho:ne).
i.
Key Biscayne Home
The Key Biscayne home was a single-family home in Key Biscayne,
Florida. The.home wa a 23-room, luxury three-story house which included a
living room, a kitchen, a dining room, a dining area, a utility room, a den, a family
room, a patio with a balcony, seven bedrooms, and 7-1/2 bathrooms. It sat on
14,250 square feet of land and included 10,105 square feet of living area abutting
a double wide canal with access to Biscayne Bay and the Atlantic Ocean. The
-5[*5] ground floor of the home contained a four-car garage, a swimming pool, a
built-in spa, and an office.
During 2003, 2004, and 2005 Mr. Parker and his family were given rent-free
use of the Key Biscayne home. Lesli M. Loayza, Mr. Parker's daughter, resided at
the home throughout 2003, 2004, and 2005 while she attended Florida
International University. Jonathan S. Loayza, Mr. Parker's son, resided at the
home for least six months during 2003 and five months during 2005. In 2003 Mr.
Loayza attended St. Agnes Academy in Key Biscayne, and in 2005 he attended
Gulliver Academy in Coral Gables, Florida. Estrella Delgado Parker Vanini, Mr.
Parker's daughter, resided at the home for six months during 2003. She also
attended St. Agnes Academy in 2003. Marcella Vanini, Mr. Parker's wife, resided
at the home whenever she visited Miami, including at least five visits to Miami.in
April, July and August 2004, and February and September 2005. Mr. Parker
resided at the home whenever he visited Miami, including at least 11 visits to
Miami in May, June, September, October, and December 2003; in January,
February, June, and September 2004; and in February and September 2005. Mr.
Parker reserved a bedroom at the home exclusively for his use. Blanca A.
Gonzalez, the Parker family's personal maid, also lived at the Key Biscayne home
during 2003, 2004, and 2005.
-6[*6] Ms. Bruce, the Èdministrative assistant for the GD Parker affiliated group,
worked out of the Key Biscayne home. She used the office on the ground floor
five days a week. The office contained the records and files for the four
companies making up the GD Parker affiliated group. Ms. Bruce had exclusive
use of the ground floor office as none of Mr. Parker's family members used the
office space.
ii.
Valdemossa Home
The Valdemossa home was a two-story building on 31,090 square meters of
land on top of a mountain on the island of Mallorca, Spain, overlooking the
Mediterranean Sea. Mr. Parker used the Valdemossa home during 2003, 2004,
and 2005 as a vacatio home for approximately one month per year. Mr. Parker
used the yacht, the Stella Mar (described infra), while he was on vacation at the
Valdemossa home. Petitioner did not rent, or offer to rent, the Valdemossa home
to third parties during 2003, 2004, and 2005.
B. .
Stella-Mar
Stella-Mar was a corporation organized under the laws of the State of
Florida on February 6, 1997. Petitioner owned all the stock of Stella-Mar. StellaMar purchased a 78-foot Azimut yacht called the Stella Mar (yacht).
-7[*7] C.
GDP
GDP was a corporation organized under the laws of the State of Florida on
May 21, 1996. Petitioner owned 80% of the stock of GDP. In turn GDP held an
approximately 49% limited partnership interest in Conch Harbor and a 50%
limited partnership interest in Miami Beach Marina Associates. Conch Harbor
owned the Conch Harbor Marina in Key West, Florida. Miami Beach Marina
Associates owned the Miami Beach Marina in Miami Beach, Florida.
The following chart shows the holdings of the various entities.
-8[*8]
Vilanova, S.A.
Panamanian
corporation
100%
G.D. Parker,
Inc.
Florida
corporation
80
M. Vanini
Investments, Inc.
Florida
corporation
G.D.P.
Investmen ts, Inc.
Florida
corporation
Stella-Mar, Inc.
Florida
corporation
Miami Beach Marina
Associates LT D
Conch Harbor
Marina Associates
Florida limited
partnership
Florida limited
partnership
On December 5, 2003: GDP sold all of its partnership interest in Miami
Beach Marina Associates and Conch Harbor (partnership interests) to Robert
Christoph for $7 milli n. Mr. Parker negotiated the price and other terms of the
sale on behalf of GDP. The parties entered into an installment sale in which Mr.
-9[*9] Christoph paid $1 million to GDP in 2003 and $6 million to GDP in 2004.
Petitioner filed Forms 6252, Installment Sale Income, with both its 2003 and 2004
Federal income tax returns. The installment sale resulted in petitioner's reporting
capital gains of $3,089,131 for 2003 and $7,722,827 for 2004.4 Petitioner treated
the $1 million GDP received from Mr. Christoph in 2003 as an advance on the $7
million GDP was supposed to receive in sale proceeds in 2004. Consequently, his
accountants treated the $1 million as a loan and not income for 2003. Petitioner
reported the $1 million received in 2003 and the $6 million received in 2004 as $7
million of capital gain income on its 2004 consolidated Federal income tax return.
Morrison, Brown, Argiz & Farra, LLP (MBAF), prepared the GD Parker
affiliated group's U.S. Federal income tax returns. MBAF also provided tax
planning advice to Mr. Parker and the GD Parker affiliated group. Miguel G.
Farra is a partner at MBAF, a certified public accountant, and an attorney. On
September 1, 2004, Mr. Farra met with Mr. Parker to discuss the GD Parker
affiliated group's 2003 and 2004 Federal income tax returns. Mr. Farra informed
Mr. Parker that the GD Parker affiliated group would owe Federal income tax on
4The difference between the capital gains reported on petitioner's 2003 and
2004 Federal income tax returns and the cash received is due to petitioner's
claiming deductions for partnership losses which should have been carried
forward or otherwise limited.
- 10 [*10] approximately $7 million of gain for 2004 from the sale of the partnership
interests. Mr. Parker indicated to Mr. Farra that it was an inopportune time to
have to pay so much tax. The two men discussed ways to avoid paying tax on the
gain for 2004.
On September 17, 2004, Mr. Farra and Lief Novie, a certified public
accountant and an attorney working for MBAF in 2004, wrote a memorandum to
Mr. Parker in which MBAF determined that the best way to offset the $7 million
of capital gains for 2004 was to have Vilanova, petitioner's parent corporation,
contribute to petitioner in a section 351 transaction shares of stock.with a built-in
loss.5 MBAF included a warning that the IRS could disallow the loss deduction to
petitioner if Vilanova's transfer of the built-in loss asset did not have a legitimate
business purpose. The memorandum further warned that there was a proposal in
Congress to limit the transfer of built-in loss assets and that petitioner might not be
entitled to claim a tax loss from the disposition of the built-in loss asset if the
legislative proposal was implemented with an effective date prior to the date of
petitioner's acquisition of the built-in loss asset. On September 30, 2004, Mr.
Farra prepared a Spanish translation of the September 17, 2004, memorandum.
5Discussed infra
- 11 [*11] On October 22, 2004, Congress passed the American Jobs Creation Act of
2004, Pub. L. No. 108-357, sec. 836(a), 118 Stat. at 1418, which added section
362(e) limiting the importation of built-in losses. Section 362(e) is effective for
transactions occurring after October 22, 2004.
2.
Mr. Parker's Foreign Corporations
A.
Tele2000
Mr. Parker also controlled a group of foreign corporations. This group
included Vilanova, petitioner's parent corporation. Mr. Parker organized these
foreign corporations before organizing petitioner and the GD Parker affiliated
group.
In 1990 Mr. Parker organized Telemovil, S.A. (Telemovil), a Peruvian
telecommunications company. Mr. Parker also organized a Panamanian
corporation, Vicmar, S.A. (Vicmar). Mr. Parker held all the shares of Vicmar.
Mr. Parker and Vicmar together owned approximately 73% of the outstanding
shares of Telemovil with the general public owning the remaining outstanding
shares of stock. On April 11, 1993, Telemovil changed its name to Tele2000, S.A.
(Tele2000).6 Tele2000 was a publicly traded company listed on the Lima Stock
6In 1999 Tele2000 changed its name to BellSouth Peru, N.A. (BellSouth
Peru). During November 2004 BellSouth Peru changed its name to
(continued...)
- 12 [*12] Exchange in Lima, Peru, that provided cellular telephone and paging
services in Peru. As of July 16, 1996, Mr. Parker owned approximately 33% of
Tele2000 and Vicmar owned approximately 39% of Tele2000. Vicmar also
owned.all of the stock of Vilanova.
The following c art shows the holdings of the various entities.
Genaro
Delgado
Parker
33%
100%
Vicmar, S.A.
Panamanian
corporation
Tele2000, S.A.
Peruvian
corporation
100%
Vilanova, S.A.
anamanian
c rporation
6(...COnlinued)
Comunicaciones Moviles del Peru, S.A. (Comunicaciones Moviles). On June 1,
2005, Comunicaciones Moviles changed its name to Telefonica Moviles, S.A.
(Telefonica Moviles Peru). Unless otherwise indicated, for purposes of this
opinion we refer to Telemovil, Tele2000, BellSouth Peru, Communicaciones
Moviles, and Telefonic|a Moviles Peru as "Tele2000 ".
- 13 -
[*13] B. ·
Sale of Tele2000 Shares to BellSouth
BellSouth Corp. (BellSouth) is a corporation organized under the laws of
the State of Georgia. In 1996 BellSouth entered into negotiations with Mr. Parker
and Vicmar as part of an effort to acquire a majority interest in Tele2000.
BellSouth created BellSouth Peru BVI, Ltd. (BellSouth Peru BVI), a corporation
organized under the laws of the British Virgin Islands, to hold the shares of stock
it purchased in Tele2000. On December 5, 1996, Mr. Parker, Vicmar, BellSouth
Peru BVI, and Tele2000 entered into a stock purchase agreement under which Mr.
Parker and Vicmar sold 37.28% of the outstanding shares in Tele2000 to
BellSouth Peru BVI for $71,280,000. As of January 7, 1997, BellSouth Peru BVI
had acquired from all shareholders, including the public, approximately a 60%
majority shareholder interest in Tele2000 while Mr. Parker and Vicmar retained
approximately a 40% minority interest.
BellSouth Peru BVI made substantial changes to Tele2000's management
structure and its accounting methods. Tele2000 began losing money, which
required it to make a capital call of $50 million in 1997 and another $50 million in
1998. In order to maintain its and Mr. Parker's approximately 40% minority
position in Tele2000, Vicmar purchased 13,333,333 additional shares for $1.50
per share in 1997 and 20 million shares for $1 per share in 1998.
- 14 [*14] On March 26, 1999, Mr. Parker, Vicmar, Vilanova, and BellSouth Peru BVI
entered into a second s ock purchase agreement (second stock purchase
agreement) under whi
BellSouth Peru BVI agreed to purchase all but
approximately 2% of
. Parker's, Vicmar's, and Vilanova's remaining shares of
stock in Tele2000. M . Parker, Vicmar, and Vilanova received 50 cents a share in
cash and the shares of TeleCable, S.A. (TeleCable), a·wholly owned subsidiary of
Tele2000. TeleCable is a corporation organized under the laws of the Republic of
Peru that provided television cable services in Peru. BellSouth had no.interest in
the cable business. After the close of the second stock purchase agreement, Mr.
Parker, Vicmar and Vilanova were left with 14,643,477 shares of Tele2000 stock
and all of the stock of TeleCable, now held as a wholly owned subsidiary of
Vicmar
As of July 18, 2001, BellSouth Peru BVI owned 97.4267% of the total
shares of stock in Tele2000. Vicmar held 12,746,730 shares of stock in Tele2000,
representing 2:09151% of the total shares of stock in Tele2000 (Tele2000 shares).
The Tele2000 shares were valued at $l iper share giving Vicmar a basis of
$12,746,7307 in the shares.
7The parties stip lated the basis attributable to the remaining Tele2000
shares.
- 15 [*15] The following chart shows the holdings of the various entities as of July 18,
2001.
TeleCable, S.A.
Peruvian
corporation
Genaro
Delgado
BellSouth
Corporation
Georgia
Parker
corporation
100%
100%
Vicmar, S.A.
BellSouth Peru
Panamanian
BVI, Limited
corporation
British Virgin
Islands corporation
Tele2000, S.A.
Peruvian
corporation
- 16 [*16] On November 29, 2002, Vicmar transferred ownership of the Tele2000
shares to Vilanova. The following chart shows the holdings of the various entities
as of November 29, 2002.
Genaro
Delgado
Parker
mo%
BellSouth
Corporation
Georgia
corporation
Vicmar, S.A.
Panamanian
corporation
100%
100%
BellSouth Peru
BVI, Limited
British Virgin
Islands corporation
100%
,
TeleCable, S.A.
Vilanova, S.A.
Peruvian
corporation
Panamanian
corporation
97.4267%
2.09151
Tele2000, S.A.
Peruvian
corporation
- 17 [*17] In 1999 the Superintendencia Nacional De Administraciòn Tributaria
(SUNAT)8 began an audit of Tele2000. SUNAT determined that Tele2000 had an
unpaid Peruvian tax liability of 165,320,885 Peruvian soles (approximately $50
million) for 1994 through 1.996, years in which Mr. Parker and Vicmar controlled
the company. In September 2000 Tele2000 settled its Peruvian tax liability
through an amnesty program agreeing to pay SUNAT 34,585,372 Peruvian soles
(approximately $10 million).
BellSouth Peru BVI and Tele2000 sought indemnification from Mr. Parker
and Vicmar for the approximately $10 million paid to SUNAT. They argued that
the tax liability was incurred during Mr. Parker and Vicmar's management of
Tele2000. Mr. Parker and Vicmar argued that BellSouth Peru BVI was solely
responsible for the tax liability because BellSouth Peru BVI had lost Tele2000's
1994, 1995 and 1996 tax records which substantiated the tax positions taken for
those years.
During 2001 and 2002 Tele2000, BellSouth Peru BVI, Mr. Parker, and
Vicmar engaged in settlement negotiations to resolve their various disputes,
.
including the dispute over the approximately $10 million payment to SUNAT. In
8SUNAT is an agency of the Peruvian Government responsible for
enforcing the Peruvian tax laws, similar to the Internal Revenue Service (IRS).
- 18 [*18] September 2001 Mr. Parker and Vicmar proposed contributing $5 million
towards Tele2000's $10 million settlement with SUNAT in exchange for
BellSouth Peru BVI's purchasing all of Mr. Parker's and Vicmar's stock in
Tele2000, including tl3e Tele2000 shares, for $2 a share ($29,286,954 for
14,643,477 shares). BellSouth Peru BVI rejected Mr. Parker and Vicmar's
settlement proposal.
.
In 2002 BellSouth and BellSouth Peru BVI began negotiating with
Telefonica Moviles, S.A. (Telefonica), a Spanish media conglomerate, to sell
Telefonica its Latin American operations, including Tele2000. Telefonica wanted
to acquire 100% of Tele2000, not just BellSouth Peru BVI's interest. Thus,
BellSouth Peru BVI resumed negotiations with Mr. Parker and Vicmar. On April
4, 2002, Mr. Parker and Vicmar again offered to sell their shares in Tele2000,
including the Tele200Ò shares, to BellSouth Peru BVI, this time for 35 cents per
share and BellSouth Peru BVI's agreement to drop its claim with regard to the $10
million paid to SUNAT. BellSouth Peru BVI rejected the offer, instead choosing
to handle the matter through arbitration.
On August 1, 2003, BellSouth Peru BVI and Tele2000 filed for arbitration
against Mr. Parker and Vicmar seeking $10 million in damages (arbitration) not
knowing that the Tele2000 shares had been transferred from Vicmar to Vilanova
- 19 [*19] on November 29, 2002. The arbitration took place in September 2004 in
New York City and was titled "BellSouth Peru BVI Limited and BellSouth Peru,
S.A. v. Corporacion Vicmar, S.A. and Genaro Delgado Parker". The arbitration
panel consisted of three attorneys from the law firm Hughes, Hubbard & Reed,
LLP. Petitioner, though not a party to the arbitration, paid the expenses associated
with the arbitration including Vicmar's (Vilanova's) attorney's fees.
Mr. Parker in turn sought legal advice about initiating a shareholder
derivative suit against BellSouth Peru BVI and Tele2000 in Lima, Peru. Mr.
Parker argued that BellSouth Peru BVI's poor management of Tele2000 had
caused the minority shareholders (i.e., Mr. Parker and Vilanova) to sustain a
substantial economic loss. Mr. Parker's attorney, James Vidalon Orellana,
recommended that Vilanova transfer the Tele2000 shares to a U.S. company
because Panamanian companies were viewed less favorably by the Peruvian
courts. Mr. Orellana recommended that they proceed by filing a complaint in
Vilanova's name and later amend the complaint to reflect new ownership of the
shares.
On December 10, 2004, Vilanova initiated a shareholder derivative suit
against Tele2000 and BellSouth Peru BVI in the 17th Civil Specialized Court of
Lima, Peru (shareholder derivative suit).
- 20 [*20] C.
Transfer of Tele2000 Shares to Petitioner
On August 30, 2004, Pedro Mujica Benavides, Vilanova's Peruvian
attorney, wrote a letter to petitioner on behalf of Vilanova proposing to make a
capital contribution to petitioner of the Tele2000 shares. The shares were valued
at $1 per share for a capital contribution of $12,746,730. On September 2, 2004,
at a special meeting of the board of directors of petitioner, Mr. Parker, as the sole
director of petitioner, íccepted Vilanova's contribution. That same day, Mr.
Parker, as president of petitioner, responded to the August 30, 2004, letter
accepting Vilanova's capital contribution. Vilanova confirmed receipt of
petitioner's September 2, 2004, acceptance and informed petitioner that it was
sending a letter of instructions to Sociedad Agente de Bolsa LatinoAmericana,
S.A. (LatinoAmericana),9 as transferor, requesting that it formalize the transfer.
On September 20, 200 , Mr. Parker as a representative of petitioner, wrote a letter .
to LatinoAmericana directing LatinoAmericana to transfer the Tele2000 shares to
petitioner in an over-t e-counter transaction. That same day, Federico Castro
Ramirez, as a representative of Vilanova, also wrote a letter to LatinoAmericana
9LatinoAmericana, a corporation organized under the laws of the Republic
of Peru, is a brokerage firm licensed to trade securities listed on the Lima Stock
Exchange.
- 21 [*21] directing it to transfer the Tele2000 shares to petitioner in an over-thecounter transaction.-
The physical stock certificate for the Tele2000 shares (Tele2000 stock
certificate) was being held in Vilanova's account with Lehman Brothers, Inc.
(Lehman), in Miami, Florida. Felix Perez, a senior vice president in the financial
services division of Lehman's Miami office handled Vilanova's account. On
September 17, 2004, Mr. Quesada, Vilanova's attorney, faxed a letter to Lehman
dated September 15, 2004, requesting Lehman to transfer the Tele2000 shares into
a Lehman account established for petitioner.
Mr. Perez, though.the account manager, was not authorized to make the
transfer. Lehman maintained a back office that was responsible for executing all
transfers of securities. Mr. Perez requested the back office to take the necessary
steps to transfer the stock to petitioner. Lehman's back office at first was unsure
how to transfer the Tele2000 shares. Eventually, it determined that the stock was
a local security which needed to be transferred in accordance with Peruvian law.
Lehman determined that Vilanova had to transfer the stock through the Lima
Stock Exchange.
On November 17, 2004, Mr. Parker sent a letter to Lehman on behalf of
Vilanova. Mr. Parker requested that Lehman complete the transfer of the
-22[*22] Tele2000 shares from Vilanova's account to petitioner's account and notify
the Lima Stock Exchange of the transfer. Lehman received the letter, and an
employee of Lehman
ade a handwritten note on the letter to make journal entries
moving the Tele2000 hares from Vilanova's account to petitioner's account.
Petitioner opened an account with Lehman sometime in November 2004. Lehman
issued an account statement to petitioner for the month of December 2004.'° The
December 2004 state ent was the first account statement that Lehman issued for
petitioner's account. The December statement contained a December 1, 2004,
journal entry transferring the Tele2000 shares into petitioner's account. The
statement also contained.a second journal entry on December 2, 2004, canceling
the December 1, 2004, journal entry. As a result, the Tele2000 shares never
entered petitioner's account.
On December 17, 2004, Lehman received a signed letter from Mr. Parker on
behalf of Vilanova. M . Parker requested that Lehman mail the Tele2000 stock
certificate to Lima, Peru. That same day, Lehman mailed the Tele2000 stock
certificate to Lima in accordance with Vilanova's instructions.
1°The exact date petitioner opened its account with Lehman is unknown.
The first financial statement available for petitioner's account with Lehman is the
December 2004 statem nt. Mr. Perez testified that the first statement for an
account becomes available in the month following the month in which the account
is opened.
- 23 [*23] On December 21, 2004, LatinoAmericana received delivery of the Tele2000
stock certificate from Lehman. The fair market value of the Tele2000 shares on
December 21, 2004, was $195,418 (12,746,730 shares valued at approximately 1.5
cents per share). On December 21, 2004, petitioner sent a letter to
LatinoAmericana confirming petitioner's September 20, 2004, order requesting
the transfer of the Tele2000 shares to petitioner. LatinoAmericana took a number
of steps on December 21, 2004, to transfer the Tele2000 shares to petitioner: (1)
LatinoAmericana executed the transfer in an over-the-counter transaction and
issued two transfer documents, one reflecting Vilanova's transfer of the Tele2000
shares and the other reflecting petitioner's receipt of the Tele2000 shares; (2)
LatinoAmericana informed Tele2000 of the transfer; (3) Tele2000 canceled the
Tele2000 stock certificate and issued a new certificate reflecting petitioner's
ownership of the Tele2000 shares; (4) Tele2000 registered the transfer in its stock
ledger; and (5) LatinoAmericana notified the Lima Stock Exchange of the transfer
and the Lima Stock Exchange reported the transfer in the Lima Stock Exchange
Daily Gazette.
D.
· Sale of Tele2000 to Telefonica
In March 2004 BellSouth entered into an agreement with Telefonica to sell
its Latin American operations, including its stock in Tele2000 for $5.8 billion.
- 24 [*24] Telefonica agreed to pay approximately 1.5 cents per share for Tele2000,
and BellSouth agreed to indemnify Telefonica for any ongoing litigation with
Tele2000's minority shareholders and to ensure that Telefonica would not have to
pay more per share to the minority shareholders than it paid to BellSouth Peru BVI
for its shares. BellSou h contacted Mr. Parker and informed him of the sale and
Telefonica's offer to purchase the Tele2000 shares for approximately 1.5 cents per
share. The sale of Bellsouth's Latin American operations to Telefonica was
finalized on October 28, 2004.
On December 16, 2004, BellSouth, Tele2000, Telefonica, Mr. Parker,
Vicmar, Vilanova, and petitioner entered into a share transfer and settlement
agreement (share transfer agreement). Petitioner was made a party to the share
transfer agreement at t e last minute after Mr. Parker represented to the other
parties that petitioner was the owner of the Tele2000 shares. Before Mr. Parker's
last-minute representation, BellSouth's attorney, Arthur Hillman, was unaware of
petitioner's existence. Petitioner agreed to sell the Tele2000 shares to Telefonica
for $195,418 (approximately 1.5 cents per share), and BellSouth Peru BVI and
Tele2000 agreed to seek dismissal of the arbitration. Vilanova also agreed to seek
dismissal of its sharehdlder derivative suit. On December 16, 2004, Vilanova filed
- 25 [*25] a motion in the 17th Civil Specialized Court of Lima, Peru, to dismiss its ·
shareholder derivative suit.
The sale was finalized on December 23, 2004. Telefonica paid $122,570 for
the shares ($195,418 less brokerage commissions, CONASEV fees, and sales tax).
Telefonica made payment to Mr. Parker, not petitioner. Petitioner reported the
sale of the Tele2000 shares on its 2004 Federal income tax return. Petitioner
reported a sale price of $122,570 and a basis in the Tele2000 shares of
$12,746,730 resulting in a capital loss of $12,624,219. Although respondent
concedes the sale price of the Tele2000 shares, he challenges petitioner's basis in
the Tele2000 shares and the deductibility of the capital loss on the various grounds
discussed infra.
On December 28, 2004, BellSouth Peru BVI, Tele2000, Mr. Parker, and .
Vicmar filed a stipulation of dismissal with the arbitration panel stating that the
parties had settled all claims raised in the arbitration. As a result, on January 7,
2005, the arbitration panel dismissed the claims without ruling on the merits of the
case.
- 26 [*26] 3.
Notice of Determination and Notices of Deficiency
A.
Notice of Determination (Docket No. 20280-06L)
Petitioner filed a delinquent consolidated Federal income tax return for
2003 on January 4, 2005. Petitioner reported, but did not pay, a tax liability of
$636,279. Petitioner also failed to make estimated páyments of tax for 2003. On
June 7, 2005, respondent filed a notice of Federal tax lien in Dade County,
Florida, with respect t petitioner's self-assessed tax liability for 2003. On or
about June 14, 2005, respondent mailed petitioner Letter 3172, Notice of Federal
Tax Lien Filing & Yo r Right to a Hearing Under IRC § 6320 (notice of Federal
tax lien). Petitioner timely filed Form 12153, Request for a Collection Due
Process or Equivalent Hearing. On July 14, 2006, respondent's Appeals Office
held a telephone conference with petitioner's representative, Rosa Bravo. During
the due process hearing, petitioner argued that it had sustained a capital loss on its
2004 Federal income tax return and had filed an amended Federal consolidated
income tax return for 2003 claiming a capital loss carryback which reduced its
2003 tax liability to zero. Petitioner timely filed its 2004 Federal consolidated
income tax return on March 15, 2005, along with an amended Federal
consolidated income tax return for 2003. Respondent did not process petitioner's
2004 return until May 9, 2005. As a result, petitioner's 2003 amended Federal
- 27 [*27] income tax return could not be processed when filed as the 2004 carryback
was not available. On September 12, 2006, respondent's Appeals Office issued a
notice of determination sustaining the filing of the notice of Federal tax lien. On
October 5, 2006, petitioner filed the petition in docket No. 20280-06L.
B.
Notice of Deficiency (Docket No. 29268-09)
On September 16, 2009, respondent issued to petitioner a notice of .
deficiency for 2005 which determined a Federal income tax deficiency of
$839,462 and an accuracy-related penalty of $335,785 under section 6662 based
upon petitioner's failure to substantiate its claimed basis in the Tele2000 shares.
Accordingly, the capital loss carryover of $2,660,117 claimed for 2005 was
disallowed. Respondent, alternatively, determined that the transaction in which
petitioner acquired the Tele2000 shares constituted an importation of a net built-in
loss under section 362(e). Therefore, under respondent's determination
petitioner's basis in the Tele2000 shares was equal to the fair market value of the .
shares immediately after acquisition, eliminating the claimed capital loss
carryover. Respondent also determined that the capital loss carryover was
disallowed under section 482 and the doctrine of Commissioner v. Court Holding
Co., 324 U.S. 331 (1945), and because the transfer of the Tele2000 shares served
no business purpose. Finally, respondent determined that petitioner failed to
- 28 [*28] substantiate various trade and business expenses under section 162. On
December 9, 2009, petitioner timely filed the petition in docket No. 29268-09.
C.
Notice of Deficiency (Docket No. 5044-10)
On December 10, 2009, respondent issued petitioner a notice of deficiency
which determined Federal income tax deficiencies of $793,692 and $2,888,443 for
2003 and 2004, respectively. Respondent also determined that petitioner was
liable for accuracy-rel ted penalties of $158,738 and.$1,102,840 for 2003 and
2004, respectively. Respondent determined that petitioner had failed to report $1
million of income during 2003 from the sale of its partnership interests.
Respondent alternatively argued that if the $1 million is determined to be a loan,
petitioner failed to report income from the discharge of indebtedness in 2004.
Respondent also determined that petitioner had failed to substantiate its claimed
basis in the Tele2000 shares. Thus, respondent disallowed the capital loss in 2004
and the capital loss carryback claimed for 2003. Respondent, alternatively,
determined that the capital loss claimed for 2004 and resulting capital loss
carryback claimed for 2003 were disallowed under sections 362(e) and 482 and
under the step transaction doctrine. Finally, respondent determined that petitioner
failed to substantiate various trade and business expenses under section 162. On
February 26, 2010, petitioner timely filed the petition in docket No. 5044-10
- 29 [*29] D.
Notice of Deficiency (Docket No. 5020-10)
On January 26, 2010, respondent issued petitioner a notice of deficiency
which determined Federal income tax deficiencies of $87,300, $90,000, and
$90,000 for 2003, 2004, and 2005, respectively. Respondent also determined that
petitioner was liable for the following additions to tax: $19,643, $20,250, and
$20,250 for 2003, 2004, and 2005, respectively, for failure to file withholding tax
returns under section 6651(a)(1); $21,825, $22,500, and $21,150 for 2003, 2004,
and 2005, respectively, for a failure to pay withholding tax under section
6651(a)(2); and $8,730, $9,000, and $9,000 for 2003, 2004, and 2005,
respectively, for failure to deposit withholding tax under section 6656.
Respondent has conceded all of the above additions to tax related to the
unreported dividends. Respondent determined that petitioner failed to withhold a
tax of 30% on constructive dividends paid to Mr. Parker. On February 25, 2010,
petitioner timely filed the petition in docket No. 5020-10.
A trial was held in Miami, Florida, in January 2011.
- 30 -
[*30]
I.
OPINION
Burden of Proof
As a general rul the taxpayer bears the burden of proving that the
Commissioner's deterniinations are erroneous. Rule 142(a)(1); Welch v.
Helvering, 290 U.S. 111, 115 (1933).
II.
Step Transaction Doctrine
Respondent claims that petitioner should be denied the capital loss
deduction claimed on its 2004 Federal income tax return under the step transaction
doctrine. Respondent argues that Vilanova always intended to sell the Tele2000
shares to Telefonica and that it simply interjected petitioner into the transaction to
obtain a U.S. Federal income tax benefit. Petitioner claims that each step in its
transaction had independent significance and a business purpose.
"Under the step transaction doctrine, a particular step in a transaction is
disregarded for tax purposes if the taxpayer could have achieved its objective more
directly, but instead included the step for no other purpose than to avoid U.S.
taxes." Del Commercial Props., Inc. v. Commissioner, 251 F.3d 210, 213-214
(D.C. Cir. 2001), aff' T.C. Memo.1999-411; see also Superior Trading, LLC v.
Commissioner, 137 T.C. 70, 88 (2011); Penrod v. Commissioner, 88 T.C. 1415,
1428-1430 (1987); Go don v. Commissioner, 85 T.C. 309, 324 (1985).
- 31 [*31] Courts have applied three alternative tests in deciding whether the step
transaction doctrine should be invoked in a particular situation; namely, (1) if at
the time the first step was entered into, there was a binding commitment to
undertake the later step (binding commitment test), (2) if separate steps constitute
prearranged parts of a single transaction intended to reach an end result (end-result
test), or (3).if separate steps are so interdependent that the legal relations created
by one step would have been fruitless without a completion of the series of steps
(interdependence test). See Penrod v. Commissioner, 88 T.C. at 1428-1430. More
than one test might be appropriate under any given set of circumstances; however,
the circumstances need satisfy only one of the tests in order for the step transaction
doctrine to apply. Associated Wholesale Grocers, Inc. v. United States, 927 F.2d
1517, 1527-1528 (10th Cir.1991)(finding end-result test inappropriate but ,
applying the step transaction doctrine using the interdependence test). We now
turn to the application of these three tests to the transaction involved herein.
A.
End-Result Test
We first consider application of the end-result test. The end-result test
combines into a single transaction separate events that appear to be components of
something undertaken to reach a particular result. Kornfeld v. Commissioner, 137
F.3d 1231, 1235 (10th Cir.1998), aff'a T.C. Memo.1996-472; Associated
- 32 [*32] Wholesale Grocers, Inc., 927 F.2d at 1523. Under the end-result test, if we
find that a series of cl sely related steps in a transaction is merely the means to
reach a particular end result, we will not separate the steps but instead will treat
them as a single transa tion. Superior Trading, LLC v. Commissioner, 137 T.C. at
88-89; see also King E ers., Inc. v. United States, 418 F.2d 511, 516 (Ct. Cl.
1969); Helvering v. Ala. Asphaltic Limestone Co., 315 U.S. 179 (1942); Morgan
Mfg. Co. v. Commissioner, 124 F.2d 602 (4th Cir. 1941), aff'g 44 B.T.A. 691
(1941); Heintz v. Comn1issioner, 25 T.C. 132.(1955); Ericsson Screw Mach.
Prods. Co. v. Commissioner, 14 T.C. 757 (1950).
The end-result test focuses upon the actual intent of the parties at the time of
the transaction. It is flexible and bases tax consequences on the substance of the
transaction, not on the formalisms chosen by the participants. "The intent we
focus on under the end result test is not whether the taxpayer intended to avoid
taxes. * * * Instead, the end-result test focuses on whether the taxpayer intended to
reach a particular resul by structuring a series of transactions in a certain way."
True v. United States, 190 F.3d 1165, 1175 (10th Cir. 1999).
Under the end-result test, there is no independent tax recognition of the
individual steps unless the taxpayer shows that at the time the parties engaged in
the individual step, its esult was the intended end result in and of itself. Id. If
- 33 [*33] this is not what was intended, then we collapse the series of steps and give
tax consideration only to the intended end result. Id.
That, from the outset, a sale of the Tele2000 shares was the end result
intended by Mr. Parker and Vilanova is shown by several key pieces of evidence.
Mr. Parker was actively trying to sell the Tele2000 shares on behalf of Vilanova
before transferring the shares to petitioner. Mr. Lacasa, Mr. Parker's attorney,
testified that as early as 2001 Mr. Parker was trying to sell the Tele2000 shares.
Mr. Parker engaged in negotiations with BellSouth in 2001 to sell BellSouth Peru
BVI the Tele2000 shares for $2 per share. The parties could not agree to terms,
and the negotiations ended. In 2002 BellSouth entered into negotiations with
Telefonica to sell Telefonica BellSouth's Latin American operations, including
Tele2000. Mr. Parker was made aware of the negotiations and of Telefonica's
desire to purchase 100% of the shares of stock of Tele2000. Telefonica intended
to delist Tele2000 from the Lima stock exchange and make it a private company,
essentially making the Tele2000 shares worthless. Mr. Parker, with this newfound knowledge, once again engaged BellSouth Peru BVI in negotiations to sell
the Tele2000 shares at 35 cents per share. BellSouth Peru BVI once again rejected
Mr. Parker and Vilanova's offer.
- 34 [*34] In March 2004 BellSouth and Telefonica finalized the sale of BellSouth's
Latin American operat ons, meluding Tele2000. Telefonica purchased BellSouth
Peru BVI's interest in Tele2000 for approximatelysl.5 cents per share. .As part of
the terms of the sale, EellSouth, agreed to indemnify Telefonica.for any ongoing
litigation relating to th: Tele2000 shares. BellSouth also agreed that Telefonica
would not have to pay more per share to Tele2000's minority shareholders than
they paid to BellSouth Peru BVI. BellSouth contacted Mr. Parker and informed
him of the terms of the sale. The sale essentially put a ceiling on the price of the
Tele2000 shares.
Mr. Parker was informed on September 1, 2004, by his accountants that
petitioner would owe income tax on approximately $7 million of long-term capital
gain for 2004 from the sale of the partnership interests. His accountants informed
him he could avoid pa ment of the tax on the sale of the partnership interests by
transferring the Tele2 00 shares to petitioner, thus allowing petitioner to use the
long-term capital loss from the sale of the shares to Telefonica. At the time of the
transfer of the Tele2000 shares to petitioner, a sale of the shares to Telefonica was
a foregone conclusion. The parties had negotiated terms and several drafts of an
agreement before petit oner's involvement in the sale. Mr. Hillman testified that
- 35 [*35] he was unaware of petitioner's involvement in the sale of the Tele2000
shares until the very last minute, when petitioner was added to the fmal agreement.
On December 16, 2004, BellSouth, Tele2000, Telefonica, Mr. Parker,
Vicmar, Vilanova, and petitioner entered into the share transfer agreement. On
December 23, 2004, Telefonica paid $195,418, minus fees, for the Tele2000
shares. The payment was made to Mr. Parker individually, not petitioner.
Consequently, under the end-result formulation of the step transaction
doctrine, it is clear from the record that, from the start, the acquisition of the
Tele2000 shares by petitioner and the subsequent sale to Telefonica were really
steps of a single transaction intended to be taken for the purpose of reaching the
ultimate result. Those steps constituted part of a prearranged plan to have
Telefonica obtain the Tele2000 shares while having the capital loss shifted to
petitioner. Had Telefonica acquired the shares directly from Vilanova, this shift in
the capital loss would not have occurred, and petitioner would have been obligated
to report a capital gain rather than a capital loss that it could carry back to prior
years. Petitioner may not avoid this result by employing mere formalisms thinly
disguised to mask its true intentions. See Brown v. United States, 329 F.3d 664,
672 (9th Cir. 2003) (courts have "readily ignored the role of the intermediary"
where "a party acts as a 'mere conduit' of funds-a fleeting stop in a predetermined
-36[*36] voyage toward a particular result"). Hence under the end-result test
petitioner's ownership of the Tele2000 shares must be ignored, with Telefonica
being viewed as havmg acquired the shares from Vilanova. .
Petitioner argues that there was a legitimate business purpose for
transferring the shares to petitioner. Specifically, petitioner argues that it needed
money to build a 4G cellular network in TeleCable and obtaining the Tele2000
shares would provide uch funding. However, petitioner's argument does not
account for the fact that TeleCable was not part of the GD Parker affiliated group.
TeleCable was a Peruvian corporation, wholly owned by Vicmar, a Panamanian
corporation. Moreove , there is no evidence in the record of a joint venture
between petitioner and TeleCable or any agreement at all regarding the
development of a 4G cellular network. In fact, Ms. Bruce testified that the
expenses incurred in the development of the 4G cellular network were TeleCable's
expenses and were categorized as such on the bank reconciliation reports created
by Ms. Bruce.
Petitioner also argues that as an American company it was in a better
position to maximize the value of the Tele2000 shares in the ongoing disputes
with BellSouth and BellSouth Peru BVI. The value of the Tele2000 shares was
- 37 [*37] fixed by Telefonica. The identity of the seller of the Tele2000 shares was
irrelevant to a determination of price.
Moreover, the existence of business purposes and economic effects relating
to the individual steps in a complex series of transactions does not preclude
application of the step transaction doctrine. True, 190 F.3d at 1176-1177.
To ratify a step transaction that exalts form over substance merely
because the taxpayer can either (1) articulate some business purpose
allegedly motivating the indirect nature of the transaction or (2) point
to an economic effect resulting from the series of steps, would
frequently defeat the purpose of the substance over form principle.
Events such as the actual payment of money, legal transfer of
property, adjustment of company books, and execution of a contract
all produce economic effects and accompany almost any business
_ dealing. Thus, we do not rely on the.occurrence of these events alone
to determine whether the step transaction doctrine applies. Likewise,
a taxpayer may proffer some non-tax business purpose for engaging
in a series of transactional steps to accomplish a result he could have
achieved by more direct means, but that business purpose by itself
does not preclude application of the step transaction doctrine. * * *
Id. at 1177.
Under the end-result test, there is no independent tax recognition of the
individual steps unless the taxpayer shows that at the time the parties engaged in
the individual step, its result was the intended end result in and of itself. If this is
not what was intended, then we collapse the series of steps and give tax
consideration only to the intended end result. Transferring the Tele2000 shares to
- 38 [*38] petitioner was never the end result. Even if we were to believe petitioner's
business purpose, it in and of itself contemplates the sale of the Tele2000 shares as
the end result, one which could be accomplished without the additional step.
Petitioner's arguments do not disturb our application of the step transaction
doctrine. The intermediate step is ignored, and petitioner is denied its claimed
capital loss deduction from the sale of the Tele2000 shares in 2004 and
consequently the carryback to 2003 and carryover to 2005.
B.
Binding Commitment Test and Interdependence Test
Having found the end-result test applicable, we need not discuss the
application of the binding commitment and interdependence tests to the facts of
these cases.
III.
Section 362(e)
Respondent altematively argues that the transfer of the Tele2000 shares
falls under section 362(e) and as a result petitioner's basis in the Tele2000 shares
is $195,418, thus eliminating petitioner's 2004 capital loss, 2003 capital loss
carryback, and 2005 capital loss carryover. Though both respondent and
petitioner spent most of their briefs arguing when the transfer of the Tele2000
shares occurred and whether the transfer fell under section 362(e), we do not need
to reach a decision with respect to the section 362(e) issue, having found that no
- 39 [*39] transfer occurred for purposes of Federal income tax law under the step
transaction doctrine.
IV.
.
Whether Appeals Properly Sustained Respondent's Filing of the Notice of
Federal Tax Lien
Section 6321 imposes a lien in favor of the United States upon all property
and rights to property belonging to a person who is liable for Federal taxes and
neglects or refuses to pay them after notice and demand for payment has been
made. Section 6320(a) and (b) provides that a taxpayer shall be notified in writing
by the Commissioner of the filing of a notice of Federal tax lien and provided an
opportunity for an administrative hearing. A hearing under section 6320 is
conducted in accordance with the procedural requirements of section 6330. Sec.
6320(c).
If a taxpayer requests a hearing in a lien case, the hearing is to be conducted
by the Commissioner's Appeals Office. Sec. 6320(b)(1). At the hearing the
Appeals officer must verify that the requirements of any applicable law or
administrative procedure have been met. Secs. 6320(c), 6330(c)(1). The taxpayer
may raise any relevant issue with regard to the Commissioner's intended
collection activities, including challenges to the appropriateness of the proposed
lien and collection alternatives. Sec. 6330(c)(2)(A). A taxpayer is expected to
- 40 [*40] provide all relevant information requested by Appeals for its consideration
of the facts and issues involved in the hearing, including financial statements.
Secs. 301.6320-1(e)(1), 301.6330-1(e)(1), Proced. & Admin. Regs. A taxpayer
may raise challenges to the existence or amount of the underlying tax liability if
the taxpayer did not receive a notice of deficiency or otherwise have an
opportunity to dispute he tax. Sec. 6330(c)(2)(B).
If a taxpayer's underlying liability is properly at issue, the Court reviews
any determination regarding the underlying liability de novo. Sego v.
Commissioner, 114 T.C. 604, 610 (2000); Goza v. Commissioner, 114 T.C. 176,
181-182 (2000). The Court will review all other determinations regarding the
proposed collection for abuse of discretion. Sego v. Commissioner, 114 T.C. at
610; Goza v. Commissioner, 114 T.C. at 181-182. Generally, we consider only
arguments and issues the taxpayer raised at the collection hearing or otherwise
brought to the attentio of the Appeals Office. Giamelli v. Commissioner, 129
T.C. 107, 112-113 (2007); Magana v. Commissioner, 118 T.C. 488, 493 (2002);
see also sec. 301.6330- (f)(2), Q&A-F3, Proced. & Admin. Regs.
Petitioner argue that respondent's Appeals Office incorrectly sustained
respondent's filing of notice of Federal tax lien because it ignored the fact that
petitioner's 2003 Fede al income tax liability had been eliminated by a capital loss
- 41 [*41] carryback derived from the sale of the Tele2000 shares in 2004. Petitioner
was entitled to dispute its self-assessed 2003 Federal income tax liability because
it had not received a notice of deficiency or otherwise had an opportunity to
dispute the tax. See Montgomery v. Commissioner, 122 T.C. 1, 10 (2004).
Having conducted a de novo review of petitioner's argument above, we find that
petitioner is barred by the step transaction doctrine from claiming a capital loss for
2004 from the sale of the Tele2000 shares and a resulting capital loss carryback
for 2003. Therefore, there is no capital loss carryback to offset petitioner's 2003
Federal income tax liability. Accordingly, we find that respondent's Appeals
Office's decision to ignore petitioner's capital loss carryback was not arbitrary and
capricious, and therefore respondent's Appeals Office correctly sustained the
notice of Federal tax lien.
V.
Installment Sale of Partnership Interests
GDP sold its partnership interests for $10,811,958, receiving $7 million in
cash." GDP reported $10,811,958 of income on its 2003 and 2004 Federal
income tax returns. One million dollars of the sale proceeds was paid to GDP in
2003, and the remaining $6 million was paid to GDP in 2004. Petitioner treated
the sale as an installment sale and reported a capital gain of $3,089,131 in 2003
"See supra note 4.
- 42 -
[*42] and a capital gain of $7,722,827 in 2004. The capital gain of $3,089,131 did
not include the $1 million GDP received in 2003. Respondent argues that
petitioner should have reported the $1 million received in 2003 as long-term
capital gain for 2003 and thus understated its long-term capital gain for taxable
year 2003 by $1 million. We agree.
Mr. Parker has taken inconsistent positions regarding the receipt ofthis $1
million. He admits that the $1 million was part of the proceeds from the sale of
the partnership interests but claims the $1 million was a loan, telling his
accountants to treat the $1 million as a loan. Petitioner has failed to provide any
evidence supporting the existence of a loan. Therefore, we find that the $1 million
GDP received in 2003 was not a loan, but rather payment in part for the sale of the
partnership interests. Thus, the $1 million was part of the installment sale and
should be treated as long-term capital gain on petitioner's 2003 Federal income
tax return. Because petitioner has to report the $1 million on its 2003 return,
petitioner may reduce its long-term capital gain on its 2004 return by $1 million.
VI.
Repair and Maintenance Expenses and Depreciation
Deductions are a matter of legislative grace, and the taxpayer must prove he
or she is entitled to the deductions claimed. Rule 142(a); New Colonial Ice Co. v.
Helverina, 292 U.S. 435, 440 (1934). Section 162(a) provides that "There shall be
- 43 [*43] allowed as a deduction all the ordinary and necessary expenses paid or
incurred during the taxable year in carrying on any trade or business". The
regulations specify that ordinary and necessary business expenses include "the
ordinary and necessary expenditures directly connected with or pertaining to the
taxpayer's trade or business". Sec. 1.162-1(a), Income Tax Regs. Taxpayers are
required to maintain records sufficient to establish the amounts of allowable
deductions and to enable the Commissioner to determine the correct tax liability.
Sec. 6001; Shea v. Commissioner, 112 T.C. 183, 186 (1999). Section 167(a)(1)
provides a depreciation deduction with respect to property used in a trade or
business. Section 262 specifically disallows deductions for personal, living, and
family expenses.
Respondent disallowed the following deductions related to the Valdemossa
home, the yacht, and the Key Biscayne home:
Deduction
2003
2004
2005
Repair and maintenance expenses
$123,242 $50,0.00
$9,623
Depreciation
104,650
84,089
85,610
Respondent argues that these expenses were not ordinary and necessary trade or
business expenses and that even if they were, petitioner has failed to substantiate
them. In order to determine whether these expenses were ordinary and necessary
- 44 [*44] trade or business expenses, we must first consider whether the ownership
and maintenance of the Valdemossa home, the yacht, and the Key Biscayne home
related primarily to persOnal Or business purposes.
In general, where the acquisition and maintenance of property such as a
yacht or a residence are primarily associated with profit-motivated purposes and
personal use can be said to be distinctly secondary and incidental, a deduction for
maintenance expenses and depreciation will be permitted. Int'l Artists, Ltd. v.
Commissioner, 55 T.C. 94, 104 (1970). Conversely, if the acquisition and
maintenance are primarily motivated by personal considerations, the deductions
must be disallowed. Süch expenditures are not ordinary and necessary trade or
1
business expenses and therefore fail to qualify as deductions under section 162.
Id. Moreover, the disallowance of personal expenditures is expressly mandated by
section 262.
The above prmciples apply to corporate as well as individual taxpayers. In
the former case, since the corporation cannot itself make personal use of the
property, the character of an expenditure is determined by reference to the benefit
conferred upon shareholders, officers, or other individuals in control of corporate
affairs. Int'l Trading Co. v. Commissioner, 275 F.2d 578 (7th Cir. 1960), aff'g
T.C. Memo. 1958-104. As in the case of individual taxpayers, the personal use by
- 45 [*45] a shareholder of corporate property renders expenditures therefor personal
and results in taxable income to the shareholder. However, where substantial
business and personal motives exist, allocation becomes necessary. Int'l Artists,
Ltd. v. Commissioner, 55 T.C. at 105.
A.
Valdemossa Home
Respondent argues that petitioner did not use the Valdemossa home in its
trade or business and therefore cannot deduct repair and maintenance expenses
,
and depreciation. Petitioner argues that the Valdemossa home was purchased as an investment and therefore the costs associated with maintaining the home should
be deductible. Petitioner was not in the business of buying and selling real estate.
Rather, petitioner claims it was in the business of attempting to develop the
infrastructure to bring a 4G cellular network through TeleCable to Peru. We do
not see how the purchase of the Valdemossa home aided in, or was used in,
petitioner's trade or business. Mr. Parker testified that he and his family used the
Valdemossa home as a vacation home for one month a year during 2003, 2004,
and 2005. There is no proof of business use in the record. The home was never
rented to third parties or used to generate any profits. As a result, we agree with
respondent that the Valdemossa home was not used in petitioner's trade or
business.and therefore all repair and maintenance expense and depreciation
- 46 [*46] deductions claimed on petitioner's 2003, 2004, and 2005 Federal income tax
returns associated with that home are disallowed.
B.
The Yacht
Much like the Valdemossa home, the yacht was used exclusively for
personal purposes by Mr. Parker and his family. Petitioner has failed to introduce
any evidence indicating that the yacht was used in its trade or business or
purchased with a profit motive. Therefore, we hold that all repair and maintenance
expenses and depreciation associated with the yacht and claimed on petitioner's
2003, 2004, and 2005 Federal income tax returns are disallowed.
C.
Key Biscayne Home
Respondent arg es that petitioner did not use the Key Biscayne home in its
trade or business and therefore cannot deduct repair and maintenance expenses
and depreciation associated with the Key Biscayne home. Specifically, respondent
argues that Mr. Parker and his family used the Key Biscayne home as a personal
residence during 2003, 2004, and 2005. Therefore, respondent argues that the
expenses associated with the home were personal and nondeductible under section
262.
Mr. Parker and is family used the home as their residence while in Miami.
Lesli M. Loayza, Mr. I arker's daughter, resided at the Key Biscayne home
- 47 [*47] throughout 2003, 2004, and 2005 while she attended Florida International
University. Jonathan S. Loayza, Mr. Parker's son, resided at the home for at least
six months during 2003 and five months during 2005 while he attended high . . 042
school in Miami. Estralla Delgado Parker Vanini, Mr. Parker's daughter, resided
at the home for six months in 2003 while she attended high school in Miami. Mr.
Parker and his wife used the home as their residence throughout 2003, 2004 and
2005 when they came to Miami. Finally, Blanca A. Gonzalez, the family's
personal maid, resided at the home throughout 2003, 2004, and 2005. Mr. Parker
and his family as well as Ms. Gonzalez were given full access to and use of the
premises for personal purposes. The only area of the home that Mr. Parker's
family did not have use of was the office on the ground floor where Ms. Bruce
worked and where petitioner's records and books were kept.
Expenses associated with the ground floor office are the only expenses
which may be deducted under section 162.° Petitioner may deduct repair and
maintenance expenses and depreciation based on the percentage of the home used
exclusively for the business, i.e. the square footage of the first floor office.
"Sec. 280A imposes additional rules on individuals and S corporations with
respect to home office deductions. Petitioner and Vanini are both C corporations;
therefore sec. 280A is inapplicable in the cases at hand.
- 48 -
[*48] VII.
Other Deductions
Respondent disEllowed the following other deductions from petitioner's
Federal income tax returns:
Other deductions
2003
2004
2005
Bank charges
$783
Contract labor
49,445
44,927
40,225
Miscellaneous expenses
4,025
---
58
---
7,069
3,734
Legal fees
630,000
---
---
Other rent and royaltý expenses
76,379 172,630
80,001
Office expenses
Professional fees
242,806 166,025
Other deductions from Conch Harbor
Telephone expenses
Travel expenses
Total other expenses
$1,506 $14,675
.
279,355
---
---
25
---
---
66,485
1,106,497 468,938 304,718
If the trial record provides sufficient evidence that the taxpayer has incurred
a deductible expense but the taxpayer is unable to substantiate adequately the
precise amount of the deduction to which he or she is otherwise entitled, the Court
may estimate the amount of the deductible expense and allow the deduction to that
extent (Cohan rule). Cohan v. Commissioner, 39 F.2d 540, 543-544 (2d Cir.
1930); Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985); Sanford v.
- 49 [*49] Commissioner, 50 T.C. 823, 827-828 (1968), aff'd per curiam, 412 F.2d 201
(2d Cir. 1969). In these instances, the Court is permitted to make as close an
approximation of the allowable expense as it can, bearing heavily against the
taxpayer whose inexactitude is of his or her own making. Cohan v.
Commissioner, 39 F.2d at 544. However, in order for the Court to estimate the
amount of an expense, the Court must have some basis upon which an estimate
may be made. Vanicek v. Commissioner, 85 T.C. at 742-743. Without such a
basis, any allowance would amount to unguided largesse. Williams v. United
States, 245 F.2d 559, 560-561 (5th Cir. 1957).
Petitioner has failed to substantiate most of its other expenses. Petitioner
introduced a number of documents into evidence, including tax returns, work
papers from its accountant, bank statements, and canceled checks. However,
petitioner failed to explain to the Court, in brief or at trial, which of these
documents and more specifically which of the thousands of pages before us
substantiate its claimed expenses. On the basis of our analysis of the evidence, we
find that petitioner is entitled to a contract labor deduction of only $15,000 for
2004. This expense was for payment to Ms. Bruce, petitioner's administrative
assistant. The payments are substantiated by two canceled checks in the amounts
of $9,000 on January 28 and $6,000 on September 3, 2004. All of petitioner's
- 50 [*50] other deductions are either unsubstantiated or unrelated to petitioner's trade
or business and thus
e denied.
Petitioner failed to substantiate its bank charges; therefore, those deductions
are denied. Petitioner failed to provide us a breakdown of its contract labor
expense. As mentioned above, all we could determine was that Ms. Bruce's salary
was included in this amount and only $15,000 for 2004 was substantiated.
Petitioner failed to provide any detail with regard to its miscellaneous expenses,
let alone substantiate those expenses. With regard to petitioner's office expenses,
we have a reply to an information document request in which petitioner's
accountants provide a breakdown of the office expense for 2004. However, a
simple chart of expenses paid without documentation of the actual payments is not
enough to substantiate the expenses. Therefore, petitioner is denied all deductions
related to its office expenses.
Petitioner claiméd legal fees paid to attorneys in relation to the arbitration
and the shareholder derivative suit. These legal fees were ordinary and necessary
trade or business expenses because petitioner was the owner of the Tele2000
shares at the time of the arbitration and shareholder derivative suits. However,
petitioner has failed to:substantiate most of the claimed legal fees. Though
petitioner provided a ledger, we are unable to rely on the information in it without
- 51 [*51] further support. The only support petitioner provided to the Court was two
checks. The first check was made out to Hughes, Hubbard & Reed for $50,000 on
December 8, 2003. The second check was made out to Lydia Quesada for $5,000
on December 4, 2003. Without additional proof of payment of the claimed legal
fees, we can award petitioner only a $55,000 deduction relating to the legal fees
for taxable year 2003.
Petitioner also claimed deductions for other rent and royalty expenses.
Once again petitioner failed to provide a breakdown of this category of expenses
and failed to provide the Court with evidence to substantiate any such expenses.
Petitioner claimed expense deductions for professional fees paid to independent
contractors hired to assist petitioner with the 4G cellular network. Similar to every
other expense deduction petitioner claimed, the amounts reported on petitioner's
tax returns do not correlate with any of the information introduced into evidence.
Regardless, we deny these deductions as petitioner has failed to prove it was in the
trade or business of developing a 4G cellular network; thus any expenses
associated with the development of such a network are not ordinary and necessary
trade or business expenses. Furthermore, it is unclear whether these independent
contractors performed services for petitioner or TeleCable. TeleCable is a
Peruvian corporation independent of petitioner. Mr. Parker as the indirect owner
- 52 [*521of both TeleCable and petitioner may not simply pay the expenses of his
Peruvian corporation with funds from.his Florida corporation and then reap the
benefits of a U.S. Federal income tax deduction.
Petitioner failed to provide a breakdown of the other deductions from Conch
Harbor or provide any information regarding these deductions, let alone provide
substantiating information. These deductions are denied. Finally petitioner's
claimed telephone expenses and travel expense deductions are denied. Petitioner
failed to introduce any evidence of when or where the.travel took place or who
was traveling.
VIII. Withholding Taxes on Constructive Dividends -
Respondent contends that Mr. Parker and his family's rent-free use of the
Key Biscayne and Valdemossa homes is a constructive dividend paid from Vanini
to Mr. Parker through he chain of petitioner, Vilanova, and Vicmar.
Section 301 requires a taxpayer to include in gross income amounts
received as dividends. Generally, a dividend is a distribution of property by a
corporation to its shareholders out of its earnings and profits. Sec. 316(a). A
dividend need not be formally,declared or even intended by a corporation. Noble
v. Commissioner, 368 F.2d 439, 442 (9th Cir.1966), ¡Lffg T.C.-Memo. 1965-84.
When a shareholder or his family is permitted to use corporate property for
- 53 [*53] personal purposes, the fair rental value of the property is includable in his or
her income as a constructive dividend to the extent of the corporation's earnings
and profits. Commissioner v. Riss, 374 F.2d 161, 166-167, 170 (8th Cir. 1967),
aff'a in part, rev'g in part T.C. Memo. 1964-190; Melvin v. Commissioner, 88
T.C. 63, 80-81 (1987), aff'd, 894 F.2d 1072 (9th Cir. 1990); Falsetti v.
Commissioner, 85 T.C. 332, 356 (1985). For a corporate benefit to be treated as a
constructive dividend, the item must primarily benefit the taxpayer's personal
interests as opposed to the business interests of the corporation. Ireland v. United
States, 621 F.2d 731 (5th Cir.1980); Palo Alto Town & Country Village, Inc. v.
Commissioner, 565 F.2d 1388 (9th Cir.1977), remanding T.C. Memo. 1973-223;
Commissioner v. Riss, 374 F.2d 161.
We held above that Mr. Parker and his family's use of the Valdemossa
home was a personal use of the home and that there was no corporate business
purpose to the use. Likewise we held that Mr. Parker and his family's use of the
Key Biscayne home, except for the office on the ground floor, was primarily for
personal use. The only evidence petitioner offered establishing the use of the Key
Biscayne home for a business purpose was Mr. Parker's self-serving testimony
that he used the upper levels of the Key Biscayne home as a facility to host
meetings and as an office to conduct petitioner's business. We need not accept
- 54 [*54] Mr. Parker's self-serving statements if they are questionable, improbable, or
unreasonable. See Quock Ting v. United states, 140 U.S. 417, 420-421 (1891);
Tokarski v. Commissioner, 87 T.C. 74, 77 (1986). Petitioner has failed to prove
that Mr. Parker did no derive personal benefit from the use of the Valdemossa and
Key Biscayne homes.
Respondent argues that the rent-free use of the Valdemossa and Key
Biscayne homes is a distribution from Vanini to petitioner, from petitioner to
Vilanova, and so on up the chain of corporations to Mr. Parker. Petitioner
contends that Mr. Parker paid rent for the use of the two homes and therefore there
is no distribution for the rent-free use of the homes. Petitioner reported rental
income from·the Key Biscayne home on its Federal income tax returns of $12,000,
$30,000, and $30,000 for taxable years 2003, 2004, and 2005, respectively.
Petitioner also reported rental income from the Valdemossa home on its Federal
income tax returns of 15,000, $24,000, and $24,000 for taxable years 2003, 2004,
and 2005, respectively! Petitioner argues that Mr. Parker paid this rent through the
reduction of a loan he had made to petitioner.
We found no evidence of a loan to petitioner in the record, and petitioner
submitted no evidence of a reduction of said loan as payment for rent.
Additionally, Vanini, riot petitioner, owned the Key Biscayne and Valdemossa
- 55 [*55] homes; thus rent should have been paid to Vanini, not petitioner. On the
evidence in the record, we do not believe Mr. Parker ever intended to pay rent for
his use of the two homes. Rental income was included in petitioner's Federal
income tax returns only at the behest of Mr. Parker's accountants. We find that
Mr. Parker's rent-free use of the home was a distribution from Vanini to petitioner,
followed by a distribution from petitioner to Vilanova, and so on up the chain of
corporations to Mr. Parker. Though the transaction took place in a single step
(i.e., Mr. Parker directly gaining a personal benefit from Vanini), given the
corporate structure, we find that the benefit and thus the distribution traveled up
the chain of corporations.
In Tollefsen v. Commissioner, 52 T.C. 671 (1969), aff'd, 431 F.2d 511 (2d
Cir. 1970), this Court determined that a distribution in a vertical chain of
corporations was a constructive dividend. Mr. Tollefsen owned 100% of
Tollefsen Brothers, Inc. (Tollefsen Bros.). Tollefsen Bros. in turn owned 100% of
Tollefsen Manufacturing Corp. (Tollefsen Manufacturing). Tollefsen
Manufacturing operated as a manufacturer of mineral shot and grit products. In
1960 Tollefsen Manufacturing sold its machinery, equipment, and other fixed
assets, together with all its rights to manufacture mineral shot and grit, to a third
party. After the sale, Tollefsen Manufacturing became inactive, holding only cash.
- 56 [*56] Mr. Tollefsen began making cash withdrawals from Tollefsen
Manufacturing during 1960 after completion of the sale. The cash withdrawals
were reflected on the ooks of Tollefsen Manufacturing as loan receivables, and
Mr. Tollefsen issued
llefsen Manufacturing interest-free promissory notes in
exchange for the withdrawals. The Commissioner issued Mr. Tollefsen a notice of
deficiency assessing tax for unreported dividend income in the amount of the
withdrawals.
This Court found that the withdrawals were not loans but were in effect
dividends from Tollefsen Bros. to Mr. Tollefsen. In so finding, the Court stated:
It is clear that [1 .] Tollefsen exercised complete control over
Tollefsen Manu acturing through the ownership of all the stock in its
parent company Tollefsen Bros. He was able to siphon off the assets
of Tollefsen Manufacturing only because * * * [he] owned 100
percent of the stock of Tollefsen Bros. and the latter owned 100
percent of the stock of Tollefsen Manufacturing. In every real sense
the funds in que tion came to him through Tollefsen Bros.,
notwithstanding that two steps (a transfer from Tollefsen
Manufacturing to its parent, followed by a transfer from the parent to
Tollefsen) were ompressed into a single step, the transfer of funds
directly to [Mr.] Tollefsen. We find, therefore, that the withdrawals in
issue were in su stance distributions to Tollefsen Bros. from its
subsidiary Tollefsen Manufacturing, with a resulting constructive
dividend to petitioners, the sole shareholders of Tollefsen Bros. * * *
Id. at 681.
- 57 [*57] Similarly, Mr. Parker exercised complete control over Vanini through his
ownership of the intervening corporations, Vicmar, Vilanova, and petitioner. Mr.
Parker and his family were able to use the two homes without paying rent because
he owned 100% of Vicmar, which owned 100% of Vilanova, which owned 100%
of petitioner, which owned 100% of Vanini. Much as in Tollefsen, four steps
(transfers from (1) Vanini to petitioner, (2) petitioner to Vilanova, (3) Vilanova to
Vicmar, and (4) Vicmar to Mr. Parker) were compressed into a single step, Mr.
Parker and his family's rent-free use of Vanini's two homes. Therefore, we find
that the rent-free use of the homes was in substance distributions to petitioner from
Vanini, followed by distributions to Vilanova from petitioner, followed by
distributions to Vicmar from Vilanova, and finally, distributions to Mr. Parker
from Vicmar.
The amount of the distribution to Mr. Parker is the fair rental value for one
month's use of the Valdemossa home in each of 2003, 2004, and 2005 and the fair
rental value for the full-year use of the Key Biscayne home in 2003, 2004, and
2005, taking into account that the office on the ground floor was used solely for
business purposes. Respondent concedes that the fair rental values for the
Valdemossa home were $15,000, $24,000, and $24,000 for taxable years 2003,
- 58 [*58] 2004, and 2005, respectively. Both petitioner and respondent offered expert
reports and testimony as to the fair rental value of the Key Biscayne home.
Petitioner submitted the testimony of Cecilia Samaja. Ms. Samaja is a real
estate broker and sales associate in Florida. Ms. Samaja is not a licensed real
estate appraiser. Having reviewed Ms. Samaja's report and her testimony, we do
not find that her report is credible and therefore reject in whole her opinion.
Respondent relics on the expert report of Edward N. Ames" to determine
the fair rental value of the Key Biscayne home in 2003, 2004, and 2005. Mr.
Ames' report finds fair rental values of $21,000, $23,000, and $23,000 per month
for 2003, 2004, and 2035, respectively. These rent amounts were for full use of
the home including the office on the ground floor. Mr. Ames is a licensed
appraiser. His expert report was thorough. He listed and described comparables
and explained his metl-odology to the Court. We find the fair rental values
determined by Mr. Ames to be fair measures of the rent that should have been
charged for use of the Key Biscayne home during 2003, 2004, and 2005.
However, these fair rental- amounts did not take into account the exclusive
"Edward N. Ames was employed by respondent as a field specialist. He is
licensed in Florida as a certified general real estate appraiser, a registered real
estate broker, and a licensed mortgage broker. He also is an MAI member of the
Appraisal Institute.
- 59 [*59] business use of the first floor office and therefore must be adjusted. For
purposes of entering decisions in these cases, we will order the parties to prepare
the requisite computation under Rule 155 to determine the fair rental values
excluding the square footage of the first floor office.
In order to determine the amounts of the constructive dividends distributed
from petitioner to Vilanova, we will order the parties to compute as part of their
computations under Rule 155 petitioner's earnings and profits for 2003, 2004, and
2005 and to determine the amounts of the distributions outlined in this opinion
that are treated as dividend income, return of basis, and long-term capital gain.
See secs. 301 and 302.
Except as provided in section 881(c)," section 881(a) imposes a tax of 30%
on, inter alia, dividends received from U.S. sources by a foreign corporation" to
the extent the dividend received is not effectively connected with the conduct of a
trade or business within the United States. Section 1442(a) generally requires the
payor of interest subject to the tax imposed by section 881(a) to deduct and
"Sec. 881(c) is not relevant to these cases.
"A "foreign corporation" is a corporation that is not organized in the United
States or under the law of the United States or of any State. Sec. 7701(a)(4) and
(5). Vilanova is a corporation organized under the law of the Republic of Panama,
and petitioner is a corporation organized under the law of Florida.
- 60 [*60] withhold that ta: 041
at the source. If the payor does not do so, it becomes liable
for such taxes under section 1461. Petitioner paid a constructive dividend to the
extent of its earnings and profits emanating from Mr. Parker's use of the
Valdemossa and Key Biscayne homes. Petitioner failed to withhold a tax equal to
30% of the dividends distributed to Vilanova in 2003, 2004, and 2005. We hold
that petitioner, having failed to make the proper withholding under section 1442,
is liable for the tax under section 1461 in accordance with the Rule 155
computation of earnings and profits.
IX.
Penalties
A.
Accuracy Related Penalties in General
Respondent determined that petitioner is liable for accuracy-related
penalties under section 6662 for 2003",.2004, and 2005. Section 6662(a) and
(b)(1)-(3) and (e) imposes a 20% accuracy-related penalty upon any underpayment
of tax resulting from: (1) negligence or disregard of the rules or regulations; (2)
substantial understaten ent of income tax; or (3) substantial valuation
misstatement.
An underpayme t is due to a taxpayer's negligence where the taxpayer fails
to make a reasonable attempt to comply with the provisions of the Code. Sec.
6662(c). An understat ment is substantial if it exceeds the greater of 10% of the
- 61 [*61] tax required to be shown on the return or $5,000. Sec. 6662(d)(1)(A).
There is a substantial valuation misstatement where the value of any property (i.e.
the basis in the Tele2000 shares) reported on a return is 150% or more of the
amount determined to be the correct amount of the property's adjusted basis. Sec.
6662(e)(1)(A). Finally, the section 6662(a) penalty is increased to 40% when the
underpayment of tax is the result of a "gross valuation misstatement". Sec.
6662(h). However, no penalty is imposed under section 6662 if there is
reasonable cause for the underpayment of tax and the taxpayer has acted in good
faith. Sec. 6664(c)(1).
B.
Burden of Production
The Commissioner bears the burden of production with respect to the
taxpayer's liability for the section 6662(a) penalty and must produce sufficient
evidence indicating that it is appropriate to impose the penalty. See sec. 7491(c).
Once the Commissioner meets his burden of production, the taxpayer must come
forward with persuasive evidence that the Commissioner's determination is
incorrect or that the taxpayer had reasonable cause or substantial authority for the
position. Rule 142(a); Higbee v. Commissioner, 116 T.C. 438, 447 (2001).
- 62 [*62] C.
Penalty Determinations
1.
2003
For 2003 respondent adjusted petitioner's taxable income to include an
additional $1 million of capital gain net income and disallowed $1,134,389 of
repair and maintenance expenses, depreciation, and other deductions. The result,
as set out in the notice of deficiency, was a deficiency in tax of $793,692.
Respondent determined petitioner was liable for an accuracy-related penalty of
$158,738 under section 6662(a) attributable to (1) negligence or disregard of rules
or regulations under section 6662(b)(1); or (2) a substantial understatement of
income tax under section 6662(b)(2).
2.
2004
For 2004 respondent adjusted petitioner's taxable income to include an
additional $7,722,822 f capital gain net income and an additional $1 million of
other income16 and dis llowed $604,548 of repair and maintenance expenses,
depreciation, and othe deductions. The result, as set out in the notice of
deficiency, was a deficiency in tax of $2,888,443. Respondent determined
petitioner was liable for an accuracy-related penalty of $52,536 under section
16This other income is a determination of cancellation of indebtedness
income argued in the alternative by respondent. We have found there was no
cancellation of indebtedness income for 2004.
- 63 [*63] 6662(a) attributable to (1) negligence or disregard of rules or regulations
under section 6662(b)(1); or (2) a substantial understatement of income tax under
section 6662(b)(2). Respondent also determined that petitioner was liable for a
$1,050,304 accuracy-related penalty relating to its capital gáin net income on
account-of a gross valuation misstatement under section 6662(a), (b)(3), and (h).
3.
2005
For 2005 respondent adjusted petitioner's taxable income to include an
additional $2,660,177 of capital gain net income and disallowed $398,430 of
d
repair and maintenance expenses, depreciation, and other deductions. The result,
as set out in the notice of deficiency, was a deficiency in tax of $839,462.
Respondent determined that the underpayment of tax was attributable to a gross
valuation misstatement under section 6662(a), (b)(3), and (h). Accordingly,
respondent imposed an accuracy-related penalty of $335,785 for 2005.
Respondent alternatively argues that if we do not find a gross valuation
misstatement for 2005, petitioner is liable for an accuracy-related penalty under
section 6662(a) of $164,220 attributable to (1) negligence or disregard of rules or
regulations under section 6662(b)(1); or (2) a substantial understatement of
income tax under section 6662(b)(2).
-64[*64] D.
Negligence
Respondent argùes that petitioner's underpayments of tax resulting from
petitioner's claimed re air and maintenance expenses, depreciation, and other
deductions for 2003, 2Ò04, and 2005 are the result of petitioner's negligence and
thus subject to the accúracy-related penalty under section 6662(a). Respondent
argues that he met his burden of production under section 7491(c) by showing that
petitioner failed to keep adequate records to substantiate most of petitioner's
repair and maintenance expenses, depreciation, and other deductions in
accordance with the requirements of section 162. We agree.
However, petitióner was able to substantiate some repair and maintenance
expenses and depreciation associated with the Key Biscayne home, certain legal
fees, and a small portion of salary it paid to Ms. Bruce. Accordingly, we find that
petitioner is subject to he accuracy-related penalties with respect to all claimed
deductions except those few deductions mentioned above that were substantiated.
E.
Gross Valuation Misstatement
Section 6662(b)(3) imposes a 20% penalty on that portion of an
. underpayment which r sults from a substantial valuation misstatement. There is a
substantial valuation misstatement if the value of any property reported on the
return is 150% or more of the amount determined to be the correct amount and the
- 65 [*65] portion of the underpayment for the taxable year attributable to the
substantial valuation misstatement exceeds $5,000. Sec. 6662(e)(1)(A), (2).
Section 6662(h) increases the penalty to 40% in the case of a gross valuation
misstatement. There is a gross valuation misstatement if the value is 200% or
more of the value determined to be the correct amount. Sec. 6662(h)(2)(A)(i). By
its terms, the gross valuation misstatement penalty applies only when an
underpayment is "attributable to" a valuation misstatement. Sec. 6662(a), (b)(3),
(e)(2), (h).
1. Gustashaw v. Commissioner,
Absent stipulation otherwise, these cases are appealable to the Court of
Appeals for the Eleventh Circuit. That Court of Appeals in Gustashaw v.
Commissioner, 696 F.3d 1124 (11th Cir. 2012), af£g T.C. Memo. 2011-195,
recently joined the majority of Courts of Appeals by holding that the gross
valuation misstatement penalty applies to underpayments attributable to overstated
bases in property when a transaction is disregarded because it lacks economic
substance."
"See Alpha I, L.P., ex rel. Sands v. United States, 682 F.3d 1009, 10261031 (Fed. Cir. 2012); Fid. Int'l Currency Advisor A Fund v. United States, 661
F.3d 667, 671-675 (1st Cir. 2011); Merino v. Commissioner, 196 F.3d 147, 157159 (3d Cir. 1999), af£g T.C. Memo. 1997-385; Zfass v. Commissioner, 118 F.3d
(continued...)
- 66 [*66] In Gustashaw the taxpayers entered into custom adjustable rate debt
structure transactions (CARDS transactions) to shelter income resulting from the
exercise of stock options. As part of the CARDS transaction, the taxpayers
created an inflated fictional basis in property acquired in a foreign currency
transaction which was later sold at a loss when taking into account the property's
inflated basis.18
In Gustashaw the taxpayer conceded the deficiencies in income tax for all
years at issue and challenged only the application of the valuation misstatement
penalties. The taxpay r argued that because the CARDS transaction lacked
economic substance, tliere was no value or basis to misstate which would trigger
the valuation misstatement penalties and.the penalties should not apply as a matter
of law, relying òn Gair er v. Commissioner, 893 F.2d 225 (9th Cir. 1990), af('g
T.C. Memo. 1988-416, and Todd v. Commissioner, 862 F.2d 540 (5th Cir. 1988),
affg 89 T.C. 912 (198 ).
"(...continued)
184, 190-191 (4th Cir. 1997), af_f'g T.C. Memo. 1996-167; Illes v. Commissioner,
982 F.2d 163, 167 (6th Cir. 1992), aff'g T.C. Memo. 1991-449; Gilman v.
Commissioner, 933 F.2d 143, 151 (2d Cir. 1991), aff'g T.C. Memo. 1989-684;
Massengill v. Commissioner, 876 F.2d 616, 619-620 (8th Cir. 1989), af['g T.C.
Memo. 1988-427.
18For a detailed escription of the contours of a prototypical CARDS
transaction, see Kerman v. Commissioner, T.C. Memo. 2011-54.
- 67 [*67] In affirming the Tax Court, the Court of Appeals for the Eleventh Circuit
specifically rejected the reasoning of the Court of Appeals for the Fifth and Ninth
Circuits, applied the gross valuation misstatement penalty, and held that the "rule
rests upon the fact that the abusive tax shelter is built upon the basis misstatement,
and the transaction's lack of economic substance is directly attributable to that
misstatement." Gustashaw v. Commissioner, 696 F.3d at 1136.
2.
The Cases at Bar
The cases at bar do not involve a sham transaction. Unlike the Gustashaw
case, where no economic loss occurred, these cases involve Vicmar's actual
payment of $12,746,730 for the Tele2000 shares, which were later sold for
$195,418. Respondent has conceded that Vilanova had a basis of $12,746,730 in
the Tele2000 shares. The sale of the Tele2000 shares resulted in actual economic
loss.
In contrast to the transactions in Gustashaw, Vilanova's contribution of the
Tele2000 shares to petitioner was not intertwined with any overvaluation
misstatement. This Court would have disregarded the transfer of the Tele2000
shares under the step transaction doctrine regardless of the basis petitioner claimed
in the Tele2000 shares. Stated differently, our determination of the applicability
- 68 [*68] of the step transaction doctrine has nothing to do with any possible
.
overvaluation or misstatement of petitioner's basis in the Tele2000 shares.
We have applied the step transaction doctrine to disregard Vilanova's
contribution of the Tel 2000 shares to petitioner for U.S. Federal income tax
purposes. Consequent y, for U.S. Federal income tax purposes, we have
disallowed petitioner's claimed capital loss for 2004 and claimed capital loss
carryover for 2005. TLus, we find that petitioner's underpayments of tax are not
"attributable to" a valuation misstatement because the amount of basis petitioner
claimed in the Tele2000 shares did not affect our application of the step
transaction doctrine.
Petitioner's underpayment for 2005 was also attributable to the
disallowance of deduc ions for repair and maintenance expenses, depreciation, and
other deductions. BecÀuse the repair and maintenance expenses, depreciation, and
other deductions claim d for 2005 did not depend on disputed valuation or basis
statements, any underpayments of tax resulting from their disallowance cannot be
based on gross valuation misstatements. See Jaroff v. Commissioner, T.C. Memo.
2004-276. However, the disallowed deductions for repair and maintenance
expenses, depreciation; and other deductions are subject to the negligence penalty
unless reasonable cause can be proved.
- 69 [*69] On the basis of the foregoing, we find that petitioner is not liable for the
40% accuracy-related penalty for a gross valuation misstatement for 2004 and
2005.
F.
Reasonable Cause
Section 6664(c)(1) provides that no penalty is imposed under section 6662
with respect to any portion of an underpayment if it is shown that there is.
reasonable cause for such portion and the taxpayer has acted in good faith. The
taxpayer bears the burden of establishing that it acted with reasonable cause and in
good faith. Calloway v. Commissioner, 691 F.3d 1315, 1334 (11th Cir. 2012),
aff'g 135 T.C. 26 (2010). . The decision as to whether the taxpayer acted with
reasonable cause and in good faith depends upon all the pertinent facts and
circumstances. Sec. 1.6664-4(b)(1), Income Tax Regs. The most important factor
is the extent of the taxpayer's effort to determine its proper tax liability. Id.
Circumstances indicating that a taxpayer acted with reasonable cause and in good
faith include "an honest misunderstanding of fact or law that is reasonable in light
of all of the facts and circumstances, including the experience, knowledge, and
education of the taxpayer." IL
We find that petitioner has not acted with reasonable cause and in good faith
with respect to the various trade or business expense deductions claimed.
- 70 [*70] Petitioner deducted business expenses which it has been unable to
substantiate and has not attempted to substantiate. Petitioner caused its various
U.S. entities to purchase assets for the personal use of its shareholder, Mr. Parker,
and his family without any regard for the fact that corporate funds were being
used.
042Petitioner
then attempted to obtain a tax break from the use of these funds.
Given the circumstances, we find that petitioner has not acted with reasonable
cause and in good faith with respect to these deductions and is therefore liable for
the accuracy-related penalty as to these deductions under sectioi16662(a) for 2003,
2004, and 2005, as described above.
However, we find that petitioner has acted with reasonable cause and in
good faith with respect to the capital loss denied for 2004 and the capital loss
carryback and carryover disallowed for 2003 and 2005, respectively. A taxpayer
may meet his burden of establishing that he acted with reasonable cause and in
good faith by showing that he reasonably relied in good faith on the advice of an
independent professional, such as a tax adviser, lawyer, or accountant, as to the
transaction's tax treatment. United States v. Boyle, 469 U.S. 241, 251 (1985); sec.
1.6664-4(c), Income Tax Regs.
The professional advice must meet several requirements. First, the taxpayer
must show that the advice was based on "all pertinent facts and circumstances and
- 71 [*71] the law as it relates to those facts and circumstances." Sec. 1.6664-4(c)(i),
Income Tax Regs. Second, the advice relied upon must not be based on any
"unreasonable factual or legal assumptions," and must not "unreasonably rely on
the representations, statements, findings, or agreements of the taxpayer or any
other person." Sec. 1.6664-4(c)(ii), Income Tax Regs. Third, the reasonableness
of any reliance turns on the quality of the advice and whether, under the
circumstances, it was objectively reasonable for the taxpayer to rely on that
advice. See Gustashaw v. Commissioner, 696 F.3d at 1139; 106 Ltd. v.
Commissioner, 684 F.3d 84, 90 (D.C. Cir. 2012), aff'g 136 T.C. 67 (2011).
Petitioner relied on the advice of its accountants and attorneys in preparing
its 2003, 2004, and 2005 returns claiming the capital loss and the capital loss
carryback and carryover and put forth an argument that Vilanova had indeed
transferred the Tele2000 shares to petitioner in September 2004 and thus incurred
a capital loss for 2004. Petitioner's accountants wrote a memorandum of law to
petitioner in which it advised.petitioner that Vilanova could transfer the Tele2000
shares to petitioner before the enactment of section 362(e) and be entitled to a
carryover basis in the Tele2000 shares. Vilanova began taking steps to transfer
the Tele2000 shares to petitioner before the enactment of section 362(e).
Petitioner and its accountants and lawyers all believed that the Tele2000 shares
- 72 [*72] had been transfeired before the enactment of section 362(e), thus allowing
petitioner to claim a carryover basis in the Tele2000 shares.!9 We believe the
advice petitioner recei ed from its accountants at MBAF took into account all of
the facts and circumstances of the transaction and the law as it related to those
facts and circumstances. Further we.do not believe that MBAF's advice was
based on unreasonable factual or legal assumptions. Finally, we fmd it reasonable
for petitioner to rely on the advice of MBAF in deducting the capital loss
disallowed for 2004 and the capital loss carryback and carryforward disallowed
for 2003 and 2005, resþectively. As a result, we find that petitioner acted with
reasonable cause and in good faith with respect to the 2004 capital loss, the 2003
capital loss carryback, and 2005 capital loss carryover. Therefore, petitioner is not
liable for the accuracy4related penalty under section 6662(a) and (h) with respect
to these losses for 200 , 2004, and 2005, as described above.
In reaching our 1 oldings herein, we have considered all arguments made,
and, to the extent not mentioned above, we conclude they are moot, irrelevant, or
without merit.
19We note that v e have not ruled on the issue of whether petitioner received
the Tele2000 shares fr m Vilanova before the enactment of sec. 362(e) because
the issue is irrelevant when the end-result step transaction doctrine is applied.
- 73 [*73] To reflect the foregoing,
Decisions will be entered under
Rule 155.
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