# UNITED STATES TAX COURT

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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

T.C. Memo 2002-97

UNITED STATES TAX COURT

ANDANTECH L.L.C., WELLS FARGO EQUIPMENT FINANCE, INC. (f.k.a.
NORWEST EQUIPMENT FINANCE, INC.), TAX MATTERS PARTNER, AND WELLS
FARGO & COMPANY (f.k.a. NORWEST CORPORATION), A PARTNER OTHER
THAN THE TAX MATTERS PARTNER, ET AL.,1 Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket Nos. 15532-98, 4277-00,
6348-00.

Filed April 9, 2002.

On Sept. 28, 1993, A, a limited liability Wyoming
company, composed of two Belgian citizens, BP and FBE,
purchased a portfolio of 40 IBM mainframe computers (the
equipment) from C, for $122,415,762, which was paid: (1)
$14,995,931 in cash (which A borrowed from UBS, a Swiss
bank), and (2) $107,419,831 by A’s notes to C. At the
time of sale, the equipment was under existing leases to
end users and subject to existing liens; the equipment
was sold to A subject to the existing leases and liens.
Simultaneously with its purchase of the equipment,
A leased the equipment back to C.

1

Cases of the following petitioners are consolidated
herewith: Andantech L.L.C., Equipment Investors Co., Inc., A
Partner Other Than The Tax Matters Partner, docket Nos. 4277-00
and 6348-00.

- 2 On Oct. 29, 1993, A sold a portion of the rents due
from C to NationsBank for $87,805,802. The sale of the
rents caused a portion ($87,805,802) of A’s note to C to
accelerate, and the proceeds A received from the sale
were paid to C.
On Dec. 9, 1993, FBE entered into an agreement with
EICI pursuant to which FBE assigned his 2-percent
interest in A to EICI.
On Dec. 10, 1993, BP entered into an agreement with
RDL, a subsidiary of NEFI, pursuant to which (1) BP
exchanged his 98-percent interest in A for 6,150 shares
of preferred stock in RDL, and (2) NEFI agreed to
contribute $14,817,382 in cash to RDL in exchange for 100
shares of RDL common stock.
BP’s transfer of his 98-percent interest in A caused
an acceleration of A’s note to UBS. As a result, RDL and
EICI contributed $14,817,382 and $302,396, respectively,
to the capital of A.
A used these amounts (totaling
$15,119,778) to pay the principal and interest due under
its note to UBS.
On its Federal income tax return for the short
period from Sept. 28 to Dec. 10, 1993 (the 12/10/93 short
period), A reported net income of $86,930,096 that was
allocated to BP, FPE, and EICI. On its Federal income
tax return for the short period from Dec. 11 to Dec. 31,
1993 (the 12/31/93 short period), A reported a $2,143,937
loss (consisting of depreciation deductions and interest
expense). A reported a $50,069,397 loss for 1994 (also
consisting of depreciation deductions and interest
expense).
Respondent determined that the sale-leaseback
transaction described above was a prearranged transaction
that lacked business purpose as well as economic
substance.
Consequently, in FPAAs issued to A,
respondent determined that the losses claimed by A
($2,143,937 for the 12/31/93 short period and $50,069,397
for 1994) should be disallowed. Additionally, respondent
determined that A should have reported $87,805,801 of
income for the 12/31/93 short period.
Held: A is disregarded because BP and FPE did not
intend to join together for the purpose of carrying on a
business as partners or sharing in the profits and losses
from an equipment leasing activity.

- 3 Held, further, alternatively, participation of BP,
FBE, and EICI in the sale-leaseback transaction described
above is disregarded under the step transaction doctrine.
Held, further, the sale-leaseback transaction
described above lacked a valid business purpose, as well
as economic substance, and thus is not to be respected
for Federal tax purposes. Consequently, (1) A is not
required to include the sale of the rents ($87,805,801)
as income for the 12/31/93 short period, (2) A is not
entitled to deduct $2,143,937 as expenses from “other
rental activities” for the 12/31/93 short period, and (3)
A is not entitled to deduct $50,069,397 of similar
expenses for 1994.

Mark Alan Hager, Walter A. Pickhardt, John R. Kalligher,
William K. Wilcox, and Myron L. Frans, for petitioners in
docket No. 15532-98.
Walter A. Pickhardt, Mark Alan Hager, and William K.
Wilcox, for petitioner in docket No. 4277-00.
Walter A. Pickhardt, for petitioner in docket No. 6348-00.
Robert M. Ratchford, Donna C. Hansberry, John C. Schmittdiel,
and Robert J. Burbank, for respondent.

- 4 CONTENTS
FINDINGS OF FACT

. . . . . . . . . . . . . . . . . . . . . . . 7

I.

Norwest and Its Affiliated Group . . . . . . . . . . . . . 7
A.
Norwest . . . . . . . . . . . . . . . . . . . . . . . 7
B.
NEFI . . . . . . . . . . . . . . . . . . . . . . . . 8

II.

Comdisco and CIG . . . . . . . . . . . . . . . . . . . . . 8

III. Negotiations . . . . . . . . . . . . . . . . . . . . . .
A.
CIG’s Initial Discussions With Norwest and NEFI . .
B.
NEFI’s Credit Approval Presentation . . . . . . . .
C.
Financial Projections and Appraisals . . . . . . .
D.
The Foreign Investors . . . . . . . . . . . . . . .
IV.

12
12
14
16
25

Formation of Andantech and the Sale-Leaseback (Appendixes
A, B, and C) . . . . . . . . . . . . . . . . . . . . . .
A.
The Purchase Price . . . . . . . . . . . . . . . .
B.
The Equipment Lease . . . . . . . . . . . . . . . .
C.
The Bank Loan . . . . . . . . . . . . . . . . . . .

28
30
31
37

V.

Sale of Comdisco Rents (Appendix D)

39

VI.

Mr. de la Barre d’Erquelinnes’s and Mr. Parmentier’s
Withdrawal From Andantech . . . . . . . . . . . . . . .
A.
Mr.
de
la
Barre
d’Erquelinnes’s
and
Mr.
Parmentier’s Withdrawal of Capital Contributed to
Andantech . . . . . . . . . . . . . . . . . . . . .
B.
Transfer of Mr. de la Barre d’Erquelinnes’s
Membership Interest in Andantech to EICI (Appendix
E) . . . . . . . . . . . . . . . . . . . . . . . .
C.
Transfer of Mr. Parmentier’s Membership Interest to
RD Leasing in Exchange for Preferred Stock
(Appendix F) . . . . . . . . . . . . . . . . . . .

. . . . . . . . . .

VII. Repayment of Bank Loan (Appendixes F and G)

41
41
41
42

. . . . . .

43

. . . . . . . . . . . . .

44

IX.

Comdisco’s Exercise of Early Termination Options . . . .

45

X.

Dissolution of RD Leasing and Andantech

. . . . . . . .

50

XI.

Andantech’s Federal Income Tax Returns . . . . . . . . .

50

XII. Respondent’s Determinations . . . . . . . . . . . . . .
A.
FPAAs for the 1993 Short Years . . . . . . . . . .
B.
FPAA for the 1994 Taxable Year . . . . . . . . . .

52
52
53

VIII. Sale of Computer to End User

- 5 OPINION . . . . . . . . . . . . . . . . . . . . . . . . . . .

53

I.

Procedural Issues

53

II.

Whether the Sale-Leaseback Transaction Should Be
Respected . . . . . . . . . . . . . . . . . . . . . . . 55
A.
Overview
of
Statutory
Framework
for
the
Transactions . . . . . . . . . . . . . . . . . . . 56
B.
Positions of the Parties . . . . . . . . . . . . . 61
C.
Analysis . . . . . . . . . . . . . . . . . . . . . 62
1.
Andantech Is Not a Valid Partnership and Is
Not Recognized for Federal Tax Purposes . . . 64
a.
Andantech-Foreign Should Be Disregarded
Because Messrs. Parmentier and de la
Barre d’Erquelinnes Did Not Intend To
Join Together for the Purpose of Carrying
On a Business and Sharing in the Profits
or Losses From the Equipment Leasing
Activity . . . . . . . . . . . . . . . . 65
b.
Andantech-US
Should
Be
Disregarded
Because EICI Did Not Intend To Join With
RD Leasing for the Purpose of Carrying On
Partnership Business and Sharing in the
Profits or Losses From the Partnership’s
Equipment Leasing Activity . . . . . . . 68
2.
Andantech Acted as a Mere Shell or Conduit To
Strip the Income From the Transaction and
Avoid Income Taxation and, Under the Step
Transaction Doctrine, Should Be Disregarded . 69
a.
Binding Commitment Test . . . . . . . . . 71
b.
End Result Test . . . . . . . . . . . . . 72
c.
Interdependence Test . . . . . . . . . . 75
3.
The Sale-Leaseback Transaction Lacked Business
Purpose and Economic Substance . . . . . . . . 82
a.
The Experts . . . . . . . . . . . . . . . 84
b.
No Reasonable Possibility for Profit
Existed . . . . . . . . . . . . . . . . . 89
c.
RD Leasing/Norwest Was Not Motivated by
Any Business Purpose Other Than Obtaining
Tax Benefits . . . . . . . . . . . . . . 95
i.
Presence or Absence of Arm’s-Length
Price Negotiations . . . . . . . . . 97
ii. The Relationship Between the Selling
Price and the Fair Market Value . . 99
iii. The Structure of the Financing . . . 99
iv. The
Degree
of
Adherence
to
Contractual Terms . . . . . . . . . 102
v.
The Reasonableness of the Income and

. . . . . . . . . . . . . . . . . . .

- 6 -

D.

Residual Value Projections . . . . . 104
vi. Insertion of Other Entities . . . . 106
4.
The Transaction Was Not a Sale and the
Financing Did Not Constitute Genuine Debt . . 108
Conclusion . . . . . . . . . . . . . . . . . . . . 112

APPENDIX A . . . . . . . . . . . . . . . . . . . . . . . 114

MEMORANDUM FINDINGS OF FACT AND OPINION
JACOBS,

Judge:

Respondent

issued

Andantech,

L.L.C.

(Andantech), a limited liability Wyoming company, notices of final
partnership

administrative

adjustment

(FPAAs)

that

reflected

adjustments to Andantech’s partnership returns for taxable years
which ended on December 10, 1993 (the 12/10/93 FPAA), December 31,
1993 (the 12/31/93 FPAA), and December 31, 1994 (the 12/31/94
FPAA).
These consolidated cases involve an equipment sale-leaseback
transaction that is described in flow chart form, in attached
appendixes A through G. The transaction is designed to produce tax
benefits

to

RD

Leasing,

Inc.

(RD

Leasing),

a

member

of

an

affiliated group in which Norwest Corp. (Norwest) is the common
parent, through RD Leasing’s membership in Andantech.
The substantive issue to be resolved is whether the saleleaseback transaction involved herein should be respected for
Federal tax purposes.
All section references are to the Internal Revenue Code as in
effect for the years in issue.

- 7 FINDINGS OF FACT
Some

of

accordingly.

the

facts

have

been

stipulated

and

are

found

The stipulations of facts and the attached exhibits

are incorporated herein by this reference.
I.

Norwest and Its Affiliated Group
A.

Norwest

At all relevant times, Norwest was a Delaware corporation,
maintaining
Minnesota.

its

principal

place

of

business

in

Minneapolis,

In 1998, Norwest merged with Wells Fargo & Co.

Norwest

was the surviving corporation, but it subsequently changed its name
to Wells Fargo & Co.
Norwest is a bank holding company registered with the Federal
Reserve Bank under the Bank Holding Company Act of 1956.

Norwest’s

affiliates provide banking and other financial services. From 1993
through

1996,

Norwest

and

its

affiliated

consolidated Federal income tax returns.

corporations

filed

Norwest is a publicly

held company whose stock is traded on the New York Stock Exchange
and on the Midwest Stock Exchange.
J. Daniel Vandermark was Norwest’s senior vice president of
tax; he reported to John Thornton, Norwest’s chief financial
officer. All sale-leasebacks had to be approved by Mr. Vandermark.
B.

NEFI

Norwest Equipment Finance, Inc. (NEFI), now known as Wells
Fargo Equipment Finance, Inc., is a Minnesota corporation engaged
in the business of equipment leasing.

At all relevant times, NEFI

- 8 was a wholly owned subsidiary of Norwest Bank Minnesota, N.A.
(NBM), which in turn was a wholly owned subsidiary of Norwest.
NEFI was actively involved in leasing transactions involving
“middle market” equipment (i.e., equipment having a market value
between $25,000 and $2 million). NEFI was also involved, albeit to
a lesser extent, in leasing transactions involving higher end
equipment.
Within the Norwest group, sale-leasebacks were usually taken
in the name of NEFI’s parent, NBM.
NEFI.

James Renner was president of

Phyllis Grossman was vice president of sale-leaseback

transactions for NEFI. She was primarily responsible for reviewing
the structure of, and overseeing the completion of, all proposed
sale-leaseback transactions.
NEFI employed the law firm of Faegre & Benson (and used the
services of David Beadie and John Steffen) to render legal advice
with respect to the sale-leaseback transaction involved herein.
II.

Comdisco and CIG
Comdisco, Inc. (Comdisco), is a Delaware corporation with its

principal place of business in Rosemont, Illinois.

Comdisco is a

publicly held corporation whose stock is traded on the New York
Stock Exchange.

Comdisco is a lessor, dealer, and remarketer of

computer equipment.

In 1993, it was the largest independent

computer leasing company in the United States.
Comdisco purchases computers primarily through debt financing.
After entering into a lease with a customer (existing lease),

- 9 Comdisco borrows, on a nonrecourse basis, an amount equal to the
present value of the rental payments due under the lease (existing
financing) from a financial institution or insurance company. Such
borrowing is secured by an assignment of the rents and a lien on
the equipment (existing lien).

Comdisco rarely obtains sufficient

proceeds from the existing financing to fund the total cost of the
equipment.

(The balance of the equipment cost is referred to as

the equity portion.

The equity portion ranges from 10 to 25

percent of the cost of the equipment, depending on the length of
the lease and the type of equipment.)

Comdisco recovers a portion

of the equity portion by entering into sale-leaseback transactions
with third parties.
In a sale-leaseback transaction, the third party purchases the
equipment (subject to the existing lease and existing lien) and
leases it back to Comdisco.

Generally, the present value of rent

paid by Comdisco to the third party is less than the purchase price
paid by the third party.

The third party obtains the depreciation

deductions associated with the equipment and is entitled to the
residual value of the equipment at the end of the lease.

Ideally,

the transaction is structured so that the third party can recover
most of his investment from the residual value and profits from the
tax savings he receives from depreciation and interest deductions.
Comdisco also obtains a tax benefit from the transaction; the saleleaseback transaction allows Comdisco a deduction for the rent it
pays to the third party (instead of a deduction for depreciation of

- 10 the equipment), thereby reducing Comdisco’s alternative minimum
tax.
Between 1993 and 1996, Comdisco had a wholly owned subsidiary,
Comdisco Investment Group, Inc. (CIG).

CIG’s executives included:

Frank Trznadel-–president; Robert Snyder--executive vice president;
and Paula Ortmann–vice president.
CIG

assisted

Comdisco

in

structuring

sale-leaseback

transactions of computers involving foreign investors and U.S.
corporations (domestic corporations), referred to by Comdisco as
cross-border equipment leasing transactions.

CIG presented to

domestic corporations proposals for cross-border equipment leasing
transactions between Comdisco, partnerships made up of the foreign
investors, and the domestic corporations.2 The proposals stated in
relevant part:
COMDISCO EQUIPMENT LEASING CONCEPT
Comdisco has developed a cross-border equipment
leasing transaction that produces permanent U.S. tax
savings through the advantageous use of U.S. tax rules
concerning the acceleration of taxable income from rents.
Unlike most Western countries, the United States
treats as taxable income any amounts received as prepaid
rent or as proceeds from a sale, without recourse, of a
stream of rental payments. These amounts are income even
though they are unearned and are attributable to future
years.

2

Comdisco had entered into transactions similar to the
transaction at issue in these cases. Prior transactions involved
the participation of the following four partnerships: Fillupar
Leasing (1991); Astropar Leasing (1991); Compupar Leasing (I)
(1992); and Compupar Leasing (II) (1992).

- 11 As will be shown below, the unusual U.S. treatment
of these income amounts creates an opportunity for an
“arbitrage” between the U.S. tax system and that of
another country (such as Belgium) which does not treat
the amounts as currently taxable income.
The essential elements of the transaction are as
follows:
1.
Two Belgian individuals, with experience in all
aspects of the leasing business, purchase a portfolio of
U.S. computer equipment from Comdisco, Inc. (“Comdisco”).
The purchase is made through an entity that is treated as
a partnership for U.S. tax purposes (the “Partnership”).
The equipment is immediately leased back to Comdisco,
which in turn subleases the equipment to its customers,
the users of the equipment. Neither the Partnership nor
its partners are subject to U.S. tax.
2.
Subsequently, the Partnership sells to a bank
the right to receive the rents payable by Comdisco under
the lease.
The sale of the Comdisco rent stream is
without recourse to either the Partnership or to the
equipment. Accordingly, from a U.S. point of view, all
of the rental income from the Comdisco lease is deemed to
have been accelerated. Stated another way, the sale of
the rent stream removes or “strips” the rental income
from the leased equipment.
3.
At a later date, but without any prior
commitment (formal or informal) to do so, a U.S. company
may acquire a 98% interest in the Partnership, utilizing
certain provisions of the U.S. tax code under which tax
attributes carry over to the new owner.
4.
The U.S. company, as 98% partner, would be
entitled to depreciation with respect to 98% of the cost
of the equipment. No rental income would be reportable
by the U.S. company, that income having been accelerated
into the tax period prior to the U.S. company’s becoming
a partner.
5.
The resulting U.S. tax savings from the
depreciation would be permanent tax savings, not mere
deferrals. They would be reflected in reported earnings.
The law firm of Baker & McKenzie provided Comdisco with legal
services related to the sale-leaseback transactions.

- 12 III. Negotiations
A.

CIG’s Initial Discussions With Norwest and NEFI

In June 1993, representatives from CIG (Mr. Trznadel, Mr.
Snyder, and Ms. Ortmann), Norwest (Mr. Vandermark), NEFI (Ms.
Grossman), and Peat Marwick met to discuss a cross-border equipment
leasing transaction involving a portfolio of IBM computer equipment
(ultimately, the sale-leaseback transaction involved herein).

At

this meeting, representatives of CIG made a presentation from a
paper (entitled “Equipment Leasing Proposal” (the Proposal)), and
various flowcharts that outlined the elements and tax benefits of
a proposed cross-border equipment leasing transaction.
Following the June presentation by CIG, Ms. Grossman requested
additional information from Comdisco. On July 6, 1993, Ms. Ortmann
sent Ms. Grossman an economic analysis of a hypothetical saleleaseback transaction involving a $75 million portfolio of computer
equipment.3

On August 3, 1993, Ms. Ortmann provided Ms. Grossman

with sample documents (including a contract for sale of equipment,
lease, notes, security agreements, and a contract for sale of the
lease receivable) which could be used in connection with a proposed
cross-border equipment leasing transaction.

Ms. Grossman gave

these documents to NEFI’s attorneys for their review. Ms. Grossman
also

requested,

3

by

interoffice

memo,

that

the

articles

of

The economic analysis of a $75 million portfolio shows
a cash investment by the 98-percent shareholder of $9,252,693 and
a pretax profit of 6.1 percent using an estimated residual value
on the lease termination date of $22,754,717.

- 13 incorporation of a then-dormant corporation, known as Radio Dealers
Leasing, Inc.,4

be

amended

so

as

to

change

corporation to RD Leasing, Inc. (RD Leasing).5

the

name

of

the

RD Leasing was to

become the U.S. company involved in the sale-leaseback transaction
which is the subject of this litigation.
On August 6, 1993, Ms. Ortmann provided Ms. Grossman with a
portfolio of computers owned by Comdisco valued at $94 million
which could be the subject of a cross-border equipment leasing
transaction.

The

equipment

Comdisco

proposed

to

sell

and

simultaneously lease back was subject to existing leases between
Comdisco (as lessor) and others (i.e., large corporations and
institutions) as end users.

The equipment was also subject to

existing liens securing nonrecourse loans.

Some of the existing

leases required the consent of the end user to any sale of the
equipment by Comdisco.

A draft of a letter to one of the end

users, dated August 30, 1993, requested written consent to a sale
of the equipment to Norwest Bank Corp. and assured that the
“transfers are subject, subordinate to and in no way alter your
rights under the Lease.

Comdisco remains responsible for all of

its obligations as Lessor of the Equipment to the same extent as if
the transfers had not occurred.”

Letters dated September 7, 1993,

4

Radio Dealers Leasing, Inc., was organized as a
corporation under Minnesota law on Apr. 20, 1988.
5

NEFI owned all the common stock of RD Leasing during
the years in issue and through the dissolution of RD Leasing in
1997.

- 14 to two end users requested written consent for a sale to “a bank
with a combined capital and surplus of at least $50,000,000”.

A

letter to another end user stated that the sale was to a Wyoming
limited liability company.

The letters to the end users also

stated that Comdisco had the option to repurchase the equipment at
the end of the lease and “expect[ed] to do so”.
On August 30, 1993, Ms. Grossman faxed CIG Norwest’s credit
standards for end users of the equipment.6
B.

NEFI’s Credit Approval Presentation

Mark Valentine, assistant vice president of credit for NEFI,
managed a staff of credit analysts and officers.

His role in the

sale-leaseback transaction involved herein was limited to reviewing
Comdisco’s creditworthiness and ability to service any acquired
portfolio of leased computers.
On September 2, 1993, having received information regarding
the proposed sale-leaseback transaction from Ms. Grossman, Mr.
Valentine authorized a “Transaction Credit Analysis”, referred to
within NEFI as a “Credit Approval Presentation” (CAP).

The stated

purpose of the CAP was to review “Comdisco’s ability to service an
acquired portfolio and, in the event of a sub-leasee default,
replace equipment leases.” The CAP emphasized that the risk of the

6

The creditworthiness of the end user was important
because the computers sold (as well as the rents due Comdisco
from the end users) had been used by Comdisco as collateral to
secure its own loans and were subject to the existing liens.
Ms. Grossman, however, did not inquire into the amounts of the
existing liens, and that information was not provided to her.

- 15 transaction was rated “purely on the credit of Comdisco and not on
the risks inherent in this tax advantaged lease transaction”.
The CAP stated in relevant part: “All credit and tax risks
will be assumed by Norwest Tax Department”; NEFI’s role would be
“that of consultant”; and NEFI would be paid a fee for its
services.

The

CAP

also

contained

a

“Collateral”

section,

reflecting that “Limited value is placed upon the collateral with
the transaction’s purpose being tax driven and subject to Norwest
Tax Department approval.

However, there is upside potential for

the benefit of Norwest Corporation.”

The CAP further stated that

“Credit risk is considered remote based upon Comdisco’s credit,
substantial underlying lessees and short 36 month term.”7
Because Mr. Vandermark was head of the Norwest tax department,
his signature was required on all CAPs involving sale-leaseback
transactions.

Mr. Vandermark had to verify that Norwest had

taxable income sufficient to use the desired tax benefits.
Various Norwest and NEFI officers signed the CAP; the last
signature

7

was

dated

September

21,

1993.

The

CAP

approved

According to Mr. Vandermark and Mr. Renner, president
of NEFI, all sale-leaseback transactions have substantial tax
benefits; the “upside potential” (as referred to in the CAP) was
“in the residuals”. According to Ms. Grossman, the CAP’s
reference to “tax driven” meant that there were tax benefits
associated with the proposed sale-leaseback transaction and that
there was “residual upside”, meaning that the residual value of
the computers could produce a substantial economic profit.

- 16 Comdisco’s credit rating but did not commit Norwest, NEFI, or RD
Leasing to enter into the sale-leaseback transaction involved
herein.
C.

Financial Projections and Appraisals

CIG had a contract with Marshall & Stevens (M&S) pursuant to
which M&S agreed to provide appraisal reports for the computer
equipment in Comdisco’s portfolio. M&S agreed to perform quarterly
appraisals for $1,500 per quarter and to submit to CIG reports
derived from these quarterly appraisals at $300 per report.
sent the reports to James Hastings, a CIG executive.
prepared

financial

analyses

(including

the

M&S

Mr. Hastings

modeling

of

the

economics of transactions CIG proposed), handled various accounting
issues, and worked with appraisers.
When

the

sale-leaseback

transaction

involved

herein

was

proposed, Mr. Hastings used the M&S report to interpolate the
values stated therein to arrive at values relevant to the specific
dates in

the

proposed

transaction.

He

then

presented

these

interpolated numbers to Greg Barwick, one of M&S’s appraisers.8
CIG had a letter, dated September 25, 1993, delivered by
messenger to Ms. Grossman, as well as Messrs. Beadie and Steffen.
That letter included red-lined drafts of the documents for the

8

Mr. Hastings prepared an equipment schedule with
current and projected residual values to verify that the numbers
were still “in force as of the date of the transaction in case
the transaction date fell between a couple of quarters”. Mr.
Barwick used Mr. Hastings’ equipment schedule to write his
appraisal report.

- 17 proposed

sale-leaseback

transaction,

as

well

as

a

financial

analysis (the September Projections), which consisted of economic
projections relating to the transaction:

one projection was

premised upon the assumption that Comdisco would exercise an early
termination

option,9

while

the

other

assumption that Comdisco would not.

was

premised

upon

the

The assumptions as to the

residual values were identical to the forecasts set forth in the
appraisal of the equipment dated September 28, 1993, provided by
M&S.
The following charts set forth the economic projections with
respect to the proposed purchasing partnership (charts 1-8) and to
the proposed U.S. company partner (charts 9-12):

9

Early termination dates and final termination dates
were specified in the documents.

- 18 Chart 1
Computation of Partnership Taxable Income With Estimated Residual Value Proceeds
(Assumes Full Term)
Interest Expense
Year

Sale Rent

Additional

Depreciation

Install.

Ending

Receivable

Fixed Rent

Deduction

Bank Loan

Note

11/28/93

$87,793,608

-0-

-0-

($106,409)

($364,289)

12/31/93

-0-

-0-

($6,120,788)

-0-

12/31/94

-0-

-0-

(46,517,990)

-0-

12/31/95

-0-

-0-

(27,910,794)

-0-

12/31/96
12/31/97

-0-0-

$19,385,022

(16,746,476)

6,003,302

(25,119,714)

Total

87,793,608

(106,409)

25,388,324 (122,415,762)

Balloon

Residual

Taxable

Note

Income

Income(Loss)

($300,982)

-0-

$87,021,928

-0-

(305,514)

-0-

(6,426,302)

-0-

(1,932,141)

-0-

(48,450,131)

-0-

(2,113,390)

-0-

(30,024,183)

-0-

-0-

(2,158,409)

-0-

480,136

-0-

-0-

(335,666)

$25,418,982

5,966,904

(364,289)

(7,146,103)

25,418,982

8,568,352

Chart 2
Computation of Partnership Cash Flow With Estimated Residual Value Proceeds
(Assumes Full Term)
Debt Service
Year
Ending
11/28/93

Equipment
Purchase

Bank Loan

($122,415,762) $14,995,931

Install.

Balloon

Note

Note

($364,289) $19,990,512

Sale Rent

Additional

Residual

Pretax

Receivable

Fixed Rent

Income

Cash Flow

$87,793,608

-0-

-0-

-0-

12/31/93

-0-

(15,102,340)

-0-

-0-

-0-

-0-

-0-

($15,102,340)

12/31/94

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

12/31/95

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

12/31/96

-0-

-0-

-0-

(4,819,668)

-0-

$19,385,022

-0-

14,565,354

12/31/97
Total

-0(122,415,762)

-087,793,608

6,003,302
25,388,324

$25,418,982
25,418,982

9,105,338
8,568,352

0(106,409)

-0(22,316,947)
(364,289) (7,146,103)

- 19 Chart 3
Computation of Partnership Taxable Income Without Estimated Residual Value Proceeds
(Assumes Full Term)
Interest Expense
Year

Sale Rent

Additional

Depreciation

Install.

Ending

Receivable

Fixed Rent

Deduction

Bank Loan

Note

11/28/93

$87,793,608

-0-

-0-

($106,409)

($364,289)

12/31/93

-0-

-0-

($6,120,788)

-0-

12/31/94

-0-

-0-

(46,517,990)

-0-

12/31/95

-0-

-0-

(27,910,794)

-0-

12/31/96
12/31/97

-0-0-

$19,385,022

(16,746,476)

6,003,302

(25,119,714)

Total

87,793,608

(106,409)

25,388,324 (122,415,762)

Balloon

Balloon Note

Taxable

Note

COD Income

Income(Loss)

($300,982)

-0-

$87,021,928

-0-

(305,514)

-0-

(6,426,302)

-0-

(1,932,141)

-0-

(48,450,131)

-0-

(2,113,390)

-0-

(30,024,183)

-0-

-0-

(2,158,409)

-0-

480,136

-0-

-0-

(335,666)

$20,335,186

883,108

(364,289)

(7,146,103)

20,335,186

3,484,555

Chart 4
Computation of Partnership Cash Flow Without Estimated Residual Value Proceeds
(Assumes Full Term)
Debt Service
Year
Ending
11/28/93

Equipment
Purchase

Bank Loan

($122,415,762) $14,995,931

Install.

Balloon

Note

Note

($364,289) $19,990,512

Sale Rent

Additional

Residual

Pretax

Receivable

Fixed Rent

Income

Cash Flow

$87,793,608

-0-

-0-

-0-

12/31/93

-0-

(15,102,340)

-0-

-0-

-0-

-0-

-0-

($15,102,340)

12/31/94

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

12/31/95

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

12/31/96

-0-

-0-

-0-

(4,819,668)

-0-

$19,385,022

-0-

14,565,354

12/31/97
Total

-0(122,415,762)

-0(364,289)

(1,981,761)
13,189,083

-087,793,608

6,003,302
25,388,324

-0-0-

4,021,541
3,484,555

0(106,409)

- 20 Chart 5
Computation of Partnership Taxable Income With Estimated Residual Value Proceeds
(Assumes Early Termination)
Interest Expense
Year

Sale Rent

Depreciation

Ending
11/28/93

Receivable
$87,793,608

Deduction
-0-

Bank Loan
($106,409)

Residual &

Install.

Balloon

Early Term.

Taxable

Note
($364,289)

Note
($300,982)

Penalty
-0-

Income (Loss)
$87,021,928

12/31/93

-0-

($6,120,788)

-0-

-0-

(305,514)

-0-

(6,426,302)

12/31/94

-0-

(46,517,990)

-0-

-0-

(1,932,141)

-0-

(48,450,131)

12/31/95

-0-

(27,910,794)

-0-

-0-

(2,113,390)

-0-

(30,024,183)

12/31/96

-0-

(41,866,191)

-0-

-0-

(940,072)

$44,619,804

1,813,541

Total

87,793,608

122,415,762

(106,409)

(364,289)

(5,592,099)

44,619,804

3,934,853

Chart 6
Computation of Partnership Cash Flow With Estimated Residual Value Proceeds
(Assumes Early Termination)
Debt Service
Year

Equipment

Install.

Balloon

Sale Rent

Early Term.

Pretax

Ending
11/28/93

Purchase
($122,415,762)

Bank Loan
$14,995,931

Note
($364,289)

Note
$19,990,512

Receivable
$87,793,608

Penalty
-0-

Cash Flow
-0-

12/31/93

-0-

(15,102,340)

-0-

-0-

-0-

-0-

($15,102,340)

12/31/94
12/31/95

-0-0-

-0-0-

-0-0-

-0-0-

-0-0-

-0-0-

-0-0-

12/31/96
Total

-0(122,415,762)

-0(364,289)

(25,582,611)
(5,592,099)

-087,793,608

$44,619,804
44,619,804

19,037,193
3,934,853

-0(106,409)

- 21 Chart 7
Computation of Partnership Taxable Income Without Estimated Residual Value Proceeds
(Assumes Early Termination)
Interest Expense
Year

Sale Rent

Depreciation

Ending

Receivable
$87,793,608

Deduction
-0-

Bank Loan
($106,409)

11/28/93

Install.

Balloon

Early Term.

Taxable

Note
($364,289)

Note
($300,982)

Penalty
-0-

Income (Loss)
$87,021,928

12/31/93

-0-

($6,120,788)

-0-

-0-

(305,514)

-0-

(6,426,302)

12/31/94

-0-

(46,517,990)

-0-

-0-

(1,932,141)

-0-

(48,450,131)

12/31/95

-0-

(27,910,794)

-0-

-0-

(2,113,390)

-0-

(30,024,183)

12/31/96

-0-

(41,866,191)

-0-

-0-

(940,072)

$25,926,467

(16,879,796)

Total

87,793,608

122,415,762

(106,409)

(364,289)

(5,592,099)

25,926,467

(14,758,484)

Chart 8
Computation of Partnership Cash Flow Without Estimated Residual Value Proceeds
(Assumes Early Termination)
Debt Service
Year

Equipment

Install.

Balloon

Sale Rent

Early Term.

Pretax

Ending
11/28/93

Purchase
($122,415,762)

Bank Loan
$14,995,931

Note
($364,289)

Note
$19,990,512

Receivable
$87,793,608

Penalty
-0-

Cash Flow
-0-

12/31/93

-0-

(15,102,340)

-0-

-0-

-0-

-0-

($15,102,340)

12/31/94
12/31/95

-0-0-

-0-0-

-0-0-

-0-0-

-0-0-

-0-0-

-0-0-

12/31/96
Total

-0(122,415,762)

-0(364,289)

(25,582,611)
(5,592,099)

-087,793,608

$25,926,467
25,926,467

343,856
(14,758,484)

-0(106,409)

- 22 Chart 9
Computation of U.S. Company Taxable Income, Tax Savings, and Cash Flow With Estimated Residual Value Proceeds
(Assumes Full Term)
Cash Flow
Taxable Income

Share of

Preferred Stock

Year

From

Taxes

Partnership

Dividend/

Pre-Tax

Taxes

After-Tax

Ending

Partnership

(Paid) Saved

Cash Flow

Redemption

Cash Flow

(Paid) Saved

Cash Flow

12/31/93

($6,297,776)

$2,376,151

($14,800,293)

-0-

($14,800,293)

$2,376,151

($12,424,142)

12/31/94

(47,481,128)

17,914,630

-0-

($48,966)

(48,966)

17,914,630

17,865,663

12/31/95

(29,423,700)

11,101,562

-0-

(48,966)

(48,966)

11,101,562

11,052,596

12/31/96
12/31/97

470,533
5,847,566

(177,532)
(2,206,287)

14,274,047
8,923,231

(48,966)
(48,966)

14,225,081
8,874,265

(177,532)
(2,206,287)

14,047,549
6,667,978

12/31/98

-0-

-0-

-0-

(661,045)

(661,045)

-0-

Total

(76,884,505)

29,008,524

8,396,985

(856,910)

7,540,074

29,008,524

(661,045)
36,548,598

Chart 10
Computation of U.S. Company Taxable Income, Tax Savings, and Cash Flow Without Estimated Residual Value Proceeds
(Assumes Full Term)
Cash Flow
Share of

Preferred Stock

Year

Taxable Income
From

Taxes

Partnership

Dividend/

Pre-Tax

Taxes

After-Tax

Ending

Partnership

(Paid) Saved

Cash Flow

Redemption

Cash Flow

(Paid) Saved

Cash Flow

12/31/93

($6,297,776)

$2,376,151

($14,800,293)

-0-

($14,800,293)

$2,376,151

($12,424,142)

12/31/94

(47,481,128)

17,914,630

-0-

($48,966)

(48,966)

17,914,630

17,865,663

12/31/95

(29,423,700)

11,101,562

-0-

(48,966)

(48,966)

11,101,562

11,052,596

12/31/96
12/31/97

470,533
865,445

(177,532)
(326,533)

14,274,047
3,941,110

(48,966)
(48,966)

14,225,081
3,892,144

(177,532)
(326,533)

14,047,549
3,565,611

12/31/98

-0-

-0-

-0-

(661,045)

(661,045)

-0-

Total

(81,866,625)

30,888,278

3,414,864

(856,910)

2,557,954

30,888,278

(661,045)
33,446,232

- 23 Chart 11
Computation of U.S. Company Taxable Income, Tax Savings, and Cash Flow With Estimated Residual Value Proceeds
(Assumes Early Termination)
Cash Flow
Taxable Income

Share of

Preferred Stock

Year

From

Taxes

Partnership

Dividend/

Pre-Tax

Taxes

After-Tax

Ending

Partnership

(Paid) Saved

Cash Flow

Redemption

Cash Flow

(Paid) Saved

Cash Flow

12/31/93

($6,297,776)

$2,376,151

($14,800,293)

-0-

($14,800,293)

$2,376,151

($12,424,142)

12/31/94

(47,481,128)

17,914,630

-0-

($48,966)

(48,966)

17,914,630

17,865,663

12/31/95

(29,423,700)

11,101,562

-0-

(48,966)

(48,966)

11,101,562

11,052,596

12/31/96
12/31/97

1,440,292
-0-

(543,422)
-0-

18,319,471
-0-

(48,966)
(48,966)

18,270,504
(48,966)

(543,422)
-0-

17,727,082
(48,966)

12/31/98

-0-

-0-

-0-

(661,045)

(661,045)

-0-

Total

(81,762,312)

30,848,920

3,519,177

(856,910)

2,662,267

30,848,920

(661,045)
33,511,187

Chart 12
Computation of U.S. Company Taxable Income, Tax Savings, and Cash Flow Without Estimated Residual Value Proceeds
(Assumes Early Termination)
Cash Flow
Share of

Preferred Stock

Year

Taxable Income
From

Taxes

Partnership

Dividend/

Pre-Tax

Taxes

After-Tax

Ending

Partnership

(Paid) Saved

Cash Flow

Redemption

Cash Flow

(Paid) Saved

Cash Flow

12/31/93

($6,297,776)

$2,376,151

($14,800,293)

-0-

($14,800,293)

$2,376,151

($12,424,142)

12/31/94

(47,481,128)

17,914,630

-0-

($48,966)

(48,966)

17,914,630

17,865,663

12/31/95

(29,423,700)

11,101,562

-0-

(48,966)

(48,966)

11,101,562

11,052,596

12/31/96
12/31/97

(16,879,179)
-0-

6,368,514
-0-

-0-0-

(48,966)
(48,966)

(48,966)
(48,966)

6,368,514
-0-

6,319,548
(48,966)

12/31/98

-0-

-0-

-0-

(661,045)

(661,045)

-0-

(661,045)

Total

(100,081,783)

37,760,857

(14,800,293)

(856,910)

(15,657,204)

37,760,857

22,103,653

- 24 Ms.
September

Grossman

reviewed

Projections

the

September

specifically

Projections.

forecasted

that:

The
(1)

If

Comdisco exercised an early termination option under the lease, the
partnership would get a pretax return of 9.0 percent, and RD
Leasing would get a pretax return of 6.6 percent and an after-tax
return of 101.5 percent; and (2) if Comdisco exercised a final
termination option under the lease, the partnership would get a
pretax return of 15.1 percent, and RD Leasing would get a pretax
return of 14.0 percent and an after-tax return of 99.5 percent.
A copy of the M&S appraisal report dated September 28, 1993,
was given to Ms. Grossman.

CIG provided two additional appraisal

reports, also dated September 28, 1993, one from Manufacturers’
Appraisal

Co.

(MAC)

and

the

other

from

Appraisal

Resources

International (ARI).
CIG paid for the M&S, MAC, and ARI appraisals.10

Ms. Grossman

was aware that the residual value forecasts of the IBM mainframe
computers in the M&S, MAC, and ARI appraisal reports were higher
than those of industry publishers, such as Daley Marketing Corp.
(DMC), International Data Corp. (IDC), and the Gartner Group.
the basis

of

her

own

experience,

Ms.

forecasts

of

IDC

and

the

Group

Gartner

Grossman
tended

believed
to

be

On
that

overly

conservative.

10

According to Ms. Grossman, Ms. Ortmann, Mr. Renner, and
petitioners’ expert Thompson Ryan, it is common for the packager
of a leasing transaction (here, CIG) to pay the appraisal fees.

- 25 The following reflects the projected residual values of the
equipment at the early and final termination dates, as set forth in
the M&S, MAC, and ARI appraisal reports:

Early termination
Final termination

M&S

MAC

ARI

$44,275,948
25,418,982

$48,442,600
34,257,000

$45,334,670
26,769,965

Ms. Grossman provided copies of the three appraisal reports to
NEFI’s attorneys, Messrs. Beadie and Steffen.
Ms. Grossman discussed the proposed returns of the transaction
with Mr. Vandermark, who in turn discussed them with Mr. Thornton
(Norwest’s chief financial officer).

Mr. Thornton subsequently

approved the transaction.
D.

The Foreign Investors

As outlined in the materials provided to Norwest in June 1993,
CIG had discussions with potential Swiss investors, Hans Humbel and
Egon Riesterer, regarding the possibility of their involvement in
a

sale-leaseback

transaction.

Messrs.

Humbel

and

Riesterer

proposed to form an entity called Intared for this purpose.

On

September 14, 1993, Comdisco sent Ms. Grossman and Faegre & Benson
copies

of

“Articles

Liability Company”.
and

Riesterer,

of

Organization

for

Intared

I,

Limited

Comdisco’s negotiations with Messrs. Humbel

however,

terminated

in

September

1993

because

Comdisco was unwilling to sign the tax indemnity agreement they
had proposed.

Immediately thereafter, CIG sought other foreign

investors to complete the transaction.

- 26 Richard Temko is an American attorney with an office in
Brussels, Belgium. CIG’s executive vice president (Mr. Snyder) was
acquainted with Mr. Temko.

Baudouin Parmentier and Frederic de la

Barre d’Erquelinnes are citizens and residents of Belgium.11

Mr.

Temko introduced Mr. Parmentier to Mr. Snyder, and Mr. Parmentier
engaged Mr. Temko as his legal adviser to represent him in the
transactions at issue in this case.
On September 15, 1993, Mr. Snyder sent a memorandum (by
facsimile)

to

Mr.

Temko

describing

a

possible

cross-border

equipment leasing transaction, along with flowcharts, in which Mr.
Parmentier would exchange an interest in a limited liability
company (ultimately, Andantech) for preferred stock to be issued by
a “U.S. Company” (ultimately, the preferred stock of RD Leasing).
The next day, although negotiations were ongoing with NEFI, Mr.
Snyder sent a second memorandum and summary sheet to Mr. Temko,
which stated that “No U.S. company has made any commitment to enter
into the exchange * * * and there can be no assurance any such U.S.

11

Neither Mr. Parmentier nor Mr. de la Barre
d’Erquelinnes was subject to our jurisdiction, and neither
appeared at trial. However, Mr. Parmentier agreed to be deposed
on May 4, 2000 (and to be interviewed on May 5, 2000), in
Brussels. The parties stipulated that had Mr. Parmentier
testified at trial, his testimony would be as set forth in the
transcript (including exhibits) of his May 4, 2000, deposition,
and the transcript (including exhibits) of his May 5, 2000,
interview.
We have examined the transcripts of Mr. Parmentier’s
deposition and interview and find many of his statements are
unsupported by other evidence in the record.
Mr. de la Barre d’Erquelinnes was neither deposed nor
interviewed.

- 27 company

will

be

found.”

Mr.

Parmentier

was

interested

in

participating in the transaction but was concerned about his
potential tax liability, as well as the financial risk.
On September 17, 1993, Mr. Temko sent a letter (by facsimile)
from Mr. Parmentier to Comdisco “confirming the terms upon which he
and his co-investor are prepared to participate in the proposed
transaction.”
letter.

Mr. Temko requested that Comdisco countersign the

Mr. Parmentier’s conditions included assurances from

Comdisco that if the transaction did not proceed as reflected in
the flowcharts, then Mr. Parmentier and his partner could (1)
promptly recover their $200,000 investment, (2) withdraw from
Andantech at no expense, (3) incur no potential liability for
Andantech debts, and (4) incur no potential liability in connection
with managing Andantech. Further, Mr. Parmentier asked Comdisco to
provide assurances that he would be able to exchange his interest
for preferred stock on the basis described in the flowcharts and
realize

the

full

value

of

the

preferred

stock

“without

any

significant risk of impairment”. Mr. Snyder advised Mr. Parmentier
that Comdisco could not make the requested assurances. However, by
letter dated September 24, 1993, Mr. Snyder confirmed to Mr.
Parmentier:
there will be no impediment to the sale of the preferred
shares at any time such a sale should be desired. (It
would be appreciated, from a tax point of view, if no
sale were arranged for one year, but no such legal
restriction would exist.)
Let me also confirm that, if the U.S. Company

- 28 defaulted on dividends (or redemption), the preferred
shareholder(s) would take over voting control of U.S.
Company. This, in turn, would trigger the “excess loss
account” of U.S. Company (that is, the excess of tax
losses previously claimed from this transaction over the
parent company's investment in the U.S. Company) as
immediate taxable income of the parent. (This would be
a disaster since it plans to never have to trigger the
excess loss account). * * *
On September 25, 1993, Barbara Spudis with Baker & McKenzie
faxed to the firm’s Amsterdam office an urgent request for answers
to questions posed by Mr. Temko.

The fax stated in part:

The client [Comdisco] is planning to close the
transaction involving the LLC on Tuesday, September 28,
1993. At the last minute, the two original investors
(Swiss individuals) in the transaction appear to have
backed out, and now the client is attempting to replace
them with two Belgian individuals. In order to do so, we
are attempting to describe the entire transaction and
satisfy their counsel as to the minimal risks associated
with the transaction on a rush basis. * * *
*

*

*

*

*

*

*

To give you more information about the transaction
I am attaching a description of the facts which was
prepared when Swiss involvement was contemplated. * * *
The
entire
transaction
is
expected
to
involve
approximately $120 million. Basically, the individuals
forming the company are involved for two months during
which the income allocation occurs and then the interest
is transferred to the U.S. corporate investor who reaps
the benefit of ongoing depreciation deductions.
IV.

Formation of Andantech and the Sale-Leaseback (Appendixes A,
B, and C)
Andantech’s articles of organization were signed on September

25, 1993, by Ms. Spudis and Regina Howell, also of the Baker &
McKenzie law firm, and the certificate of organization was issued
by the Wyoming secretary of state on September 27, 1993.

- 29 On September 27, 1993, Mr. Snyder, Ms. Ortmann, and Mr.
Trznadel flew to Minneapolis to meet with Messrs. Beadie and
Steffen (NEFI’s attorneys) to discuss the “red-lined drafts” of the
documents. During the meeting, Messrs. Beadie and Steffen provided
CIG with their changes to the drafts.
On September 27, 1993, Mr. Parmentier contributed $196,000 to
the capital of Andantech (Mr. Parmentier borrowed the entire amount
from Banque Internationale de Luxembourg), and Mr. de la Barre
d’Erquelinnes contributed $4,000 to the capital of Andantech (the
source of

funds

for

Mr.

de

la

Barre

d’Erquelinnes’s

contribution is not reflected in the record).

capital

Andantech retained

N.V.O. Computerleasing B.V. (NVO), a Dutch corporation directed by
Nicholas van Onselen, as its first manager.12

A Dutch corporation

was chosen to avoid conducting any business activity in the United
States or Belgium.
The operating agreement of Andantech, dated September 28,
1993,

provided

for

a

priority

return

for

d’Erquelinnes (or his successor in interest).

Mr.

de

la

Barre

Specifically, the

agreement provided that if, at the time of a distribution from the
partnership,

Mr.

de

la

Barre

d’Erquelinnes

had

made

capital

contribution other than his initial capital contribution of $4,000,
then distributions were to be made first to him in an amount equal
to

his

12

priority

return

(6

percent

of

his

unreturned

capital

In subsequent years, its managers were James Fetzer and
Andrew Rupprecht, NEFI employees.

- 30 compounded monthly) plus his unreturned capital.
would

then

be

made

unreturned capital.

to

Mr.

Parmentier

to

the

Distributions
extent

of

his

Any remaining amount would be distributed

among the members in proportion to their percentage interests.
Mr. Snyder did not disclose the identity of the foreign
investors to Ms. Grossman or to other NEFI representatives, nor did
he disclose the identity of the U.S. company to Mr. Parmentier.

In

October or November 1993, Ms. Grossman learned that Mr. Parmentier
was a partner in Andantech; in November 1993, Messrs. Steffen and
Beadie learned Mr. Parmentier’s identity.
On September 28, 1993, Andantech and Comdisco executed an
“Equipment

Purchase

Agreement”

(the

purchase

agreement),

an

“Equipment Lease” (the equipment lease), and other documents, which
memorialized the sale-leaseback of 40 IBM mainframe computers (the
equipment) then owned by Comdisco.

At the time the purchase

agreement was executed, the equipment was under lease to various
end users.

Pursuant to the purchase agreement, the equipment was

sold subject to the user leases and liens in favor of different
Comdisco lenders.
A.

The Purchase Price

The purchase price for the equipment was $122,415,762; the
purchase price was paid: (1) $14,995,931 in cash, which Union Bank
of Switzerland (UBS) lent to Andantech (the bank loan); and (2) the
$107,419,831 balance, by Andantech’s notes, consisting of (i) a
series of nine junior nonrecourse balloon notes (junior promissory

- 31 notes

2a-2i,

referred

to

as

the

balloon

notes)

aggregating

$19,990,51213 (the balloon notes, documenting the balloon loan), and
(ii) a junior recourse note in the amount of $87,429,31914 (the term
note, documenting the term loan). The bank loan, the balloon loan,
and the term loan all were tied to the equipment lease.
B.

The Equipment Lease

Immediately after purchasing the equipment, Andantech leased
such equipment to Comdisco pursuant to the equipment lease; this
was a net lease.

The equipment consisted of 40 IBM mainframe

computers and associated ancillary equipment.

There were nine

different models–-four were IBM 9121s and five were IBM 9021s (the
IBM 9021s were larger and more powerful than the IBM 9121s).

The

equipment lease separated the equipment into nine categories (A
through I) by model type.

Equipment in categories A through D

included the IBM 9121s and equipment in categories E through I
included the IBM 9021s.

The term of the equipment lease varied

from 41 to 47 months, depending upon the category of equipment.
During the term of the lease, Comdisco could, at its expense,
add or install upgrades on the equipment.

Any upgrade did not

13

Interest accrued on the principal at 9 percent per
annum, compounded monthly. Accrued interest was payable at
maturity.
14

Principal and interest were payable in monthly
installments equal to the monthly rent due from Comdisco before
the early termination date under the lease. Interest was payable
on the principal at 5 percent per annum, compounded monthly,
subject to any increase in rent as provided in the lease.

- 32 become an accession to the equipment and did not become the
property of Andantech.
Comdisco had an option (the final termination option) to
purchase the equipment at the end of the term of the equipment
lease at market value (as defined in the equipment lease).

If

Comdisco installed any upgrades and did not exercise the final
termination option, Comdisco was required to either remove the
upgrade or consent to Andantech’s sale or re-lease of the equipment
with

the

upgrade.

If,

after

termination

of

the

lease,

the

equipment with one or more upgrades was sold or re-leased to a
party other than Comdisco, Andantech would receive the portion of
the proceeds determined by multiplying the amount of the proceeds
by a fraction, the numerator of which would be the fair market
value of the equipment without the upgrades as of the date of the
sale or re-lease and the denominator of which would be the fair
market value of the equipment with the upgrades as of such date.
Comdisco was limited in its ability to selectively exercise
the final termination option.

If Comdisco elected to exercise the

final termination option for any of the equipment in categories A
through D, it had to do so for all equipment in those categories.
Similarly, if Comdisco elected to exercise the final termination
option for any of the equipment in categories E through I, it had
to do so for all equipment in those categories.
Comdisco also had an option (the early termination option) to
terminate the equipment lease with respect to each category of

- 33 equipment

(and

to

purchase

the

equipment)

on

certain

early

termination dates by paying to Andantech an amount equal to an
“early termination supplement” specified in the equipment lease for
that category of equipment plus the greater of (i) the then value
of the equipment in that category or (ii) the principal and accrued
interest

on

the

balloon

note

for

that

category.

The

early

termination option was limited in a manner identical to the final
termination option; i.e., if Comdisco elected to exercise the early
termination option for any of the equipment in categories A through
D, it had to do so for all such equipment.

Similarly, if Comdisco

elected to exercise the early termination option for any of the
equipment in categories E through I, it had to do so for all such
equipment.
Comdisco’s early termination option was subject to a further
restriction in that, unless the UBS bank loan (secured in part by
the rent

due

after

the

early

termination

date)

was

prepaid,

Comdisco could not exercise the early termination option without
Andantech's approval.

The purchase price, termination date, early

termination

date,

termination

supplement

follows:

early
of

termination
the

stated

equipment

by

value,

and

category

early

were

as

- 34 Computation of Fair Market Value Sales Price and Early Termination Values & Supplements
Lease
Type/Model/

List

FMV

Early Termination

Sale

Stated Value

Category

(LP)

% of LP

(SP)

Date

Mos.

Date

% of SP

Amount

% of SP

Amount

9021/720/E

$35,412,247

18%

$6,374,205

2/27/97

41

5/27/96

21.59%

$1,376,191

0.28%

$17,848

9021/740/F

12,336,045

36

4,440,976

2/27/97

41

5/27/96

20.00

888,195

0.28

12,435

9021/820/G

68,624,690

36

24,704,888

2/27/97

41

5/27/96

20.00

4,940,978

0.28

69,174

9021/860/H

40,808,478

36

14,691,052

2/27/97

41

5/27/96

20.00

2,938,210

0.28

41,135

9021/900/I

139,926,914

36

50,373,689

2/27/97

41

5/27/96

20.00

10,074,738

0.28

Total 9021

297,108,375

100,584,810

20,218,312

141,046
281,638

9121/260/A

4,637,115

53

2,457,672

7/27/97

46

9/27/96

23.23

570,917

0.28

6,881

9121/320/B

18,186,545

49

8,911,407

8/27/97

47

10/27/96

24.72

2,202,900

0.29

25,843

9121/440/C

6,923,363

49

3,392,448

8/27/97

47

10/27/96

24.72

838,613

0.29

9,838

9121/480/D

14,427,399

49

7,069,425

8/27/97

47

10/27/96

24.72

1,747,562

0.29

20,501

Total 9121

44,174,422

21,830,952

5,359,992

63,063

Total all models

341,282,796

122,415,762

$25,578,304

344,701

- 35 Rents payable under the equipment lease before the early
termination dates were subject to periodic adjustments to the
extent that prevailing market rates during the equipment lease term
increased or decreased from time to time above or below the rates
that were reflected in the original rent schedule.

Comdisco had

the right, on any rent payment date that occurred more than 5
months after the commencement of the equipment lease, to prepay (on
a present value basis) certain of the then-remaining installments
of rent.
Pursuant to the terms of the equipment lease and the term
loan, for each category of the equipment, rents due to Andantech
from Comdisco were equal to the payments under the term loan due
from Andantech to Comdisco before the early termination date.
The leases with the end users were unaffected by the equipment
lease.

When the initial subleases with the end users expired,

Comdisco had the right to re-lease the equipment.
Comdisco

agreed

to

indemnify

Andantech

from

and

against

certain taxes imposed on Andantech (or its members) as a result of
the sale, purchase, or ownership of the equipment, the payment of
rents, and other factors.

The indemnified taxes included State

sales and property taxes but did not include any Federal taxes.
Comdisco also agreed to indemnify Andantech against Federal
withholding taxes on rents or on income from the sale of any right
to receive rents; the indemnity was transferable to the benefit of
any

purchaser,

lender,

or

other

assignee

of

Andantech.

- 36 Additionally, Comdisco agreed to indemnify Messrs. Parmentier and
de la Barre d’Erquelinnes from Federal income taxes with respect to
the rents, proceeds from the sales of rents, or proceeds from the
sale of the equipment, provided (1) they did not engage in any
activities in the United States, and (2) Andantech, Mr. Parmentier,
and Mr. de la Barre d’Erquelinnes did not maintain a permanent
establishment in the United States.
Comdisco had the right to substitute a replacement computer
(replacement equipment) for a leased computer, but only if the
sublease (to an end user) of the computer terminated and a person
unrelated to Comdisco (such as an end user) made a bona fide offer
to purchase the computer. In that event, Andantech (as lessor) had
the right to request reasonable documentation from Comdisco before
transferring title pursuant to a bill of sale.
equipment

did

not

have

the

same

model

If the replacement

number

as

the

leased

computer, then the replacement equipment had to have a then value
and an estimated residual value (supported by appraisals provided
by Comdisco), as well as a remaining useful life, at least as great
as those of the substituted computer.
C.

The Bank Loan

UBS made a $14,995,931 bank loan to Andantech for the cash
portion of the purchase price. Denis Campbell, the account manager
at UBS who managed Comdisco’s account, worked on the bank loan.
UBS had been the lender in four prior Comdisco leveraged saleleaseback transactions, and Mr. Campbell had worked on all of those

- 37 loans.
Initially, the transaction which is the subject of this
litigation was to involve Intared I (the entity formed by potential
Swiss investors Hans Humbel and Egon Riesterer).

As of September

23, 1993, Mr. Campbell was evaluating the transaction with Intared
I.

By September 25, 1993, however, the Swiss investors had pulled

out of the deal, and thereafter, Andantech, with Mr. Parmentier as
the member holding the largest interest, was to be the borrower.
On September 28, 1993 (at the time the leveraged sale-leaseback
transaction was scheduled to close), a UBS loan officer in New York
(David Bawden) refused to approve the loan to Andantech.15

Mr.

Bawden requested references as to Mr. Parmentier’s character.

Mr.

Campbell then contacted UBS’s leasing affiliate in Switzerland,
which vouched for Mr. Parmentier’s character.

On September 30,

1993, UBS made the bank loan by wire transferring $14,995,931 to
Comdisco on Andantech’s behalf in payment of the purchase price of
the equipment.
The bank loan was for a term of 47 months; however, the Bank
Note contained a mandatory payment acceleration clause in the event
3 percent or more of the ownership interest in Andantech was
transferred.
within 3

15

UBS anticipated that the bank loan would be repaid

months,

inasmuch

as

previous

loans

made

in

similar

UBS wired $14,995,931 to Comdisco on Sept. 28, 1993,
but the same amount was wired back from Comdisco to UBS on the
same day.

- 38 Comdisco transactions had been prepaid in that timeframe.
V.

Sale of Comdisco Rents (Appendix D)
On September 29, 1993, and October 13, 1993, Ms. Ortmann sent

Mr.

Beadie

agreement”.

drafts

of

a

“corrected

lease

receivable

purchase

Mr. Beadie reviewed and made handwritten notations on

these drafts.
Michael Zehfuss is the manager for NationsBank in charge of
Comdisco’s account.

In October 1993, he began working on the

transaction in which NationsBank was to purchase a portion of the
rents payable under the lease by Comdisco to Andantech.
NationsBank had established a credit limit (i.e., a limitation
on the extension of credit) of $125 million for Comdisco.

The

proposed purchase of rents would have placed NationsBank’s exposure
(without considering demand deposit overdrafts) at $138 million.
Consequently, the transaction required the approval of numerous
NationsBank

officers.

Because

of

logistical

problems,

final

approval for the transaction was not given until October 27, 1993.
NationsBank’s

records

show

that

the

bank

treated

the

transaction as a loan to Comdisco and anticipated prepayment by
March 28, 1994.

The bank’s records describe the transaction as

follows:
Comdisco has approached NationsBank to provide financing
for a sale/leaseback transaction involving a lease
receivable purchase with Comdisco as the obligor. The
proposed structure is identical to two lease receivable
purchases the Bank funded for Comdisco in September 1991
($10MM related to Astropar L.P) and May 1992 ($35MM
related to Compupar L.P.). Each of these transactions *

- 39 * * generated $168,000 in net interest income for
assuming a short-term, unsecured credit position with
Comdisco * * *.
*

*

*

*

*

*

*

Although
Comdisco
has
historically
prepaid
each
receivable purchase transaction that NationsBank has
funded, the company may elect not to prepay the proposed
purchase. In this situation, NationsBank would hold a 36
month, unsecured loan to Comdisco at 75bp. In electing
not to prepay, Comdisco would reduce its ability to fund
future transactions in the bank market.
*

*

*

*

*

*

*

Based on the credit quality of Comdisco * * * , the
adequate yield * * *, and prepayment history we have
experienced in identical transactions, I recommend
approval of the $88MM TML. * * *
On October 29, 1993, NationsBank purchased from Andantech (on
a nonrecourse basis) a portion of the rents due from Comdisco under
the

equipment

receivable

lease

purchase

for

$87,805,802,

agreement.

pursuant

Pursuant

to

thereto,

the

lease

NationsBank

received “designated rights” that included the right to receive the
rents but not the equipment.
The rents purchased by NationsBank (aggregating $94,109,445)
were those payable pursuant to the equipment lease after October
29, 1993, and before the early termination dates.

Pursuant to a

Consent and Agreement, Comdisco agreed to make payment of the rents
to NationsBank.
Under the terms of the term note for the purchase of the
equipment, Andantech’s sale of the rents to NationsBank accelerated
the term note. Andantech directed NationsBank to wire transfer the

- 40 proceeds for the rent sale ($87,805,802) to Comdisco in payment of
Andantech’s

obligations

to

Comdisco

under

the

term

note.

NationsBank did so, and Comdisco canceled the term note.
VI. Mr. de la Barre d’Erquelinnes’s and Mr. Parmentier’s
Withdrawal From Andantech
A.
Mr. de la Barre d’Erquelinnes’s and Mr. Parmentier’s
Withdrawal of Capital Contributed to Andantech
On November 30, 1993, Mr. Parmentier and Mr. de la Barre
d’Erquelinnes withdrew (in the aggregate) $189,882.89 from the
capital of Andantech.
B.
Transfer of Mr. de la Barre d’Erquelinnes’s Membership
Interest in Andantech to EICI (Appendix E)
Equipment

Investors

Co.,

Inc.

(EICI),

was

organized

on

December 6, 1993, and at all relevant times thereafter validly
existed as a corporation, under the laws of Delaware.

Initially,

Mr. de la Barre d’Erquelinnes was EICI’s sole shareholder; Mr.
Parmentier was EICI’s sole director.
Pursuant

to

an

Assignment

and

Assumption

of

Membership

Interest of Andantech L.L.C., dated December 9, 1993, Mr. de la
Barre d’Erquelinnes transferred his 2-percent membership interest
in Andantech to EICI.

Mr. de la Barre d’Erquelinnes thereafter

withdrew as a member of Andantech, and EICI was admitted.
On

December

28,

1993,

Mr.

de

la

Barre

d’Erquelinnes

transferred his EICI stock to a charitable support trust (the
Trust); thereafter, the Trust was at all relevant times the sole
shareholder

of

EICI.

The

Trust

was

established

in

1988

by

- 41 Comdisco, as settlor, and by Robert Kelman, as sole trustee.

The

beneficiaries of the Trust were various charitable organizations,
and the Trust was a tax-exempt organization.
C.
Transfer of Mr. Parmentier’s Membership Interest to RD
Leasing in Exchange for Preferred Stock (Appendix F)
Mr. Parmentier transferred his 98-percent membership interest
in Andantech to RD Leasing pursuant to an Exchange Agreement dated
December 10, 1993.

RD Leasing issued 6,150 shares of series A

preferred stock (the RD Leasing preferred stock) to Mr. Parmentier
in exchange for his 98-percent membership interest. Mr. Parmentier
thereafter withdrew as a member of Andantech, and RD Leasing was
admitted.
The RD Leasing preferred stock provided for a dividend at the
rate of 6.878 percent.

The 6,150 shares of RD Leasing preferred

stock issued to Mr. Parmentier had a liquidation preference of
$615,000 (plus unpaid dividends).

The 6,150 shares of preferred

stock had a value of 0.5 percent of the equipment’s purchase price
(approximately $122 million).
Mr. Parmentier agreed to hold the RD Leasing preferred stock
for 1 year (i.e., through December 10, 1994).

RD Leasing, however,

was required to maintain a portion of its assets in “permitted
investments”

(low-risk

securities)

sufficient

to

satisfy

the

liquidation preference, including all accrued but unpaid dividends.
RD Leasing had the option to redeem the RD Leasing preferred stock
on or after January 1, 2000, at a price equal to the liquidation

- 42 preference (plus unpaid dividends), provided that RD Leasing had
funds legally available for payment.

The holder of the RD Leasing

preferred stock had the option to require RD Leasing to redeem the
RD Leasing preferred stock on or after January 1, 1999, at a price
equal

to

the

liquidation

preference

(plus

unpaid

dividends),

provided RD Leasing had funds legally available for payment.
The holder of the RD Leasing preferred stock did not have
voting rights, except upon the occurrence of certain specified
voting rights events, as defined in the terms of the RD Leasing
preferred stock.

Such events included the failure to make the

required redemption of the RD Leasing Preferred Stock and the
failure to maintain investment assets at specified levels.

Upon

the occurrence of such an event, the holder of the RD Leasing
preferred stock would have a right, voting with the common stock,
to cast in the aggregate 21 percent of the total votes cast by all
stockholders.
VII. Repayment of Bank Loan (Appendixes F and G)
Mr.

Parmentier’s

transfer

of

his

98-percent

membership

interest in Andantech on December 10, 1993, triggered a mandatory
acceleration of the bank loan.
UBS informed Andantech that the payoff amount on the bank loan
was $15,119,777.60 and requested that this amount be wired on
December 10, 1993, to the account of UBS at the Federal Reserve
Bank in New York.
Andantech received the cash needed to repay the bank loan from

- 43 capital contributions made by RD Leasing and EICI.

Pursuant to a

Capital Contribution Agreement, dated December 10, 1993, RD Leasing
and EICI were obligated to make contributions to the capital of
Andantech in amounts proportionate to their respective membership
interests; accordingly, RD Leasing contributed $14,817,382.05, and
EICI contributed $302,395.55 to Andantech.
RD Leasing received from NEFI the $14,817,382.05 it needed to
contribute to the capital of Andantech.

(NEFI had agreed (in the

Exchange Agreement) that it would purchase 100 additional shares of
common stock in RD Leasing for $14,817,382.05.) EICI borrowed from
UBS the $302,395.55 it needed to contribute to the capital of
Andantech.

The bank records show that Comdisco guaranteed the UBS

loan to EICI.
RD Leasing and EICI made their capital contribution by wiring
$14,817,382.05 and $302,395.55, respectively, directly to UBS’
account in payment of the bank loan.
VIII. Sale of Computer to End User
In April 1994, one of the end users opted to purchase the IBM
9021 computer equipment it subleased from Comdisco.
was one that had been sold to Andantech.
any of the proceeds from that sale.

The computer

Andantech did not receive

Instead, Comdisco elected to

substitute replacement equipment. Comdisco neither provided notice
to

Andantech

that

it

was

exercising

its

right

to

substitute

replacement equipment nor invoked the procedures for substitution
required by the equipment lease.

- 44 The equipment lease imposed an obligation upon Comdisco to
provide Andantech with annual reports, which, among other things,
contained information as to the location of the equipment.

CIG

provided Andantech with location reports relating to the equipment
on March 1, 1994, February 27, 1995, and February 28, 1996.

Ms.

Grossman received these reports.
The 40 mainframe computers in Andantech’s portfolio were
identified by serial number in the location reports. The computers
shown in the reports had the same serial numbers as those that were
on the 1993 bill of sale.

The location of the equipment (and the

sublessee) sometimes changed.

In light of the fact that the CIG

location reports reflected no changes in the serial numbers, Ms.
Grossman was unaware that Comdisco had substituted replacement
equipment for one of the 40 computers that Andantech purchased.
IX.

Comdisco’s Exercise of Early Termination Options
On April 25, 1996, Comdisco informed Andantech that it was

exercising its early termination option to purchase the equipment
in categories E through I (i.e., the IBM mainframes in the 9021
series).

On

May

30,

1996,

Comdisco

received

from

Computer

Information Resources (CIR) an appraisal of the equipment in these
five categories, valuing the computers at $11,444,000.
Ms. Grossman asked Don Oram, an NEFI equipment manager, to
independently investigate the value of the equipment.

After

reviewing several reports (Computer Price Watch and the Gartner
Group reports), on May 27, 1996, Mr. Oram informed Ms. Grossman

- 45 that the value of the equipment in categories E through I was
between $11,600,000 and $12,225,000.
The principal amounts of the balloon notes for categories E
through I (junior promissory notes 2e-2i) were:

$1,083,615;

$699,454; $3,891,020; $2,313,841; and $7,933,856, respectively.
The aggregate principal amount was $15,921,786.
interest at 9 percent, compounded monthly.

The notes bore

The total liability on

the early termination date was $20,222,439.
Ms. Grossman and Mr. Vandermark discussed Comdisco’s exercise
of its early termination option, as well as Comdisco’s belief that
the value of the equipment in categories E through I was less than
the liability for principal and interest on the balloon notes. Mr.
Vandermark was disconcerted to learn that there was a good chance
that RD Leasing would receive nothing for its position in the
lease.
(ARI

On May 30, 1996, Ms. Grossman engaged ARI Propertylink Co.
Propertylink)

to

appraise

the

40

mainframe

computers

comprising the Andantech portfolio as of the early termination
dates. Mary O’Connor (who had appraised the equipment in 1993) was
ARI Propertylink’s appraiser.
On June 5, 1996, ARI Propertylink advised Ms. Grossman that
the value of the equipment was $13,465,000.

The appraisal stated

that the equipment had “eroded” in value more rapidly than had been
anticipated in 1993 because of:
strategy

(i.e.,

increased

(1) A change in IBM pricing

discounting);

(2)

an

increase

in

production of mainframes by IBM; (3) the introduction of new

- 46 products by IBM’s competitors (Amdahl Corp. and Hitachi Data
Systems, Inc.); and (4) the introduction of “CMOS based parallel
architecture” on April 5, 1994.

On June 6, 1996, CIG advised

Andantech that the value of the equipment in categories E through
I inclusive did not exceed the principal plus accrued interest due
on junior promissory notes 2e through 2i.
After analyzing the information received from Mr. Oram and the
ARI PropertyLink appraisal, Ms. Grossman concluded that Andantech
was not entitled to consideration from Comdisco for the equipment
in categories E through I, beyond the cancellation of the balloon
notes

relating

thereto.

Thus,

Andantech

accepted

Comdisco’s

determination that the value of the equipment in categories E
through I did not exceed the principal plus accrued interest on
junior promissory notes 2e through 2i.
On July 2, 1996, Andantech executed a bill of sale for the
equipment in categories E through I to Comdisco.

On July 10,

1996, Comdisco canceled the balloon notes relating to the equipment
in categories E through I (i.e., junior promissory notes 2e-2i).
On August 23, 1996, Comdisco advised Andantech that it was
exercising its early termination option to purchase the equipment
in categories A through D (i.e., the 9121 models).

Comdisco

engaged two additional companies to provide appraisals of the
equipment in category A as of the early termination date.
findings included the following:

The

(1) In its September 23, 1996,

appraisal, Computer Merchants, Inc. (CMI), concluded that the value

- 47 of category A of the equipment was $63,000 (as of September 27,
1996, the early termination date); and (2) in its September 24,
1996, appraisal, CIR concluded that the value of category A of the
equipment was $89,000 (as of September 27, 1996).

Accordingly, on

September 25, 1996, Comdisco advised Andantech that the value of
the category A equipment did not exceed the principal plus accrued
interest due on the corresponding junior promissory note 2a.
On October 3, 1996, Mr. Oram advised Ms. Grossman that the IBM
computers corresponding to equipment in category A had a maximum
value of $56,000, as of September 27, 1996.

Andantech accepted

Comdisco’s conclusion that the value of the equipment in category
A did not exceed the principal plus accrued interest on junior
promissory note 2a. Thereafter, Andantech executed an undated bill
of sale of the equipment in category A to Comdisco.

On October 8,

1996, Comdisco canceled junior promissory note 2a.
Comdisco subsequently engaged CIR and CMI to appraise the
equipment in categories B through D.

On October 21, 1996, CMI

informed Comdisco that the value of the equipment in categories B
through D was $52,000, as of October 27, 1996.

On October 25,

1996, CIR advised Comdisco that the value of the equipment in
categories B through D was $62,000, as of October 27, 1996.

Mr.

Oram advised Ms. Grossman of these findings.
In light of these appraisals, Ms. Grossman requested ARI
PropertyLink

to

update

its

June

4,

1996,

appraisal.

ARI

PropertyLink confirmed its earlier opinion as to the September 27,

- 48 1996, value of the equipment in category A, and as to the October
27, 1996, values of the equipment in categories B,
a

result

of

the

appraisal,

Andantech

C, and D.

accepted

As

Comdisco’s

determination that the value of the equipment in categories B
through D did not exceed the principal plus accrued interest on
three of the balloon notes.

Accordingly, on December 5, 1996,

Andantech executed a bill of sale of the equipment in categories B
through D to Comdisco.

On December 12, 1996, Comdisco canceled

three of the balloon notes.
The three bills of sale that Andantech executed in 1996 (the
1996 bills of sale) conveyed to Comdisco the identical computers
that Andantech had acquired pursuant to the 1993 bill of sale.

The

serial numbers on the 1996 bills of sale were identical to those on
the 1993 bill of sale.
Comdisco never

Thus, the 1996 bills of sale reflect that

replaced

any

of

the

computers

(i.e.,

did

not

substitute a different computer for any of the original Equipment).
As

stated

previously,

the

equipment

lease

provided

that

Comdisco would pay an early termination supplement if it elected to
exercise

its

early

termination

option.

Comdisco

paid

early

termination supplements of $289,076, $57,084, and $7,206. Pursuant
to

Andantech’s

operating

agreement,

Andantech

made

an

early

termination distribution of $353,366 to EICI.
X.

Dissolution of RD Leasing and Andantech
On May 1, 1997, RD Leasing was dissolved.

1997, Andantech was dissolved.

On or about May 29,

- 49 XI.

Andantech’s Federal Income Tax Returns
Andantech filed a Form 1065, U.S. Partnership Return of

Income, for the short tax year beginning September 28, 1993, and
ending December 10, 1993 (the 12/10/93 short period).

On Schedule

K, Partners’ Shares of Income, Credits, Deductions, Etc., of the
return, Andantech reported $86,930,528 of income that included
$86,930,096 of net income from other rental activity ($87,805,801
of gross income from other rental activity and $875,705 of expenses
from other rental activity) and $432 of interest income. Andantech
reported on Schedules K-1, Partner’s Share of Income, Credits,
Deductions,

Etc.,

d’Erquelinnes,
allocated

to

and
Mr.

for

Mr.

Parmentier,

Mr.

de

NEFI

that

$85,191,494

of

the

Parmentier,

$1,738,736

to

Mr.

la

Barre

income
de

la

was

Barre

d’Erquelinnes, and $134 to NEFI.
Andantech also filed a Form 1065 for the short tax year
beginning December 11, 1993, and ending December 31, 1993 (the
12/31/93 short period).

On Schedule L, Balance Sheets, of the

return, Andantech reported $20,459,014 as liability on mortgages,
notes, and bonds payable in 1 year or more.

On Schedule K of the

return, Andantech reported a $2,143,937 loss attributed to a
$2,040,263

depreciation

deduction

and

a

$103,674

interest

deduction.

Andantech reported no gross income from other rental

activity.

Andantech reported on Schedules K-1 that 98 percent of

- 50 the loss was allocated to RD Leasing and 2 percent to EICI.

The

loss allocated

1993

to

RD

Leasing

was

included

in

Norwest’s

consolidated return.
Andantech filed a Form 1065 for the tax year ending December
31,

1994.

On

Schedule

L

of

the

return,

Andantech

reported

$22,378,210 as liability on mortgages, notes, and bonds payable in
1 year or more.

On Schedule K of the return, Andantech reported a

$50,069,397 loss attributed to a $48,150,200 depreciation deduction
and $1,919,197 interest deduction.

Andantech reported no gross

income from other rental activity. Andantech reported on Schedules
K-1 that 98 percent of the loss was allocated to RD Leasing and 2
percent to EICI.

The loss allocated to RD Leasing was included in

Norwest’s 1994 consolidated return.

XII. Respondent’s Determinations
A.

FPAAs for the 1993 Short Years

On January 14, 2000, respondent issued a notice of final
partnership administrative adjustments (FPAA) regarding Andantech’s
12/10/93 short period (the 12/10/93 FPAA).

On January 14, 2000,

respondent also issued an FPAA regarding Andantech’s 12/31/93 short
period (the 12/31/93 FPAA).16
Respondent determined that Andantech’s claimed 12/10/93 short

16

As explained hereinafter, respondent contends that
there is only one 1993 taxable period for Andantech and that
there was no termination of the partnership on Dec. 10, 1993.

- 51 period should be disregarded and all income and deductions for that
period should be reported in Andantech’s 12/31/93 short period. In
the 12/10/93 FPAA, respondent determined that the $86,930,096
income reported should be reduced to zero for the 12/10/93 short
period. In the 12/31/93 FPAA, respondent determined that Andantech
should

have

reported

$2,143,937 loss.

income

of

$87,805,801,

rather

than

the

Respondent increased the gross income for the

sale of the receivable and disallowed all the claimed deductions.
Included with each copy of the 12/10/93 FPAA and the 12/31/93
FPAA was a letter advising each person of his or its right to elect
to have partnership items treated as nonpartnership items pursuant
to section 6223(e).

Neither Mr. Parmentier, Mr. de la Barre

d’Erquelinnes, NEFI, RD Leasing, Norwest, nor EICI filed such an
election.
On April 17, 2000, NEFI and Norwest timely filed a petition
for Andantech’s 12/31/93 short period (docket No. 4277-00).

On

June 6, 2000, EICI timely filed a petition for Andantech’s 12/10/93
short period (docket No. 6348-00).
B.

FPAA for the 1994 Taxable Year

On June 19, 1998, respondent issued an FPAA with regard to
Andantech’s 1994 tax year (the 1994 FPAA).
in

the

1994

Andantech

FPAA

should

that
be

$50,069,397

disallowed.

of

Respondent determined
deductions

Alternatively,

claimed

by

respondent

determined in the 1994 FPAA that the “sale” of the lease receivable

- 52 was a “financing arrangement” and consequently Andantech’s income
should be increased by $34,482,268 for rent payable in 1994.
On

September

21,

1998,

NEFI

and

Norwest

timely

filed

a

petition for Andantech’s 1994 taxable year (docket No. 15532-98).
OPINION
I.

Procedural Issues
At the outset, we deal with two procedural matters. First, we

determine whether for purposes of this litigation the statute of
limitations period under section 6501(a) expired with respect to
the

12/10/93

short

period

and/or

the

12/31/93

short

period.

Second, we determine whether the FPAAs for the 12/10/93 short
period and/or the 12/31/93 short period are valid.
First,

we

turn

to

the

period

of

limitations

matter.

Petitioners acknowledge that the period for assessing a deficiency
in tax under section 6501(a) remains open for RD Leasing and EICI.
They assert, however, that section 6501(a) is inapplicable to
partnership items and affected items.

They maintain that the

period for assessing a deficiency related to partnership items and
affected items is controlled by section 6229(a), and that the
periods within which respondent could issue an FPAA with respect to
Andantech’s 12/10/93 short period and its 12/31/93 short period had
expired under section 6229(a) before the mailing of those FPAAs.
Petitioners’ position is contrary to our holding in RhonePoulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C.
533 (2000), interlocutory appeal dismissed (for lack of appellate

- 53 jurisdiction) and remanded to the Tax Court for further proceedings
on the merits 249 F.3d 175 (3d Cir. 2001).

See also

CC & F W.

Operations Ltd. Pship. v. Commissioner, T.C. Memo. 2000-286, affd.
273 F.3d 402 (1st Cir. 2001).

In Rhone-Poulenc, we stated that

section 6501(a) provides a general period of limitations for
assessing and collecting any tax imposed by the Code.

Section

6229(a) sets forth a minimum period for assessing any income tax
with respect to any person that is attributable to any partnership
item or affected item; this minimum period can be greater than, or
Id. at 540-

less than, the period of limitations in section 6501.
543.
Section

6501

contains

no

exception

attributable to partnership items.
Congress

did

not

create

a

for

deficiencies

In drafting section 6229,

completely

separate

statute

of

limitations for assessments attributable to partnership items. Id.
at 545.

Section 6229 merely supplements section 6501.

CC & F W.

Operations Ltd. Pship. v. Commissioner, supra.
Petitioners concede that under the holding of Rhone-Poulenc
Surfactants

&

Specialties,

L.P.

v.

Commissioner,

supra,

the

limitations period has not expired. They, however, request that we
reconsider

Rhone-Poulenc.

We

decline

to

do

so.

We

hold,

therefore, that the period of limitations for issuing the FPAAs for
both 1993 short periods had not expired at the time the FPAAs were
issued.
Second, we rely upon Wind Energy Tech. Associates III v.

- 54 Commissioner, 94 T.C. 787 (1990), to conclude that issuing an FPAA
during the 120-day period set out in section 6223(d)(1) does not
invalidate an FPAA.

Accordingly, we hold that the FPAAs for the

12/10/93 short period and the 12/31/93 short period are valid.
II.

Whether the Sale-Leaseback Transaction Should Be Respected
We now turn to the substantive issue before us; namely,

whether the sale-leaseback transaction involved should be respected
for Federal tax purposes.
In essence, this case involves the stripping of income from
Andantech’s sale of the Comdisco rents (which income, for tax
purposes, passed through untaxed to Belgian citizens and residents)
and the subsequent use by Norwest (on its consolidated returns for
the

years

at

issue)

of

Andantech’s

losses

from

depreciation

deductions and interest expense related to Andantech’s purchase and
lease of the computer equipment.
A.

Overview of Statutory Framework for the Transactions

We begin our analysis with an overview of the transactions
involved herein, and the statutory provisions and caselaw within
which Comdisco planned the series of transactions that petitioners
and Comdisco assert brought into play nonrecognition provisions of
the Code governing partnerships and corporations, as well as
treaties with foreign governments.

This overview presupposes that

the transactions and entities are to be respected for Federal tax
purposes.
1.

Andantech was organized as a limited liability company,

- 55 intending to be taxed as a partnership.

(Pursuant to sections 701

and 702, a partnership is treated as a flow-through entity for
purposes of Federal income taxation.)

As such, if Andantech is

recognized as a partnership, its items of income, gain, loss,
deduction, and credit passed through to its partners.
2.

A taxpayer is permitted to sell its right to future

income.

If a bona fide sale of future income occurs at arm’s

length and for adequate consideration, then the seller of the
future income is taxed in the year of sale on the amount of
consideration he actually receives and the buyer is taxed on any
excess of income received over his purchase price.

Mapco Inc. v.

United States, 214 Ct. Cl. 389, 556 F.2d 1107, 1110 (1977).
Petitioners assert that the sale-leaseback transaction between
Andantech and Comdisco should be respected, and Andantech’s sale of
the Comdisco rents to NationsBank should be considered a bona fide
arm’s-length sale for adequate consideration.

On this premise,

Andantech contends it is deemed to recognize gain from the sale in
1993, the year of the sale, and the income passes through to
Andantech’s partners (i.e., Messrs. Parmentier and de la Barre
d’Erquelinnes/EICI).
3.

Pursuant to section 708(b)(1)(B), a partnership is deemed

terminated (for Federal tax purposes) upon the sale or exchange of
50 percent or more of the total interest in the partnership’s
capital

and

petitioners

profits
assert

within
the

a

12-month

partnership

is

period.
to

be

Here,

if

respected,

as
Mr.

- 56 Parmentier’s contribution of his 98-percent interest in Andantech
to RD Leasing in exchange for RD Leasing’s preferred stock caused
a deemed termination of the partnership. (For convenience, we will
refer to

the

partnership

prior

to

the

deemed

termination

as

Andantech-Foreign.)
If the sale or exchange of a partner’s interest in the
partnership results in the deemed termination of the partnership,
then pursuant to section 708(b)(1)(B), the partnership’s taxable
year is deemed closed upon the triggering sale or exchange.
706(c)(1).
and

the

Sec.

Consequently, if as petitioners assert the partnership

sale

of

the

rent

receivables

are

to

be

respected,

Andantech-Foreign’s taxable year is deemed closed on December 10,
1993, the date Mr. Parmentier exchanged his 98-percent interest in
the partnership for the preferred stock, and Andantech-Foreign is
required to include the income from the sale of the Comdisco rents
on its return for the 12/10/93 short period.

That income would

then

and

pass

through

to

Messrs.

Parmentier

de

la

Barre

d’Erquelinnes/EICI.
4.

Section 894 provides that, to the extent required by any

treaty obligation of the United States, income (of any kind) is
exempt from U.S. taxation and excluded from gross income.

Here,

petitioners assert that any income from the sale of the Comdisco
rents that passes through to Messrs. Parmentier and de la Barre
d’Erquelinnes would be exempt from U.S. taxation pursuant to the
treaty between the United States and Belgium. Further, petitioners

- 57 assert, pursuant to section 351(a), no gain is recognized by Mr.
Parmentier on the exchange of his interest in Andantech for the
preferred stock of RD Leasing.17

Moreover, petitioners assert,

pursuant to section 358(a), Mr. Parmentier’s basis in his RD
Leasing preferred stock is the same as that in his 98-percent
interest in Andantech that was transferred to RD Leasing.

And

pursuant to section 362(a)(1), RD Leasing’s basis in the 98-percent
Andantech interest received from Mr. Parmentier is equal to Mr.
Parmentier’s basis in the partnership interest immediately before
the partnership-interest preferred-stock exchange (approximately
$119 million18).

17

Sec. 351(a) provides:

SEC. 351(a). General Rule.–-No gain or loss shall
be recognized if property is transferred to a
corporation by one or more persons solely in exchange
for stock in such corporation and immediately after the
exchange such person or persons are in control (as
defined in section 368(c)) of the corporation.
Sec. 368(c) defines control as:
SEC. 368(c). Control Defined.–-* * * ownership of
stock possessing at least 80 percent of the total
combined voting power of all classes of stock entitled
to vote and at least 80 percent of the total number of
shares of all other classes of stock of the
corporation.
18

Mr. Parmentier’s basis in his partnership interest, if
computed according to petitioners’ contentions under secs. 705(a)
and 752, would be as follows:
Initial contribution
Plus
Share of UBS loan ($14,995,931 x 98%)

$196,000
14,696,012
(continued...)

- 58 5. Petitioners assert that a termination of Andantech-Foreign
occurred, see supra pp. 57-58, resulting in a deemed distribution
of partnership property to new and continuing partners (i.e., RD
Leasing and EICI) and that there was a deemed recontribution of the
property to a newly formed partnership.

18

Sec. 1.708-1(b)(1)(iv),

(...continued)
Share of balloon notes ($19,990,512 x 98%)
19,590,702
Share of term note ($87,429,319 x 98%)
85,680,733
Share of income
85,191,494
Less
Share of term note Paid ($87,429,319 x 98%) (85,680,733)
Share of withdrawal ($189,883 x 98%)
(186,085)
Basis
119,488,123

- 59 Income Tax Regs.

(For convenience, we will refer to the new

partnership as Andantech-US.)
Continuing,
recontribution

of

petitioners
the

assert

property

to

that,

upon

Andantech-US,

the

deemed

Andantech-US

acquired a substituted basis in the property equal to the adjusted
basis of the property in the hands of the contributing partners, RD
Leasing and EICI.

Secs. 732, 723.

Thus, according to petitioners, the effect of the deemed
termination of Andantech-Foreign is that (1) no gain or loss is
recognized to RD Leasing or EICI under section 731(a) or to
Andantech-US under section 731(b), (2) Andantech-US has a basis in
the computer equipment of $119 million, and (3) RD Leasing has a
basis of $119 million in its 98-percent interest in Andantech-US.
6.

Section 167 provides for a depreciation deduction with

respect to property used in a taxpayer’s trade or business or held
for

the

production

of

income

by

a

taxpayer.

Section

168

establishes the appropriate depreciation method, recovery period,
and convention for tangible property.

(The depreciation deduction

allows a taxpayer to recover the cost of the property used in a
trade or business or for the production of income.

United States

v. Ludey, 274 U.S. 295, 300-301 (1927); Durkin v. Commissioner, 872
F.2d 1271, 1276 (7th Cir. 1989), affg. 87 T.C. 1329 (1986).)

Here,

according to petitioner, Andantech-US’s basis in the computer
equipment was $119 million, and Andantech-US properly reported the
depreciation deduction on its partnership tax returns for the

- 60 10/31/93 short year and for 1994. Additionally, petitioners assert
that Andantech-US properly reported an interest expense deduction
under section 163(a) on its partnership tax returns for those
years.

Ultimately, RD Leasing and EICI claimed these interest and

depreciation deductions as partners of Andantech-US.
B.

Positions of the Parties

Petitioners

assert

that

the

sale-leaseback

transaction

involved herein was a genuine multiple-party transaction, with
economic substance that was compelled or encouraged by business
realities, and was not shaped solely by tax-avoidance features. As
such, petitioners assert that the transaction should be respected
for Federal tax purposes because it satisfies the test of Frank
Lyon Co. v. United States, 435 U.S. 561, 583-584 (1978).
On the other hand, respondent contends that Comdisco devised
a transaction designed to allow foreign parties (not subject to
U.S. tax) to realize tax-free rental income, while allowing a U.S.
company to report significant tax deductions related to that rental
income.

Here, approximately $87.8 million in rental income was

shifted (i.e., stripped) to non-U.S. taxpayers through AndantechForeign, while Norwest, a U.S. taxpayer (for cash and preferred
stock totaling approximately $15.4 million), received, through RD
Leasing and Andantech-US, more than $100 million of depreciation
and interest
rental

deductions

income.

without

Respondent

recognizing

contends

that

any

corresponding

the

“prearranged”

transaction at issue should not be respected for Federal tax

- 61 purposes because it had no nontax business purpose and lacked
economic substance.
C.

Analysis

The focus of each party’s position, in essence, is in terms of
substance over form and related (e.g., sham and step transaction)
judicial doctrines.

Under these judicial doctrines, although the

form of a transaction may literally comply with the provisions of
a Code section, the form will not be given effect where it has no
business purpose and operates simply as a device to conceal the
true character of a transaction.
U.S. 465, 469-470 (1935).

See Gregory v. Helvering, 293

“To permit the true nature of a

transaction to be disguised by mere formalisms, which exist solely
to alter tax liabilities, would seriously impair the effective
administration of the tax policies of Congress.”
Court Holding Co., 324 U.S. 331, 334 (1945).

Commissioner v.

Conversely, if the

substance of a transaction accords with its form, then the form
will be upheld and given effect for Federal tax purposes.

See

Blueberry Land Co. v. Commissioner, 361 F.2d 93, 100-101 (5th Cir.
1966), affg. 42 T.C. 1137 (1964).
A transaction may be treated as a sham where (1) the taxpayer
is motivated by no business purpose other than obtaining tax
benefits, and (2) the transaction has no economic substance because
no reasonable possibility of a profit exists. Rice’s Toyota World,
Inc. v. Commissioner, 752 F.2d 89, 91-95 (4th Cir. 1985), affg. on
this issue 81 T.C. 184 (1983).

But a transaction that has a valid

- 62 business purpose and economic substance may still be recast in
order to reflect its true nature. Packard v. Commissioner, 85 T.C.
397, 419-422 (1985).
Substance over form and related judicial doctrines all require
“a

searching

analysis

of

the

facts

to

see

whether

the

true

substance of the transaction is different from its form or whether
the form reflects what actually happened.” Harris v. Commissioner,
61 T.C. 770, 783 (1974).

The issue of whether any of those

doctrines should be applied involves an intensely factual inquiry.
See Gordon v. Commissioner, 85 T.C. 309, 327 (1985); see also Bowen
v. Commissioner, 78 T.C. 55, 79 (1982), affd. 706 F.2d 1087 (11th
Cir. 1983); Gaw v. Commissioner, T.C. Memo. 1995-531, affd. without
published opinion 111 F.3d 962 (D.C. Cir. 1997).
After a thorough review of the record in these consolidated
cases, we find, and thus hold, alternatively, the following:
(1)

Andantech is not a valid partnership and should not be

recognized for Federal tax purposes; more specifically:
(a)

Andantech-Foreign

should

be

disregarded

because

Messrs. Parmentier and de la Barre d’Erquelinnes did not intend to
join together as partners for the purpose of carrying on a

- 63 business; i.e., they did not join together to share in the profits
or losses from Andantech-Foreign’s equipment leasing activity; and
(b)

Andantech-US should be disregarded because EICI did

not intend to join with RD Leasing for the purpose of carrying on
a business; i.e., they did not join together to share in the
profits or losses from Andantech-US’s equipment leasing activity;
(2)
and

de

alternatively, the participation of Messrs. Parmentier
la

Barre

transactions

d’Erquelinnes,

EICI,

and

Andantech

in

the

involved herein should be disregarded under the step

transaction doctrine;
(3)

additionally,

with

respect

to

Andantech,

its

sale-

leaseback transaction with Comdisco was a sham because it (a) was
not

a

true

substance,

multiple-party

(c)

was

not

transaction,

compelled

or

(b)

lacked

encouraged

by

economic
business

realities, and (d) was shaped solely by tax-avoidance features;
(4)

with respect to Norwest and RD Leasing, Andantech’s

sale-leaseback transaction with Comdisco should not be respected
because it lacked business purpose as well as economic substance.
Our reasons for these findings/holding now follow.
1.
Andantech Is Not a Valid Partnership and Is Not
Recognized for Federal Tax Purposes
“A partnership is generally said to be created when persons
join together their money, goods, labor, or skill for the purpose
of carrying on a trade, profession, or business and when there is
community of interest in the profits and losses.”

Commissioner v.

- 64 Tower, 327 U.S. 280, 286 (1946); see also ASA Investerings Pship.
v. Commissioner, 201 F.3d 505, 513 (D.C. Cir. 2000), affg. T.C.
Memo. 1998-305.

When the existence of an alleged partnership is

challenged, the question arises whether the partners truly intended
to join together for the purpose of carrying on business and
sharing in the profits or losses or both.

Commissioner v. Tower,

supra at 286-287. “Business activity” excludes activity whose sole
purpose is tax avoidance. ASA Investerings Pship. v. Commissioner,
supra at 512.
a.
Andantech-Foreign
Should
Be
Disregarded
Because Messrs. Parmentier and de la Barre
d’Erquelinnes Did Not Intend To Join Together for
the Purpose of Carrying On a Business and Sharing
in the Profits or Losses From the Equipment Leasing
Activity
In these consolidated cases, we are convinced that Messrs.
Parmentier and de la Barre d’Erquelinnes did not intend to join
together in order to share in any profit or loss from the business
activity of Andantech-Foreign; namely, the sale and leaseback of
computer equipment. Rather, to the contrary, we are convinced that
Mr. Parmentier’s true business objective was to profit from the
preferred stock of RD Leasing that he expected to receive.
The correspondence between Mr. Parmentier’s attorney, Mr.
Temko, and Comdisco establishes to us that Mr. Parmentier’s sole
concern was with his potential tax liability and financial risk.
Mr. Parmentier wanted assurances that he and Mr. de la Barre
d’Erquelinnes could (1) promptly recover their $200,000 investment,

- 65 (2) withdraw from Andantech at no expense, (3) incur no potential
liability for Andantech debts, and (4) incur no potential liability
in connection with managing Andantech.

Further, Mr. Parmentier

asked Comdisco to provide assurances that he would be able to
exchange his partnership interest for preferred stock on the basis
described in the flowcharts and realize the full value of the
preferred stock “without any significant risk of impairment”.
Comdisco attempted to satisfy Mr. Parmentier, Mr. de la Barre
d’Erquelinnes, and their counsel as to the minimal risks associated
with the transaction.
Messrs. Parmentier and de la Barre d’Erquelinnes contributed
comparably minimal (and borrowed at that) funds ($200,000 in a
purported $122 million transaction) to Andantech-Foreign, which
they withdrew within 3 months.

We are satisfied that Andantech-

Foreign and Messrs. Parmentier and de la Barre d’Erquelinnes were
but mere conduits used by Comdisco and NEFI.

Neither took part in

any decisions regarding the sale and leaseback of the equipment;
rather, all
Comdisco.

of

the

negotiations

took

place

between

NEFI

and

NEFI set the criteria for the end users, set the $122

million amount of the transaction, reviewed the projected cashflow
(which depended on the $15 million investment from Norwest), and
reviewed the documents and instruments for the various transactions
(including the sale of the rent receivables).

- 66 Mr.

Parmentier

was

rewarded

for

participating

in

the

transaction involved herein through the redemption of the RD
Leasing

preferred

activity.

stock,

Further,

we

not
are

through

the

equipment

convinced

that

Mr.

de

leasing
la

Barre

d’Erquelinnes had no intent to profit, and did not profit, from his
participation in any of the transactions.

After withdrawing the

funds he had contributed to Andantech-Foreign, Mr. de la Barre
d’Erquelinnes transferred his 2-percent membership interest in
Andantech-Foreign to EICI and then transferred his EICI stock to a
charitable support trust established in 1988 by Comdisco.
The purpose underlying Messrs. Parmentier’s and de la Barre
d’Erquelinnes’ participation in the transaction at issue is clearly
stated in a September 25, 1993, fax from Barbara Spudis (of the
Baker & McKenzie law firm) to that firm’s Amsterdam office.
fax stated:

The

“The individuals forming the company are involved for

two months during which the income allocation occurs and then the
interest is transferred to the U.S. corporate investor who reaps
the benefit of ongoing depreciation deductions.”
The record reveals that Andantech-Foreign was not created for
the purpose of carrying on a trade or business but rather to strip
the

income

Consequently,

from

the

transaction

we

will

not

and

recognize

avoid

taxation.

Andantech-Foreign

partnership for Federal income tax purposes.
Pship. v. Commissioner, supra.

U.S.

as

a

See ASA Investerings

- 67 b.
Andantech-US Should Be Disregarded Because
EICI Did Not Intend To Join With RD Leasing for the
Purpose of Carrying On Partnership Business and
Sharing in the Profits or Losses From the
Partnership’s Equipment Leasing Activity
After Mr. de la Barre d’Erquelinnes transferred his 2-percent
membership interest in Andantech-Foreign to EICI, EICI borrowed
from UBS $302,395.55 that it needed to contribute to the capital of
Andantech.

Comdisco guaranteed the loan, and UBS treated the loan

as a loan to Comdisco.
transferred

his

EICI

Mr. de la Barre d’Erquelinnes then

stock

to

a

charitable

support

trust

established in 1988 by Comdisco.
There is no evidence that EICI had assets other than its
interest in Andantech. Moreover, EICI’s only means of repaying the
UBS loan was through its 6-percent priority return distribution in
the event Comdisco exercised its early termination option.
EICI

did

not

participate

in

the

negotiations

of

the

transactions and did not intend to profit, and did not profit, from
the transactions.

EICI did not join with RD Leasing for purposes

of carrying on a trade or business or sharing in profit or loss
from the sale-leaseback transaction.
EICI did not exist before the transactions at issue.

It was

created as a vehicle to dispose of Mr. de la Barre d’Erquelinnes’s
2-percent

interest

and

to

create

the

illusion

of

participant required for partnership classification.

a

second

Under the

principles of Gregory v. Helvering, 293 U.S. 465 (1935), AndantechUS is not recognized as a valid partnership for Federal income tax

- 68 purposes.
2.
Andantech Acted as a Mere Shell or Conduit To Strip
the Income From the Transaction and Avoid Income Taxation
and, Under the Step Transaction Doctrine, Should Be
Disregarded
Even if we believed Andantech should be respected as a valid
partnership (which we do not), it should be disregarded under the
step transaction doctrine.

“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), affg. T.C. Memo. 1999-411; see also
Penrod v.

Commissioner,

88

T.C.

1415,

1428-1430

(1987).

As

described in Smith v. Commissioner, 78 T.C. 350, 389 (1982):
The step transaction doctrine generally applies in
cases where a taxpayer seeks to get from point A to point
D and does so stopping in between at points B and C. The
whole purpose of the unnecessary stops is to achieve tax
consequences differing from those which a direct path
from A to D would have produced. In such a situation,
courts are not bound by the twisted path taken by the
taxpayer, and the intervening stops may be disregarded or
rearranged. [Citation omitted.]
The
relating

existence

of

to

individual

the

business

purposes

steps

in

and
a

economic

complex

effects

series

of

transactions does not preclude application of the step transaction
doctrine.

True v. United States, 190 F.3d 1165, 1176-1177 (10th

Cir. 1999).
To ratify a step transaction that exalts form over
substance merely because the taxpayer can either (1)

- 69 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 step transaction doctrine, a series of formally
separate steps may be collapsed and treated as a single transaction
if the steps are in substance integrated and focused toward a
particular result.

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, supra at
1428-1430. More than one test might be appropriate under any given
set of circumstances; however, the circumstances need satisfy only

- 70 one of the tests in order for the step transaction doctrine to
operate.

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.

Binding Commitment Test

We first consider the application of the binding commitment
test. Petitioners posit that RD Leasing was not bound to engage in
the transaction until it actually entered the transaction in
December

1993,

d’Erquelinnes

and

that

formed

Messrs.

Parmentier

Andantech-Foreign

commitment by RD Leasing.

and

de

independent

la

Barre

of

any

For the reasons set forth below, we do

not believe it is appropriate to apply the binding commitment test
to our step transaction analysis in this case.
The purpose of the binding commitment test is to promote
certainty in tax planning; it is the most rigorous limitation of
the step transaction doctrine. It is seldom used and is applicable
only where a substantial period of time has passed between the
steps that are subject to scrutiny.

Thus, it is not an appropriate

test to apply to the transactions before us inasmuch as the
transactions were prearranged by Comdisco, completed in 6 months,
and fell entirely within a single tax year.
Wholesale

Grocers,

Inc.

v.

United

See, e.g., Associated

States,

supra

at

1522

n.6

(rejecting use of the binding commitment test because the case did

- 71 not involve a series of transactions spanning several years).
Because the transactions in the present case do not span a long
period of time or involve a binding commitment to pursue successive
steps, we do not analyze them under the binding commitment test.
Thus, in this case, only the end result and interdependence tests
are relevant to our step transaction analysis.
b.

End Result Test

We now turn to the 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), affg. T.C. Memo. 1996-472; Associated Wholesale
Grocers, Inc. v. United States, supra at 1523.

Under the end

result test, if we find that a series of closely 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 transaction.

King Enters., Inc. v. United States, 189 Ct.

Cl. 466, 418 F.2d 511, 516 (1969); see also Helvering v. Ala.
Asphaltic Limestone Co., 315 U.S. 179 (1942); Morgan Manufacturing
Co v. Commissioner, 124 F.2d 602 (4th Cir. 1941), affg. 44 B.T.A.
691 (1941); Heintz v. Commissioner, 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 as of the time of the transaction.

It is flexible and

bases tax consequences on the substance of the transaction, not on

- 72 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 result by structuring
a series of transactions in a certain way.”

True v. United States,

190 F.3d at 1175.
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.

Id.

If this is not

what was intended, then we collapse the series of steps and give
tax consideration only to the intended end result.

Id.

“The

doctrine derives vitality, rather, from its application where the
form of a transaction does not require a particular further step be
taken; but, once taken, the substance of the transaction reveals
that the ultimate result was intended from the outset.” (Emphasis
in original.)

King Enters., Inc. v. United States, supra at 518.

Applying the end result test to the sale-leaseback transaction
at issue, we examine whether Comdisco and Norwest intended from the
outset to transfer the benefits and burdens of the sale-leaseback
of the equipment to RD Leasing.

If the intended end result was for

RD Leasing to have those benefits and burdens, then petitioners
cannot claim a right to favorable tax treatment for the various
intermediate transactions leading up to that intended result.
The record clearly indicates that every step taken by the

- 73 parties (the formation of Andantech, the sale-leaseback of the
equipment between Comdisco and Andantech, the sale of the Comdisco
rents to NationsBank, and the contribution by Mr. Parmentier of his
interest in Andantech to RD Leasing) were but transitory steps.
All

the

legal

documents

relating

to

the

transactions,

including the sale of the Comdisco rents, were negotiated and
reviewed by NEFI; and all profit and cashflow projections were
based on the assumption that a U.S. company would invest $15
million.

We are unable to glean from the record that Messrs.

Parmentier and de la Barre d’Erquelinnes ever contemplated making
(and there is no evidence that they had the means to make) a $15
million investment.
of

its

$15

(On the other hand, NEFI bore the risk of loss

million

investment.)

Moreover,

the

financial

projections never evaluate the transaction on the basis of the
initial contributions made by Messrs. Parmentier and de la Barre
d’Erquelinnes.

Simply put, we are of the opinion that Messrs.

Parmentier and de la Barre d’Erquelinnes never intended to place
their funds at risk.

They withdrew their minimal contributions as

soon as practicable and before transferring their interests to RD
Leasing and EICI.

It is obvious to us that Mr. Parmentier’s only

concerns in entering into the arrangement were to ensure that he
would not be taxed on the sale of the Comdisco rents and that he
would profit from his receipt of the preferred stock.

Neither Mr.

Parmentier nor Mr. de la Barre d’Erquelinnes had any of the
benefits or burdens associated with the sale-leaseback transaction.

- 74 The intended result from the outset was to pass the benefits and
burdens of the sale-leaseback transaction to RD Leasing in order to
allow Norwest to claim large depreciation deductions and for Mr.
Parmentier to make his profit through the value of RD Leasing’s
preferred stock.
Thus, by applying the end result test, we will give tax
consideration only to that intended result.
c.

Interdependence Test

We reach the same conclusion by reviewing the transactions
under the interdependence test. The “interdependence” test focuses
on

whether

“the

steps

are

so

interdependent

that

the

legal

relations created by one transaction would have been fruitless
without a completion of the series.”

Redding v. Commissioner, 630

F.2d 1169, 1177 (7th Cir. 1980), revg. and remanding 71 T.C. 597
(1979); see also Kass v. Commissioner, 60 T.C. 218 (1973), affd.
without published opinion 491 F.2d 749 (3d Cir. 1974); Farr v.
Commissioner,

24

T.C.

Commissioner,

16

T.C.

350
607

(1955);

Am.

(1951);

Wire

Am.

Fabrics

Bantam

Car

Corp.

v.

Co.

v.

Commissioner, 11 T.C. 397 (1948), affd. 177 F.2d 513 (3d Cir.
1949).

This test concentrates on the relationship between the

steps, rather than on their “end result”.

See Sec. Indus. Ins. Co.

v. United States, 702 F.2d 1234, 1245 (5th Cir. 1983).
The interdependence test requires a court to find whether the
individual steps had independent significance or had meaning only
as part of the larger transaction.

Penrod v. Commissioner, 88 T.C.

- 75 at 1429-1430.

If the steps have “reasoned economic justification

standing alone”, then the interdependence test is inappropriate.
Sec. Indus. Ins. Co. v. United States, supra at 1247.

If, however,

the only reasonable conclusion from the evidence is that the steps
have “meaning only as part of the larger transaction”, then the
step transaction doctrine applies as a matter of law.

Id. at 1246.

In order to maintain this objectivity and ensure the steps have
independent significance, it is useful to compare the transactions
in question with those usually expected to occur in otherwise bona
fide business settings.

See Merryman v. Commissioner, 873 F.2d

879, 881 (5th Cir. 1989), affg. T.C. Memo. 1988-72.
Here, the sale-leaseback transaction between Comdisco and
Andantech-Foreign and the sale of the Comdisco rents by AndantechForeign to NationsBank would not have taken place without the
planned participation of RD Leasing.

This point is demonstrated

both by the importance of the preferred stock to Mr. Parmentier in
the negotiations and the certain financial failure of AndantechForeign without a cash infusion from RD Leasing.
Petitioners

assert

that

the

financial

projections

using

forecasts of the residual values made by the appraisers in 1993
show that Andantech had a reasonable opportunity to earn a profit
from the transaction.

All of the financial projections, however,

were made on the basis of the $15 million supplied by RD Leasing
and the avoidance of Federal income tax on the rents payable by
Comdisco.

- 76 Mr. Parmentier’s failure to seriously evaluate the likely
residual

value

arbitrary

purchase

partnership

of

the

(which

equipment,
his

his

price,

and

would

facilitate

willingness

minimal
his

to

pay

an

investment

in

the

abandonment

of

the

transaction in the event RD Leasing failed to take the next step),
collectively persuade us that Mr. Parmentier and Andantech-Foreign
did not have profit motivation for entering into the sale-leaseback
transaction.
Additionally, the loans to Andantech were attributable to a
desire by UBS and NationsBank to accommodate Comdisco.

UBS, which

ultimately provided the approximate $15 million cash needed for the
purchase of the equipment, had provided similar amounts for other
similar Comdisco deals.

UBS made the loan to Andantech on the

basis of Comdisco’s creditworthiness and on the basis that the
earlier loans had been paid off, usually within 3 months.

On the

other hand, Andantech had minimal assets. Its only means of paying
the interest due on the approximate $15 million loan was from the
rents due from Comdisco.

But Andantech had “sold” the Comdisco

rents to NationsBank and was required to use the proceeds received
from NationsBank to pay off the $87 million term note owed to
Comdisco.

Thus,

after

the

sale

of

the

Comdisco

rents

to

NationsBank, Andantech had no means of paying the substantial
interest accruing on the approximate $15 million UBS loan as the
interest became due.
The funds provided by RD Leasing did not just enhance the

- 77 financial condition of the partnership; they were essential to the
solvency of the partnership.

The financial limitations placed on

Andantech

likely

made

it

extremely

that

the

transfer

of

Mr.

Parmentier’s interest to RD Leasing would, as it did, take place
promptly.
Our

review

of

the

entire

record

persuades

us

that

the

transactions did not take the form they did in order to afford
Andantech an opportunity to earn a profit.

To the contrary, we are

convinced that the only purpose for structuring the sale-leaseback
transaction between Comdisco and Andantech, rather than directly
between Comdisco and RD Leasing, was to avoid tax that would have
been paid by NEFI on the acceleration of rental income from the
sale of the Comdisco rents had the transactions been structured as
direct sale-leaseback transactions between Comdisco and RD Leasing.
We find that Andantech acted as a mere shell or conduit to strip
the income from the transaction and avoid income for RD Leasing.
Accordingly, we hold the steps involved in the transactions at
issue lack any reasoned economic justification standing alone.

As

stated, there was no apparent purpose for Messrs. Parmentier and de
la Barre d’Erquelinnes to purchase (through Andantech) and lease
back the equipment other than to facilitate the eventual transfer
of the property into the hands of RD Leasing.
exist before this transaction.

Andantech did not

It was created as a limited

liability company to serve as a passthrough vehicle specifically
for the transaction at issue.

- 78 The exchange of Mr. Parmentier’s partnership interest for the
RD Leasing preferred stock is suspect.

RD Leasing was a shell

corporation and was not involved in equipment leasing.

It was

recapitalized for the purpose of engaging in this transaction. Mr.
Parmentier was not interested in any true investment in RD Leasing.
He wanted cash but agreed to take and hold the RD Leasing preferred
stock only in order to qualify the exchange under section 351.
RD Leasing was required to maintain sufficient funds to pay
the liquidation preference to Mr. Parmentier.

We see no apparent

reasons for the use of an exchange of the preferred stock for Mr.
Parmentier’s interest in Andantech other than to facilitate the
tax-free transfer of the depreciation deductions to Norwest and to
compensate Mr. Parmentier for his services.
Standing

alone,

none

of

the

individual

steps

in

the

transaction at issue is the type of business activity one would
expect to see in a bona fide, arm’s-length business deal between
unrelated parties, and none of them makes any objective sense
standing alone without contemplation of the subsequent steps in the
transaction.
next.

Each step in the transaction leads inexorably to the

Consequently, the interdependence test is satisfied for

application of the step transaction doctrine.
We are of the opinion that NEFI and Comd

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A8ace0c306458692c. Public record. Not legal advice.