# 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.

042
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.

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 Simultaneously with its purchase of the equipment,
A leased the equipment back to C.

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.

- 3 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.

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

CIG's Initial Discussions With Norwest and NEFI .
NEFI's Credit Approval Presentation . . . . . . .
Financial Projections and Appraisals . . . . . .

.
.
.

12
14
16

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

A. Norwest . . . . . . . . . . .
7
B. NEFI . . . . . . . . . . . . . . . . . . . . . . . . 8
II. Comdisco and CIG . . . . . . . . . . . . . . . . . . . . . 8
III. Negotiations . . . . . . . . . . . . . . . . . . . . . . 12
A.
B.
C.

D.

IV.

The Foreign Investors . . . . . . . . . . . . . . . 25

Formation of Andantech and the Sale-Leaseback (Appendixes

. .

.

. .

.

.

.

.

.

41

Andantech . . . . . . . . . . . . . . . , , , . . , 41

B.
C.

Transfer of Mr.
de la Barre d'Erquelinnes's
Membership Interest in Andantech to EICI (Appendix

E)

. . . . . . . . . . . . . . . . . . . . . . . . 41

Transfer of Mr. Parmentier's Membership Interest to
RD
Leasing
in
Exchange
for
Preferred
Stock

(Appendix F)

. . . . . . . . . . . . . . . . . . . 42

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

.

.

.

.

.

.

43

VIII. Sale of Computer to End User . . . . . . . . . . . . . 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

.

.

.

.

.

.

.

.

52

XII. Respondent's Determinations

A.

.

.

.

.

.

.

FPAAs for the 1993 Short Years . . . . . . . . . . 52

- 5 B.

FPAA for the 1994 Taxable Year

.

.

.

.

.

.

.

.

.

.

53

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.
C.

Positions of the Parties

.

.

.

.

.

.

.

.

.

.

.

.

.

61

Andantech Is Not a Valid Partnership and Is
Not Recognized for Federal Tax Purposes . . .
a.
Andantech-Foreign Should Be Disregarded
Because Messrs. Parmentier and de la

64

Analysis . . . . . . . . . . . . . . . . . . . . . 62
1.

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.

2.

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 . . . . . . .
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 .
a.
Binding Commitment Test . . . . . . . . .

b.

3.

b.
c.

69
71

End Result Test . . . . . . . . . . . . . 72

c.
Interdependence Test . . . . . . . . . .
The Sale-Leaseback Transaction Lacked Business
Purpose and Economic Substance . . . . . . . .

a.

68

75
82

The Experts . . . . . . . . . . . . . . . 84
No Reasonable Possibility for Profit
Existed . . . . . . . . . . . . . . . . . 89

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 . . . . . . . . .
ii. The Relationship Between the Selling
Price and the Fair Market Value . .
iii. The Structure of the Financing . . .
iv. The
Degree
of
Adherence
to

97

99
99

- 6 -Contractual Terms . . . . . . . . .
The Reasonableness of the Income and
Residual Value Projections . . . . .
vi. Insertion of Other Entities . . . .
4.
The Transaction Was Not a Sale and the
Financing Did Not Constitute Genuine Debt . .
Conclusion . . . . . . . . . . . . . . . . . . . .

102

v.

D.

104
106
108
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

appendixes A through G.
benefits

to

RD

form,

in attached

The transaction is designed to produce tax

Leasing,

Inc.

(RD

Leasing) ,

affiliated group in which Norwest Corp.

a

(Norwest)

member

of

an

is the common

parent, through RD Leasing' s membership in Andantech.
The substantive issue to be resolved is whether the saleleaseback

transaction

Federal tax purposes.

involved

herein

should be

respected

for

- 7 All section references are to the Internal Revenue Code as in
effect for the years in issue.
FINDINGS OF FACT

Some

of

the

accordingly.

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,
principal

Norwest was a Delaware corporation,

maintaining

its

place

of

business

in

Minneapolis,

Minnesota.

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

officer.

reported

to

John

Thornton,

Norwest's

chief

financial

All sale-leasebacks had to be approved by Mr. Vandermark.

- 8 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

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) .
a

lesser

extent,

in

leasing

NEFI was also involved, albeit to

transactions

involving higher

end

equipment.
Within the Norwest group, sale-leasebacks were usually taken
in the name of NEFI's parent, NBM.

James Renner was president of

NEFI.

president

Phyllis

Grossman

transactions for NEFI.

was

vice

of

sale-leaseback

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

_ 9 _
Stock Exchange.
computer

Comdisco is a lessor, dealer, and remarketer of

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),

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)

leases it back to Comdisco.

and

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,

- 10 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
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
corporations

and U.S.

(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:

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 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.
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.

- 12 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.
III. Neootiations
A.

CIG's Initial Discussions With Norwest and NEFI

In June
Snyder,

1993,

and Ms.

representatives

Ortmann),

Norwest

from CIG
(Mr.

(Mr.

Trznadel,

Vandermark),

NEFI

Mr.
(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).
this meeting,

At

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.
sent Ms.

On July 6, 1993, Ms. Ortmann

Grossman an economic analysis of a hypothetical sale-

leaseback transaction involving a $75 million portfolio of computer

- 13 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

articles

requested,

by

interoffice

memo,

that

the

of

incorporation of a then-dormant corporation, known as Radio Dealers
Leasing,

Inc.,4

be

amended

so

corporation to RD Leasing, Inc.

as

to

change

(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

3
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.
4
Radio Dealers Leasing, Inc., was organized as a
corporation under Minnesota law on Apr. 20, 1988.
NEFI owned all the common stock of RD Leasing during
the years in issue and through the dissolution of RD Leasing in
1997.

- 14 -

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,

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.'
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

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 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

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";

042
services.
The

CAP

and

NEFI

would

also

contained

be
a

paid

a

fee

"Collateral"

for

its

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

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
( continued. . . )

- 16 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

was

dated

September

21,

1993.

The

CAP

approved

Comdisco' s credit rating but did not commit Norwest, NEFI, or RD
Leasing

to

enter

into

the

sale-leaseback

transaction

involved

herein.
C.

Financial Pro1ections 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

proposed,

Mr.

Hastings

used

transaction
the M&S

involved

report

herein

was

to interpolate

the

( . . . continued)
"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.

- 17 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
proposed

sale-leaseback

transaction,

as

well

as

a

for the

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,'

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):

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.
9
Early termination dates and final termination dates
were specified in the documents.

12 /31/97

-0-

6, 003, 302

(25, 119r 714)

-0-

-0-

. ( 335 , 666)

$25 , 418 , 982

5 , 966 , 904

- 18 Chart 1
Computation of Partnership Taxable Income With Estimated Residual Value Proceeds

(Assumes Full Term)
Interest Expense
Year
Ending
11/28/93
12/31/93
12/31/94

Sale Rent
Receivable
$87, 793, 608
-0-0-

Additional

Depreciation

Install.

Balloon

Residual

Fixed Rent
-0-0-0-

Deduction
-0($6,12Ò,788)
(46,517,990)

Bank Loan
($106, 409)
-0-0-

Notg
($364, 289)
-0-0-

Note
($300, 982)
(305,514)
(1,932,141)

Income
-0-0-0-

Taxable
Income (Loss)
$87, 021, 928
(6,426,302)
(48,450,131)

12/31/95

-0-

-0-

(27,910,794)

-0-

-0-

(2,113,390)

-0-

(30,024,183)

12 /31/96

-0-

$19, 385, 022

(16, 74 6, 476)

-0-

-0-

(2, 158, 409)

-0-

4 80, 136

Total

87, 793, 608

.25, 388, 324

(122, 415, 762)

(106, 409)

(364, 289)

(7, 14 6, 103)

25, 418, 982

8, 568, 352

Chart 2
Computation of Partnership Cash Flow With Estimated Residual Value Proceeds
(Assumes Full Term)

Debt Service
Install.

Balloon

Sale Rent

Additional

Residual

Pretax

Bank Loan
$14, 995, 931
(15,102,340)

No_tt.g
($364, 289)
-0-

Note
$19, 990, 512
-0-

Receivable
$87, 793, 608
-0-

Fixed Rent
-0-0-

Income
-0-0-

Cash Flow
-0($15,102,340)

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

12/31/95

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

12 /31/96
12/31/97
Total

-0.
-0(122, 415, 762)

-0-0(364, 289)

(4, 819, 668)
(22, 316, 947 )
(7, 146, 103)

-0-087, 793, 608

$19, 385, 022
6, 003, 302
25, 388, 324

-0$25 , 418 , 982
25, 418, 982

14, 565, 354
9 , 105 , 338
8, 568, 352

Year

Equipment

Ending
11/28/93
12/31/93

Purchase
($122, 415, 762)
-0-

12/31/94

-00(106, 409)

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

Sale Rent

Additional

Depreciation

Install.

Balloon

Balloon Note

Taxable

Ending
11/28/93

Receivable
$87,793,608

Fixed Rent
-0-

Deduction
-0-

Bank Loan
($106,409)

Note
($364,289)

Note
($300,982)

COD Income
-0-

Income(Loss)
$87,021,928

12/31/93

-0-

-0-

($6,120,788)

-0-

-0-

(305,514)

-0-

(6,426,302)

12/31/94

-0-

-0-

(46,517,990)

-0-

-0-

(1,932,141)

-0-

(48,450,131)

12/31/95

-0-

-0-

(27,910,794)

-0-

-0-

(2,113,390)

-0-

(30,024,183)

12/31/96
12/31/97

-0-0-

$19,385,022
6,003,302

(16,746,476)
(25,119,714)

-0-0-

-0-0-

(2,158,409)
(335,666)

-0$20,335,186

480,136
883,108

Total

87,793,608

25,388,324

(122,415,762)

(106,409)

(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

Equipment

Ending
11/28/93

Purchase
($122,415,762)

12/31/93

-0-

12/31/94
12/31/95
12/31/96
12/31/97
Total

-0-0-0-0(122,415,762)

Install.

Balloon

Sale Rent

Additional

Residual

Pretax

Bank Loan
$14,995,931

($364,289)

Note
$19,990,512

Receivable
$87,793,608

Fixed Rent
-0-

Income
-0-

Cash Flow
-0-

(15,102,340)

-0-

-0-

-0-

-0-

-0-

($15,102,340)

-0-0-0-0(364,289)

-0-0(4,819,668)
(1,981,761)
13,189,083

-0-0-0-087,793,608

-0-0$19,385,022
6,003,302
25,388,324

-0-0-0-0-0-

-0-014,565,354
4,021,541
3,484,555

-0-0-00(106,409)

- 20 Chart 5
Computation of Partnership Taxable Income With Estimated Residual.Value Proceeds
(Assumes Early Termination)
Interest Expense
Residual &
Year
Ending
11/28/93
12/31/93
12/31/94
12/31/95
12/31/96
Total

Sale Rent
Receivable
$87, 793, 608
-0-0-0-087, 793, 608

Depreciation
Deduction
-0($6,120,788)
(46,517,990)
(27, 910, 794)
(41,866,191)
122, 415, 762

.
Bank Loan
($106, 409)
-0-0-0-0(106, 409)

Install.
Note
($364,289)
-0-0-0-0(364, 289)

Balloon
Note
($300, 982)
(305,514)
(1,932,141)
(2,113, 390)
(940,072)
(5, 592, 099)

Early Term.
Taxable
Penalty
Income (Loss)
-0$87, 021, 928
-0.
(6,426,302)
-0(48,450,131)
-0(30, 024, 183)
$44,619,804
1,813,541
44, 619, 804 .
3, 934, 853

Chart 6
Computation of Partnership Cash Flow With Estimated Residual Value Proceeds

(Assumes Early Termination)
Debt Service
Install.
Balloon

Year

Equipment

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

-0-

-0-

-0-

-0-

12/31/95
12/31/96
Total

-0-0(122,415,762)

-0-0(106,409)

-0-0(364,289)

-0(25,582,611)
(5,592,099)

-0-

-0-087,793,608

-0-

-0$44,619,804
44,619,804

-0-

-019,037r193
3,934,853

- 21 Chart 7

Year
Ending
11/28/93

Computation of Partnership Taxable Income Without Estimated Residual Value Proceeds
(Assumes Early Termination)
Interest Expense
Sale Rent
Depreciation
Install.
Balloon
Early Term.
Receivable
Deduction
Bank Loan
Note
Note
Penalty
$87, 793, 608
-0($106, 409)
($364,289)
($300, 982)
-0-

12/31/93

-0-

($6,120,788)

12/31/94

-0-

(46,517,990)

12/31/95
12/31/96

-0-0-

(27,910,794)
(41,866,191)

Total

87, 793, 608

122, 415, 762

.

Taxable
Income (Loss)
$87, 021, 928

-0-

-0-

(305,514)

-0-

(6, 426,302)

-0-

-0-

(1,932,141)

-0-

(48,450,131)

-0-0-

-0-0-

(2,113,390)
(940,072)

-0$25r926,467

(30,024,183)
(16,879,796)

(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

-0-

-0-

-0-

-0-

-0-

-0-

-0-

12/31/95

-0-

-0-

-0-

-0-

-0-

-0-

-0-

-0-

(25,582,611)

-0-

$25,926,467

343,856

(364,289)

(5,592,099)

87,793,608

25,926,467

(14,758,484)

12/31/96

-0-

Total

(122,415,762)

-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
Year
Ending
12/31/93
12/31/94
12/31/95
12/31/96
12/31/97
12/31/98
Total

Taxable Income
From
Partnership
($6,297,776)
(47,481,128)
(29,423,700)
470,533
5,847,566
-0(76,884,505)

Taxes
(Paid) Saved
$2,376,151
17,914,630
11,101,562
(177,532)
(2,206,287)
-029,008,524

Share of
Preferred Stock
Partnership
Dividend/
Cash Flow
Redemption
($14,800,293)
-0-0($48,966)
-0(48,966)
14,274,047
(48,966)
8,923,231
(48,966)
-0(661,045)
8,396,985
(856,910)

Pre-Tax
Cash Flow
($14,800,293)

Taxes
(Paid) Saved
$2,376,151

(48,966)

17,914,630

(48,966)

11,101,562

14,225,081
8,874,265
(661,045)
7,540,074

(177,532)
(2,206,287)
-029,008,524

After-Tax
Cash Flow
($12,424,142)
17,865,663
11,052,596
14,047,549
6,667,978
(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

Year

Taxable Income
From

Ending

Partnership

Taxes

Share of
Partnership

Preferred Stock
Dividend/

Pre-Tax

Taxes

After-Tax

(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-

(S48,966)

(48,966)

17,914,630

17,865,663

12/31/95

(29,423,700)

11,101,562

11,052,596

(177,532)
(326,533)
-030,888,278

(48,966)
14,225,081
3,892,144
(661,045)
2,557,954

11,101,562

470,533
865,445
-0(81,866,625)

-014,274,047
3,941,110
-03,414,864

(48,966)

12/31/96
12/31/97
12/31/98
Total

(177,532)
(326,533)
-030,888,278

14,047,549
3,565,611
(661,045)
33,446,232

(48,966)
(48,966)
(661,045)
(856,910)

- 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

Year
Ending
12/31/93
12/31/94
12/31/95
12/31/96
12/31/97
12/31/98
Total

Taxable Income
From
Partnership
($6,297,776)
(47,481,128)
(29,423,700)
1,440,292
-0-0(81,762,312)

Taxes
(Paid) Saved
$2,376,151
17,914,630
11,101,562
(543,422)
-0-030,848,920

Share of
Preferred Stock
Partnership
Dividend/
Cash Flow
Redemption
($14,800,293)
-0-0($48,966)
-0(48,966)
18,319,471
(48,966)
-0(48,966)
-0(661,045)
3,519,177
(856,910)

Pre-Tax
Cash Flow
($14,800,293)
(48,966)
(48,966)
18,270,504
(48,966)
(661r045)
2,662,267

Taxes
(Paid) Saved
$2,376,151
17,914,630
11,101,562
(543,422)
-0-030,848,920

After-Tax
Cash Flow
($12,424,142)
17,865,663
11,052,596
17,727,082
(48,966)
(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
Taxable Income
From

Taxes

Ending
12/31/93

Partnership

(Paid) Saved

($6,297,776)

12/31/94
12/31/95
12/31/96
12/31/97
12/31/98
Total

(47,481,128)

.Year

(29,423,700)
(16,879,179)
-0-0(100,081,783)

Share of
Partnership

Preferred Stock
Dividend/

Cash Flow
($14,800,293)

Redemption

$2,376,151
17,914,630
11,101,562
6,368,514
-0-037,760,857

-0-0-0-0-0(14,800,293)

($48,966)

-0-

(48,966)
(48,966)
(48,966)
(661,045)
(856,910)

Pre-Tax

Taxes

After-Tax

Cash Flow
($14,800,293)

(Paid) Saved

$2,376,151

Cash Flow
($12,424,142)

(48,966)
(48,966)
(48,966)
(48,966)
(661,045)
(15,657,204)

17,914,630
11,101,562
6,368,514
-0-037,760,857

17,865,663
11,052,596
6,319,548
(48,966)
(661,045)
22,103,653

- 24 -

Ms.

Grossman

September

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.
reports,

CIG provided two additional appraisal

also dated September 28,

Appraisal

Co.

(MAC)

and

the

1993,

other

one from Manufacturers'

from

Appraisal

Resources

International (ARI) .
CIG paid for the M&S, MAC, and ARI appraisals.1°

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,
(DMC) , International Data Corp.
the

such as Daley Marketing Corp.

(IDC) , and the Gartner Group.

basis

of

her

own

experience,

Ms.

forecasts

of

IDC

and

the

Group

Gartner

Grossman

tended

believed

to

be

On
that

overly

conservative.

¹°
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,

investors to complete the transaction.

CIG sought other foreign

- 26 Richard Temko 'is
Brussels, Belgium.

an

American

attorney with

an

office

in

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

facsimile)

to

15,

Mr.

1993,

Temko

Mr.

Snyder

describing

sent

a

a memorandum

possible

(by

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.
ll
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."

participating

in

the

Mr.

Parmentier

transaction

but

was

was

interested

concerned

about

in
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."

Mr. Temko requested that Comdisco countersign the

letter.

Parmentier's

Mr.

conditions

included

assurances from

Comdisco that if the transaction did not proceed as reflected in
the

flowcharts,

promptly

then Mr.

Parmentier and his partner

their

investment,

recover

$200,000

Andantech at no expense,

(3)

(2)

incur no potential

could

(1)

withdraw

from

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

significant risk of impairment".

preferred

stock

dated

September

24,

any

Mr. Snyder advised Mr. Parmentier

that Comdisco could not make the requested assurances.
letter

"without

1993,

Mr.

Snyder

However, by

confirmed

to

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.)

Mr.

- 28 Let me also confirm that, if the U.S. Company
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

client

[Comdisco]

The fax stated in part:
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
B, and C)

(Appendixes A,

Andantech' s articles of organization were signed on September

25,

1993,

by Ms.

Spudis and Regina Howell,

also of the Baker &

- 29 McKenzie law firm, and the certificate of organization was issued
by the Wyoming secretary of state on September 27, 1993.
On

September

Trznadel

27,

1993,

Mr.

flew to Minneapolis

Snyder,

to meet

Ms.

Ortmann,

with Messrs.

and Mr.

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,
1993,

provided

d'Erquelinnes

for

a

priority

return

dated September 28,

for

(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,
12
In subsequent years, its managers were James Fetzer and
Andrew Rupprecht, NEFI employees.

- 30 then distributions were to be made first to him in an amount equal
to

his

priority

return

compounded monthly)
would

then

be

6

percent

of

his

unreturned

plus his unreturned capital.

made

unreturned capital.

to

Mr.

Parmentier

to

the

capital

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,
"Equipment

Purchase

1993,

Andantech and Comdisco executed an

AgreeIment"

(the

purchase

agreement),

an

"Equipment Lease" (the equipnen-_ 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;

purchase price was paid:

the

(1) 514,995,931 in cash, which Union Bank

- 31 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
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 Ecuipment 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

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 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

become

did

an

accession

to

the. equipment

and

not

become

the

termination

option)

to

property of Andantech.
Comdisco had an

option

(the

final

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 withd 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

- 33 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
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.
termination

date,

The purchase price, termination date, early

early

termination

stated

value,

and

early

- 34 -

termination
follows:

supplement

of

the

equipment

by

category

were

as

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

List

FMV

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
9021/820/G

12,336,045
68,624,690

36
36

4,440,976
24,704,888

2/27/97
2/27/97

41
41

5/27/96
5/27/96

20.00
20.00

888,195
4,940,978

0.28
0.28

12,435
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

139,926,914

36

50r373,689

2/27/97

41

5/27/96

20.00

10,074,738

0.28

9021/900/I
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

14,427r399

49

7,069.425

8/27/97

47

10/27/96

24.72

1,747,562

0.29

20r501

Total 9121

44,174,422

21,830,952

5,359,992

63,063

Total all models

341,282,796

122r415,762

$25r578,304

344,701

- 36 Rents
termination

payable under
dates

were

the

equipment

subject

lease before

to periodic

the

adjustments

early
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.
the right,

Comdisco had

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

- 37 any

purchaser,

lender,

or

other

assignee

of

Andantech.

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.

- 38 UBS had been the lender in four prior Comdisco leveraged saleleaseback transactions, and Mr. Campbell had worked on all of those
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.¹³

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

¹³
UBS wired $14,995,931 to Ccmdisco on Sept. 28, 1993,
but the same amount was wired back from Comdisco to UBS on the
same day.

was

- 39 transferred.

within

3

UBS anticipated that the bank loan would be repaid

months,

inasmuch

as

previous

loans

made

in

similar

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

drafts

agreement".

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)
Consequently,
NationsBank

at $138 million.

the transaction required the approval of numerous
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

- 40 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 *
* * 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 unider
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.

- 41 -

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

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'Erguelinnes's and Mr. Parmentier's
Withdrawal From Andantech

A.
Mr. de la Barre d' Erguelinnes' s and Mr.
Withdrawal of Capital Contributed to Andantech

Parmentier' s

On November 30,

de la Barre

1993,

d'Erquelinnes withdrew

Mr.

Parmentier and Mr.

(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
December 6,

Investors

1993,

Co.,

Inc.

(EICI),

was

organized

and at all relevant times thereafter validly

existed as a corporation, under the laws of Delaware.
Mr.

on

Initially,

de la Barre d'Erquelinnes was EICI's sole shareholder;

Mr.

Parmentier was EICI's sole director.
Pursuant

to

an

Assignment

and

Assumption

Interest of Andantech L.L.C., dated December 9,

of

Membership

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.

- 42 -

On

December

28,

transferred his EICI
Trust); thereafter,

shareholder

of

1993,

Mr.

de

la

stock to a charitable

Barre

d'Erquelinnes

support trust

(the

the Trust was at all relevant times the sole

EICI.

The

Trust

was

established

in

1988

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

by
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.
stock issued to Mr.
$615,000

The 6,150 shares of RD Leasing preferred

Parmentier had a liquidation preference of

(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

- 43 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
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.
required

Such events included the failure to make the

redemption of

the RD Leasing

Preferred Stock

and

042
failure to maintain investment assets at specified levels.
the occurrence of such an event,

the

Upon

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.

- 44 -

UBS informed Andantech that the payoff amount on the bank loan
was

$15,119,777.60

December 10,

and requested that this amount be wired on

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
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.)
UBS the $302,395.55
Andantech.

EICI borrowed from

it needed to contribute to the capital of

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.

The computer

- 45 was one that had been sold to Andantech.
any of the proceeds from that sale.
substitute replacement equipment.
to

Andantech

that

it

was

Andantech did not receive

Instead, Comdisco elected to

Comdisco neither provided notice

exercising

its

right

to

substitute

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

identified by serial number in the location reports.

portfolio

were

The computers

shown in the reports had the same serial numbers as those that were
042
on the 1993 bill of sale.
sublessee)

The location of the equipment (and the

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

- 46 -

series) .

On

May

30,

1996,

Comdisco

receive.d

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,
independently

investigate

the

an NEFI equipment manager,

value

of

the

equipment.

to

After

reviewing several reports

(Computer Price Watch and the Gartner

Group reports),

1996, Mr. Oram informed Ms. Grossman

on May 27,

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

$699,454;

(junior

promissory

$3,891,020;

notes

$2,313,841;

2e-2i)

were:

$1,083,615;

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

- 47 -

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
strategy

(i.e.,

production
products

1993 because of:
increased

of mainframes

by

IBM' s

(1)

A change in

discounting);

by

IBM;

competitors

(3)

the

(Amdahl

(2)

an

IBM pricing
increase

introduction

Corp.

and

in

of

new

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

determination

thereto.

that

the

Thus,
value

of

Andantech
the

accepted

equipment

Comdisco' s

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,

- 48 -

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

engaged two additional

D

(i.e.,

companies

the

9121 models) .

to provide

Comdisco

appraisals

of

equipment in category A as of the early termination date.
findings included the following:

(1)

In its September 23,

the
The

1996,

appraisal, Computer Merchants, Inc. (CMI), concluded that the value
of category A of the equipment was $63,000

(as of September 27,

1996,

in its September 24,

the early termination date) ; and (2)

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.
1996, Comdisco canceled junior promissory note 2a.

On October 8,

- 49 -

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,
1996,

as of October 27,

CIR advised Comdisco that

1996.

the value of

On October 25,
the

equipment

categories B through D was $62,000, as of October 27,

1996.

in

Mr.

Oram advised Ms. Grossman of these findings.
In

light

PropertyLink

of

these appraisals,

Ms.

Grossinan

to

update

4,

1996,

its

June

requested ARI

appraisal.

ARI

PropertyLink confirmed its earlier opinion as to the September 27,
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

determination that the value of the equipment

As

Comdisco's

in categories B

through D did not exceed the principal plus accrued interest on

042
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.

Thus, the 1996 bills of sale reflect that

- 50 -

Comdisco

never

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

an

Andantech's

operating

agreement,

Andantech

made

early

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

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

On or about May 29,

1997, Andantech was dissolved.
XI.

Andantech's Federal Income Tax Returns
Andantech

Income,

filed

a

Form

1065,

U.S.

Partnership

for the short tax year beginning September 28,

ending December 10, 1993 (the 12/10/93 short period) .
K,

Partners'

return,

Return

Shares of Income, Credits,

Andantech reported $86,930,528

1993, and

On Schedule

Deductions, Etc.,

of

of

income that

of the

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,

Credits,

Deductions,

Etc.,

d'Erquelinnes,

and

Partner's

Share of

Income,

for

Mr.

Parmentier,

Mr.

de

NEFI

that

$85,191,494

of

the

la

Barre

income

was

- 51 allocated

to

Mr.

Parmentier,

$1,738,736

to

Mr.

de

la

Barre

short

tax

year

and ending December 31,

1993

(the

d'Erquelinnes, and $134 to NEFI.
Andantech

also

filed

beginning December 11,

a

Form

1993,

12/31/93 short period) .

1065

for

On Schedule L,

the

Balance Sheets,

of the

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

Andantech

reported

a

$2,143,937

deduction

and

On Schedule K of the
loss
a

attributed

$103,674

to

a

$2,040,263

depreciation

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

1993

allocated

to

RD

Leasing

was

included

in

Norwest's

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

042
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.

income from other rental activity.

Andantech reported no gross
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.

- 52 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) ."
Respondent determined that Andantech's claimed 12/10/93 short
period should be disregarded and all income and deductions for that
period should be reported in Andantech' s 12/31/93 short period.
the

12/10/93

FPAA,

respondent

determined that

the

In

$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.

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.

- 53 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

of

disallowed.

Respondent determined
deductions

Alternatively,

claimed

by

respondent

determined in the 1994 FPAA that the "sale" of the lease receivable
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

Second,

we

short

period

and/or

determine whether

the

the
FPAAs

12/31/93

short

for

12/10/93

the

period.
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

- 54 -

in tax under section 6501(a) remains open for RD Leasing and EICI.
They assert,

however,

that

section

6501(a)

partnership items and affected items.

is

inapplicable

to

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 Rhone-

Poulenc Surfactants & Specialties, L.P. v. Commissioner, 114 T.C.

533 (2000), interlocutory appeal dismissed (for lack of appellate
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
section

(1st Cir. 2001).

6501(a)

provides

a

In Rhone-Poulenc, we stated that
general

period

of

limitations

assessing and collecting any tax imposed by the Code.
6229(a)

for

Section

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
less than, the period of limitations in section 6501.

Id. at 540-

543.
Section
attributable

6501
to

contains

partnership

no

exception

items.

In

for

drafting

deficiencies
section

6229,

- 55 Congress

statute

of

limitations for assessments attributable to partnership items.

.I_sL.

at 545.

did

not

create

a

completely

separate

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.

limitations period has not expired.
reconsider

Rhone-Poulenc.

We

Commissioner,

supra,

the

They, however, request that 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

Eneray Tech.

Associates

III

v.

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,

Andantech's

this case involves the stripping of income from

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

- 56 -

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

treaties with foreign governments.

corporations,

as

well

as

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,

intending to be taxed as a partnership.
and 702,

(Pursuant to sections 701

a partnership is treated as a flow-through entity for

purposes of Federal income taxation.)
recognized as a partnership,

its

As such,

if Andantech is

items of income,

gain,

loss,

deduction, and credit passed through to its partners.
2.

A taxpayer

is permitted to

income.

If a bona

fide sale of future income occurs at arm's

length

and

for

future

income

adequate

is

sell

consideration,

taxed in

the

year of

its

right

to

then

the

seller

sale

on

the

future

of

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.

- 57 United

States,

Petitioners

214

Ct.

C1.

389,

556

F.2d

1107,

1110

(1977).

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

Andantech's partners

sale,

(i.e.,

and the
Messrs.

income passes

through to

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

as

respected,

Mr.

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.
refer

to

the

partnership

prior

to

(For convenience, we will

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).

Sec.

Consequently, if as petitioners assert the partnership

- 58 and

the

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)

exempt from U.S. taxation and excluded from gross income.

is

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 pursuan't to the
treaty between the United States and Belgium.

Further, petitioners

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.l'

¹'

Moreover,

petitioners

assert,

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:
( continued. . . )

- 59 pursuant

to

section

358(a),

Mr.

Parmentier's

basis

Leasing preferred stock is the same as that in his

in

his

RD

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).
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.

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

¹7(...continued)
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
$196,000
Plus
Share of UBS loan ($14,995,931 x 98%)
14,696,012
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

- 60 Income Tax Regs.

(For convenience,

we will refer to the new

partnership as Andantech-US.)
Continuing,
recontribution

petitioners
of

the

assert

property

to

that,

upon

the

Andantech-US,

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.
Thus,

Secs. 732, 723.

according

to petitioners,

the

effect

termination of Andantech-Foreign is that

(1)

recognized

section

to

RD

Leasing

or

EICI

Andantech-US under section 731(b),

under

of

the

deemed

no gain or loss is
731(a)

or

to

(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).)
according

to

petitioner,

Andantech-US's

basis

in

the

Here,

computer

equipment was $119 million, and Andantech-US properly reported the

- 61 -

depreciation deduction

on its

partnership

10/31/93 short year and for 1994.

tax returns

for

the

Additionally, petitioners assert

that Andantech-US properly reported an interest expense deduction

under

section 163(a)

years.

on its partnership tax returns

for those

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

deductions

without

recognizing

any

corresponding

- 62 rental

income.

transaction

at

Respondent
issue

contends

should not

be

that

the

respected

"prearranged"

for

Federal

purposes because it had no nontax business purpose

tax

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.

See Gregory v. Helvering,

U.S.

permit

465,

469-470

(1935) .

"To

the

true

nature

293
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 Holdina 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

- 63 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

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."
61

T.C.

770,

783

(1974).

The

issue

Harris v. Commissioner,

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

- 64 -

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,
la

transactions

Barre

the participation of Messrs.

d'Erquelinnes,

EICI,

and

Parmentier

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.

- 65 Tower, 327 U.S. 280, 286 (1946); see also ASA Investerings Pship.
v. Commissioner, 201 F.3d 505, 513 (2000), affg. T.C. Memo. 1998305.

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.
287.

Commissioner v. Tower, supra at 286-

"Business activity" excludes activity whose sole purpose is

tax avoidance.

ASA Investerings Pship. v. Commissioner, supra at

512.
a.
Andantech-Foreign
Should
Be
Disrecarded
Because Messrs.
Parmentier
and de
la
Barre
d'Erguelinnes Did Not Intend To Join Together for
the Purpose of Carryino On a Búsiness 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
042
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
The

stock

of

RD

correspondence

Leasing

that

between Mr.

he

expected

Parmentier's

to

receive.

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,

- 66 (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

Comdisco attempted to satisfy Mr.

risk

of

impairment".

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)

purported $122 million transaction)

they withdrew within 3 months.

funds

($200,000 in a

to Andantech-Foreign,

which

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,
Comdisco.

all

of

the

negotiations

took

place

between

NEFI set the criteria for the end users,

NEFI

and

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).

- 67 Mr.

Parmentier

transaction
Leasing

involved

preferred

activity.

was

rewarded

herein

stock,

Further,

we

through

not
are

for

participating

in

the

the

redemption

the

RD

of

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,
d'Erquelinnes

transferred his

Mr.

de la Barre

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

- 68 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

to

a

loan

transferred

Comdisco.

his

EICI

Mr.

de

la

Barre

d'Erquelinnes

stock

to

a

charitable

then

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'Erguelinnes'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), Andantech-

- 69 US is not recognized as a valid partnership for Federal income tax
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 Doctriner 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. r 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.
Cir. 1999) .

True v. United States,

190 F..3d 1165,

1176-1177

(10th

- 70 -

To ratify a step transaction that exalts form over
substance merely because the taxpayer can either (1)
articulate some business purpose allegedly motivating the
indirect nature of the transaction or (2) point to an
economic effect resulting from the series of steps, would
frequently defeat the purpose of the substance over form
principle. Events such as the actual payment of money,
legal transfer of property, adjustment of company books,
and execution of a contract all produce economic effects
and accompany almost any business dealing. Thus, we do
not rely on the occurrence of these events alone to
determine whether the step transaction doctrine applies.
Likewise, a taxpayer may proffer some non-tax business
purpose for engaging in a series of transactional steps
to accomplish a result he could have achieved by more
direct means, but that business purpose by itself does
not preclude application of the step transaction
doctrine. * * *

Id. at 1177.
Under the 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).
1428-1430.

See Penrod v. Commissioner, supra at

More than one test might be appropriate under any given

- 71 -

set of circumstances; however, the circumstances need satisfy only
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.
the

Petitioners posit that RD Leasing was not bound to engage in
transaction

December

until

1993,

d'Erquelinnes

and

it

that

formed

actually

entered

Messrs.

Parmentier

Andantech-Foreign

commitment by RD Leasing.

the

transaction

and

de

in

la

Barre

of

any

independent

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.
test

to

apply

to

the

transactions

Thus, it is not an appropriate
before

us

inasmuch

as

the

transactions were prearranged by Comdisco, completed in 6 months,
and fell entirely within a single tax year.

See, e.g., Associated

- 72 Wholesale

Grocers,

Inc.

v.

United

States,

supra

at

1522

n.6

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

Cl.

466,

418

King Enters., Inc. v. United States,

F.2d 511,

516

(1969);

189 Ct.

see also Helvering v.

Ala.

Asphaltic Limestone Co., 315 U.S. 179 (1942); Morgan Manufacturino
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).

- 73 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
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.

"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.)

Kina 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

- 74 -

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
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

including

the

sale

reviewed by NEFI;

documents
of

the

relating

to

Comdisco rents,

the

transactions,

were negotiated and

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'Erguelinnes 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

- 75 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

any

nor

Mr.

de

la

Barre

d'Erquelinnes

had

of

the

benefits or burdens associated with the sale-leaseback transaction.
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.
on

whether

"the

steps

are

The "interdependence" test focuses
so

interdependent

that

the

legal

relations created by one transaction would have been fruitless
without a completion of the series."
F.2d 1169, 1177

Redding v. Commissioner, 630

(7th Cir. 1980), revg. and remanding 71 T.C. 597

(1979); see also Kass v. Commissioner,

60 T.C. 218

without published opinion 491 F.2d 749

(3d Cir.

Commissioner,

24

T.C.

Wire

Commissioner,

16

T.C.

Commissioner,

11 T.C.

350

(1955);

607
397

Am.

(1951);

(1948),

Am.

affd.

(1973), affd.
1974);

Fabrics

Bantam
177

Car

F.2d 513

Farr v.
Corp.

v.

Co.

v.

(3d Cir.

- 76 -

1949).

This test concentrates on the relationship between the

steps, rather than on their "end result".
v. United States, 702 F.2d 1234, 1245

See Sec. Indus. Ins. Co.

(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.
at 1429-1430.

Penrod v. Commissioner, 88 T.C.

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",
step transaction doctrine applies as a matter of law.

then the

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

planned participation of RD Leasing.

taken place without

the

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.

- 77 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.
Mr.

Parmentier's

residual

value

arbitrary

purchase

partnership

of

(which

failure to seriously evaluate the

the

equipment,
his

his

price,

and

would

facilitate

willingness

minimal
his

likely

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.
other hand, Andantech had minimal assets.

On the

Its only means of paying

the interest due on the approximate $15 million loan was from the

- 78 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

NationsBank,

Andantech had no means

of

the

Comdisco

of paying the

rents

to

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
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.

- 79 -

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.

It

was

Andantech did not

created

as

a

limited

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

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

RD Leasing

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Atax-court%3A9b7676e8e9dcf658. Public record. Not legal advice.