# Appendix — Frank Lyon Co. v. United States > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1672%3A02 ## Record - **Collection:** Supreme Court brief - **Document type:** Appendix - **Published:** January 1, 1978 - **Citation:** 435 U.S. 561 ## Text Supreme Court of the United States OcToBeR TERM, 1976 No. 76-624 Frank Lyon Company, Appellant, v. Unitep States or AMERICA, Appellee. ON PETITION FOR CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT VOLUME I (Pages 1-312) PETITION FOR WRIT OF CERTIORARI FILED NOVEMBER 3, 1976 CERTIORARI GRANTED FEBRUARY 22, 1977 IN THE Supreme Court of the United States Octoser Term, 1976 No. 76-624 Frank Lyon Company, Appellants Ve Unirep States or America, Appellee Petition for Writ of Certiorari Filed November 3, 1976 Certiorari Granted February 22, 1977 INDEX Page Compiaint, filed September 27, 1973 ................ 6 Answers, filed November 26, 1973 ...............5.. 8 Stipulation, filed September 16, 1974 ................ 9 Supplemental Stipulation, filed December 23, 1974 ... 14 Transcript of Proceedings, November 26, 1974 ...... 17 Supplementary Findings of Fact and Conclusions of Re, es a ED gn cccsccvceceesesocsce 299 Proposed Findings of Fact and Conclusions of Law... 301 Judgment, filed June 11, 1975 ........... 0.0000 ees 311 Notice of Appeal, filed August 11, 1975 il Index Continued Page Plaintiffs’ Exhibit 1: Letter dated August 26, 1967 from Kdward M. Penick, President of Worthen Bank & Trust Company to 0. O. Wyrick, Vice President of Federal Reserve Bank of St. Louis.. 313 Plaintiffs’ Exhibit 2: Letter dated September 1, 1967 from Edward M. Penick to O. O. Wyrick ........ 322 Plaintiffs’ Exhibit 3: Letter dated September 12, 1967 from Edward M. Penick to 0. O. Wyrick ........ 324 Plaintiffs’ Exhibit 4: Letter dated September 13, 1967 from O. O. Wyrick to Edward M,. Penick ........ 326 Plaintiffs’ Exhibit 5: Letter dated September 1, 1967 from Edward M. Penick to H. C. Adams, Commis- sioner of State Bank Department .............. 328 Plaintiffs’ Exhibit 6: Letter dated September 5, 1967 from H. C. Adams to Edward M. Penick ........ 236 Plaintiffs’ Exhibit 7: Letter dated September 12, 1967 from Edward M. Penick to H. C. Adams ........ 338 Plaintiffs’ Exhibit 8: Letter dated September 13, 1967 from H. C. Adams to Edward M. Penick ........ 339 Plaintiffs’ Exhibit 9: Sale and Leaseback proposal dated September 28, 1967 to Goldman, Sachs & Co. 340 Plaintiffs’ Exhibit 10: Revised Sale and Leaseback proposal dated October 27, 1967 of Stephens, Inc. 344 Plaintiffs’ Exhibit 11: Letter dated October 30, 1967 from Frank Lyon to Worthen ................0. 346 Plaintiffs’ Exhibit 12; Comparison of financing plans of Frank Lyon, Stephens, Ine. and Goldman, Bache & Oe. ..0sc0c0e0encs eeu su ueeeeeee 348 Plaintiffs’ Exhibit 13: Specification for Sale-Lease- —_ of Worthen Bank Building dated October 31, ao Plaintiffs’ Exhibit 14: Letter dated November 1, 1967 from Frank Lyon to Worthen containing Lyon’s proposal numer Bo. .o0sccsceeeusens eee 352 Plaintiffs’ Exhibit 15: Comparison of financing plans Gated November & 2660 2... sccccscccencbun 355 Index Continued ili Page Plaintiffs’ Exhibit 16: Letter dated Noevinber 30, 1967 from Alan W. Peters, Vice President of First Na- _ tional City Bank to Edward M. Penick .......-- 356 Plaintiffs’ Exhibit 17: Letter dated December 18, 1967 from Richard W. Baker, Jr., Vice President of New York Life Insurance Company to Frank _ Lyon Company .......--.eeeeeeeeeeeeeerreeees 358 Plaintiffs’ Exhibit 18: Ground Lease dated May 1, 1968 between Worthen Bank & Trust Company, as Lessor, and Frank Lyon Company, as Lessee.... 366 Plaintiffs’ Exhibit 19: Building Lease dated May 1, 1968 between Frank Lyon Company, as Lessor, _ and Worthen Bank & Trust Company, as Lessee. 376 Plaintiffs’ Exhibit 20: Note Purchase Agreement dated May 1, 1968 between Frank Lyon Company and New York Life Insurance Company ........---- 443 Plaintiffs’ Exhibit 21: Building Loan Agreement dated May 14, 1968 between Frank Lyon Company and - First National City Bank ........-..5-00seeees 462 Plaintiffs’ Exhibit 22: Building Loan Mortgage Note for $7,000,000 dated — 14, 1968 from Frank Lyon Company to First National City Bank .... 488 Plaintiffs’ Exhibit 23: Building Loan Mortgage dated May 14, 1968 from Frank Lyon Company and Worthen Bank & Trust Company to First Na- tional City Bank ..........65-- ccc ceeeeeeeeeees 490 Plaintiffs’ Exhibit 24: Assignment dated May 14, 1968 from Frank Lyon Company to First National City en acc eee ees ccrccececccoces 503 Plaintiffs’ Exhibit 25: Sales Agreement dated May 19, 1968 between Frank Lyon Company, as purchaser, : and Worthen Bank & Trust Company, as seller .. 508 Plaintiffs’ Exhibit 26: Secured Note dated December 1, 1969 for $7,140,000 from Frank Lyon Company to New York Life Insurance Company ......... 523 iv Index Continued Page Plaintiffs’ Exhibit 27: First Deed of Trust dated De- cember 1, 1969 from Frank Lyon Company and Worthen Bank & Trust Company to Darrell D. Dover and New York Life Insurance Company... 527 Plaintiffs’ Exhibit 28: Assignment dated December 1, 1969 from Frank Lyon Company to New York Life Insurance Company Plaintiffs’ Exhibit 29: Consent and Agreement dated December 1, 1969 of Worthen Bank & Trust Com- pany to New York Life Insurance Company .... 575 Plaintiffs’ Exhibit 32: Specimen bank statement of Frank Lyon’s account at First National City Bank with specimen checks and credit ticket attached.. 584 Plaintiffs’ Exhibit 33: Comparative consolidated bal- ance sheets of Frank Lyon Company and subsidi- aries as of December 31, 1969 and 1968 ......... 587 Plaintiffs’ Exhibit 34: Comparative consolidated state- ment of income years ended December 31, 1969 and 1968 of Frank Lyon Company and sub- I ts RES 589 Plaintiffs’ Exhibit 35: Guaranty dated May 14, 1968 from Edward M. Penick, President of Worthen Bank & Trust Company to First National City ee OF OE TE acc dcceseseusetéctcicee 591 Plaintiffs’ Exhibit 36: Computation of tax loss on Worthen Building of Frank Lyon Company for years 1969 through 1993; years 2007 through 2019 and years 2033 through 2044 .................. 595 Plaintiffs’ Exhibit 37: Letter dated August 22, 1967 from O. O. Wyrick, Vice President of Federal Reserve Bank of St. Louis to Edward M. Penick, President of Worthen Bank and Trust Company of Little Rock, Arkansas ...................... 597 Plaintiffs’ Exhibit 38: Summary of Conservation with Mr. O. O. Wyrick dated September 6, 1967 ....... 599 Plaintiffs’ Exhibit 39: Letter dated September 20, 1967 from Mr. Theodore M. Siouris, A General] Partner to E. M. Penick, President of Worthen Bank & Trust Company in reference to Sale- Leaseback Financing of New Bank Headquarters 601 Index Continued v Page Plaintiffs’ Exhibit 40: Letter dated April 16, 1968 from Edward Penick, President of Worthen Bank and Trust Company to Mr. H. C. Adams, State Bank Commissioner, Little Rock, Arkansas ...... 609 Plaintiffs’ Exhibit 41: Letter dated April 16, 1968 — Edward Penick, President of Worthen Bank and Trust Company to Mr. O. O. Wyrick, Vice President of Federal Reserve Bank of St. Louis.. 613 Plaintiffs’ Exhibit 42: Letter dated April 19, 1968 oo O. O. Wyrick, Vice President of Federal Re- serve Bank of St. Louis to Mr. Edward M. Penick, President, Worthen Bank and Trust Company... 618 Plaintiffs’ Exhibit 43: Letter dated April 22, 1968 from James Penick, Jr., Executive Vice President of Worthen Bank and Trust Company to Mr. O. O. Wyrick, Vice President, Federal Reserve Bank of ME, BOD cccccccccsecccccceescessccesenasaces 620 Plaintiffs’ Exhibit 44: Letter dated April 23, 1968 from ©. 0. Wyrick, Viee President, Federal Re- serve Bank of St. Louis to Mr. James Penick, Jr., Executive Vice President, Worthen Bank & Trust COUMGET cc cccccccccccccccssccecece jeabewenes 622 Plaintiffs’ Exhibit 45: Comparison of annual rent with total of depreciation and interest for first 10 years of Worthen Bank Building ..................-. 623 Plaintiffs’ Exhibit 46: Worthen Bank & Trust Co. "Rent Schedule on Worthen Building 1944 ...... 624 Plaintiffs’ Exhibit 47: Safeway Lease .............. 625 Plaintiffs’ Exhibit 48: Inter-office communication dated May 13, 1969 from B. H. Dean, Jr. to James A. Rowland for Mr. W. H. Dodge regarding Safe- WEG TABI cc ccccccvcccccccsccccccccceccsecees 641 Plaintiffs’ Exhibit 49: Letter dated July 28, 1971 from James B. Bolen, Jr. to T. H. Mayer and Nicholas M. Mayer enclosing Safeway Lease ............. Plaintiffs’ Exhibit 50: Letter dated April 12, 1968 from Frank Lyon Company to Ed Penick, Presi- dent, Worthen Bank and Trust Company ....... 686 vi Index Continued Page Plaintiffs’ Exhibit 51: Letter dated April 26, 1974 from Rudy Landry, Investment Officer of Cabot, Cabot & Forbes Equity Trust to Mr. Frank Lyon, Chair- man of the Board, Frank Lyon Company ...... Plaintiffs’ Exhibit 52: Explanation of Items of Frank EI AE Defendants’ Exhibit 1: Equity interest in land and buildings of Worthen Bank & Trust Co. ......... Defendants’ Exhibit 2: Cash Flow, Frank Lyon Co.- Worthen Building ............................ Defendants’ Exhibit 3: Loss from Renial Operation, Frank Lyon Co.-Worthen Building ............. Defendants’ Exhibit 4: Gain on Sale 1980 if 1980 Op- tion is Exercised, Frank Lyon (Co.-Worthen I aie eS Le Defendants’ Exhibit 5: Tax Consequences vs. Eco- nomic Gain if 1980 Option is Exercised, Frank Lyon Co.-Worthen Building ee Defendants’ Exhibit 6: Tax Benefit—if Option Exer- cised November 30, 1980, Taking 1969 Tax Reform Act into Account, Frank Lyon Co.-Worthen Building Defendants’ Exhibit 7: Schedule of Direct Reduction Loan, Frank Lyon Company, Loan from New York Life (Schedule December 16 1969) Defendants’ Exhibit 11: Letter dated November 28, 1969 from Frank T. McGehee, Assistant Vice President of Worthen Bank and Trust Company to New York Life Insurance Company "ereeceeeeeeeeeeeereeee eee eeeeeeee ee ese “eee eevee , Defendants’ Exhibit 12: Letter dated November 25, 1969 from Members American Institute of Certi- fied Public Accountants of Gotham. Wyman & Howland to New York Life Insurance Company. . Defendants’ Exhibit 13: Letter dated September 2 a 1966 from Richard F. Gates, Vice President to Mr. Harry E. Meek, Attorney, Little Rock 687 689 691 692 693 696 697 701 705 707 Index Continued vil Page Defendants’ Exhibit 14: Letter dated October 13, 1966 with enclosures from Harry E. Meek, Attorney to Worthen Bank & Trust Company .....-.....- » 9 yw hihi y tte > September 8, Defendants’ Exhibit 15: Letter dated : ; 1967 from C. J. Giroir, Jr., Attorney to Worthen Bank and Trust Company ............-000e00e: )xhibi ): , ication Defendants’ Exhibit 16: Inter-office communicat dated August 11, 1967 from Richard F. Gates to Edward M. Penick regarding financing of bank building (pp. 1 and 2, and 8-10) ..........-+-55: 708 734 Frank Lyon Company Vv. Tue Unitrep “.rates or AMERICA Date Filings—Proceedings 9-27-73—Complaint filed. Summons issued and handed marshal for service. 10-9-73—Mar. det. on service on summons, by serving Jane Thompson, Secretary, on 10-1-73, and by certified letter to the Attorney General’s Office, 9-27-73. 11-26-73—Answer filed. C/S. 8-13-74—Order setting pre-trial conference on Wed., Sept 18, 1974, 11:00 a.m. 9-16-74—Stipulation filed by both parties. 9.20-74—Pre-Trial Order by J. Eisele ordering this case set for trial to the Court at 9:30 a.m. Tuesday, No- vember 26, 1974; Deft. USA filed a demand for jury trial; it now desires to waive trial by jurv; the case is therefore transferred to the non-jury docket; Pitf. has filed a pretrial brief with the Court. Deft. should provide the Court with citations of authority upon which it is relying; All discovery must be completed not later than November 8, 1974; No discovery will be permitted thereafter except to prevent mauifest injustice; The Court will read the stipulation and all exhibits before trial, with reference to deft’s exhibits there is no agreement that they are accurate or that they would represent the tax advantage to the Pltf. if his position were adopted, however, deft. will not be required to present the testimony of an agent who prepared them. 10-22-74—Deposition of Edward M. Penick filed by Court Reporter, taken Tuesday, September 17, 1974. 10-24-74——Deposition of Frank Lyon taken Sept. 12, 1974, Little Rock. 2 10-24-74— Deposition of E. Ralph Cotham taken 9-12-74, Little Rock. 11-15-74—Deposition of C. V. Barnes taken 11-4-74, Little Rock. 11-26-74—Trial to Court before Judge Eisele, 9:32 a.m.- 6:00 p.m. continued. 11-27-74—Trial resumed 9:00 a.m.-5:07 p.m. After comple- tion of testimony, Court stated some findings from bench: Frank Lyon is owner of building; it is highly improbable that Worthen will exercise option at end of 11th year or any other option period; there is no loan here, even if finally should determine Worthen owns the building. Simultaneous briefs due December 20; each party may respord by January 7, 1975. 12-3-74—Marshal’s Return of Service on Frank Lyon, personally 11-26-74. 12-6-74—Marshal’s Return of Service on Edward M. Penick, personally 11-22-74. 12-20-74—Deft’s. Supplemental Memorandum of Fact and Law. 12.23-74—Supplemental Stipulation by parties. 1-7-75—Reply Brief—Deft. 5-21-75—Memorandum Letter Opinion, J. Eisele. 5-27-75—Excerpted Testimony file’ by Reporter Fant (fr 11-27-74). 5-27-75—Excerpted Remarks filed by Reporrer Fant (fr 11-27-74) 6-3-75—Original transcript of remarks made by the Court at close of trial led by Scott P. Crampton, Asst. Atty. Gen’l. 6-11-75—Supplementary Findings of Fact and Conclusions of Law filed by Judge Eisele. 3 6-11-75—Judgment pursuant to findings of fact and con- clusions of law filed by Judge Eisele, entering judg- ment in favor of plaintiff in the following amounts with interest from dates indicated: $32,624.32 with interest thereon from March 15, 1969; $231,871.26 with interest thereon from March 15, 1970; $43,790.84 with interest thereon from April 19, 1973. 8-5-75--Orig. & 1 copy of Vols. I & IT of transcript of trial filed by Reporter Fanr. 8-11-75—Notice of Appeal for judgment of 6-11-75 by U.S. Dist. Court to U.S. Court of Appeals for the 8th Cir- cuit: Certified copy of N/A & 2 cert. copies of docket entries to 8th Cir.; copies to U.S. Atty., appellant— J. Gaston Williamson, atty. for appellee—& to Caro- lyn Fant, Court Reporter. GENERAL DOCKET Unrrep Srates Covert or AppraLs For tHe Eicutn Crrcvir Appeal from Eastern District of Arkansas Case No. 75-1615 Frank Lyon Compaxy, Appellee, Vs. Tue Unrrep States or Amenica, Appellant. Date Filings—Proceedings Filed 1975 Aug. 13—Docketed appeal Aug. 13—Cert. copies Notice of Appeal, Docket Entries of D.Ct. (1) 4 ) Aug. 18—-Appearance appellee 2) 9 Aug. 19—Appearance appellant (3) Aug. 25—Appearance appellant (4) Sept. 19—Motion appellant for extension of time to file appendix and brief (5) Sept. 19—Order: Appellant may have thru October 22 to serve and file appendix and opening brief (6) Oct. 24—Appendix (vol. 1 & 2) w/service (7) Oct. 24—Brief appellant w/service (8) Oct. 24—F our copies exhibit volume Oct. 23—Appearance appellant (9) Nov. 25—Order: Appellee may have thru December 4 to serve and file brief (10) Dee. 3—Brief appellee (11) Dee. 3—Affidavit of service w/brief appellee (12) Dec. 8—Submitted to screening panel Dee. 19—Mo applnt for ext to file reply brief (13) Dee. 23—Order: Appellant granted to January 2 to serve and file reply brief (14) 1976 Jan. 5—Reply brief appellant w/ser (15) Jan. 21—Transferred to February session Feb. 13—Appearance for appellee (16) Feb. 13—Argued and submitted to Judges Bricht. Henley, Regan. Gary Allen, Dept. of Justice for appellant; C. J. Giroir, Jr. for appellee; concluded by Mr. Allen. Reeorded May 26—Opinion by Judge Bright (Published) (17) J May 26—Judgment: Judgment of district court is reversed and remanded to district court for proceedings con sistent with opinion (18) June 4—Appellee’s bill of costs (19) June 4—Appearance for appellee (20) June 4—Mo appellee for ext to file pet for reh/reh en bane (21) June 4—Order: Appellee may have thru June 18 to file petition for rehearing (22) June 17—Petition of appellee for rehearing en bane and rehearing (23) Aug. 6—Order: Petition of appellee for rehearing en bane is denied (24) Aug. 6—Order: This court directs that our opinion be modi hed; petition for rehearing of Frank Lyon Co. is denied (Printed, Published) (25) Aug. 16—Mandate issued Aug. 19—-Receipt for mandate 26) Nov. 8—Notice of filing of petition for writ of certiorari in Supreme Court as Case No. 76-624 (as of 11/3 76) 27) 1977 Mar. 3—Order of Supreme Court in Case No. 76-624 grant ing certiorari 25) 6 IN THE UNITED STATES DISTRICT COURT EASTERN DISTRICT OF ARKANSAS WESTERN DIVISION (Caption Omitted in Printing) Complaint (Filed September 27, 1973) The plaintiff, Frank Lyon Company, for its cause of action against the defendant, United States of America, states: 1. Plaintiff is, and at all times mentioned in this com- plaint was, a corporation organized and existing under the laws of the State of Arkansas with its principal place of business in Little Rock, Pulaski County, Arkansas. 2. This is an action for the recovery of internal revenue taxes, with interest thereon, erroneously and illegaily as- sessed and collected. Jurisdiction is conferred upon this Court by Title 28, United States Code, Sec. 1346(a)(1), as amended. 3. Plaintiff filed its income tax return for the calendar year 1969 with the Internal Revenue Service Center, in Austin, Texas, and paid the tax reported due thereon. Following an examination of said return, the Commis- sioner of Internal Revenue assessed an income tax defi- ciency against plaintiff for 1969 as follows: Tax Deficiency Interest Total Assessment $261,063.34 $48,339.63 $309,402.37 Plaintiff paid said deficiency assessment to the Internal Revenue Service Center, in Austin, Texas, on April 19, 1973. 7 4. Of the total deficiency assessment for 1969, $24,466.98, together with interest in the amount of $4,548.79, was at- tributable to adjustments not contested by the taxpayer. The remaining deficiency assessment was attributable to the Commissioner’s erroneous determinations that plain- tiff was not the owner of the Worthen Bank Building in Little Rock, Arkansas, and was not entitled to deduct cer- tain expenses attributable to said building as set forth in plaintiff’s claim for refund, a copy of which is attached hereto as Exhibit ‘‘A’’ and incorporated herein by reference. 9. On July 20, 1973, plaintiff filed with the Internal Revenue Service Center, in Austin, Texas, a claim for refund (Exhibit ‘*A’’) of income tax for 1969 in the amount of $236,596.36, plus interest paid thereon in the amount of $43,790.84, no part of which has been repaid to plaintiff. As grounds for recovery, some of which are stated in the alternative, plaintiff incorporates herein by reference the averments contained in its claim for refund for 1969, 6. By certified letter dated August 22, 1973 from the Internal Revenue Service Center in Ausiia, Texas, plain- tiff received statutory notice that its claim for refund for ‘1969 had been disallowed in fuil. A copy of said letter is attached hereto as Exhibit ‘‘B’’. Wiererore, plaintiff prays for judgment against de- fendant for income taxes overpaid for 1969 in the amount of $236,596.36, plus interest assessed thereon in the amount of $43,790.84, for a total of $280,387.20, together with its costs and interest as provided by law, and for all other relief to which plaintiff is entitled. /s/ J. Gastoxn WititamMson J. Gaston Williamson 720 West Third Street Little Rock, Arkansas 72201 Attorney for Plaintiff IN THE UNITED STATFS DISTRICT COURT EASTERN DISTRICT OF ARKANSAS WESTERN DIVISION (Caption Omitted in Printing) Answer [Filed November 26, 1973] The defendant, United States of America, by its attorney, W. H. Dillahunty, United States Attorney for the Eastern District of Arkansas, for its answer to the complaint here- in admits, denies, and alleges as follows: 1. Admits the allegations contained in paragraph 1. 2. Admits the allegations contained in paragraph 2, ex- — cept denies that any tax or interest was erroneously and illegally assessed and collected. 3. Admits the allegations contained in paragraph 3, ex- cept alleges that the total deficiency assessment was $509,- 102.97, rather than the amount alleged in the complaint and further alleges that the Internal Revenue Service re- ceived payment of this amount on April 20, 1973, rather than the date alleged. 4. Is presently without knowledge or information suffi- cient to form a belief as to the truth of the allegations contained in paragraph 4, except denies that any deter- mination of the Commissioner was erroneous and further denies each and every allegation contained in the claim for refund unless specifically admitted herein, except ad- mits that a copy of the claim for refund was attached to the complaint as E:xhioit A. ». Admits the allegations contained in paragraph 5, ex- cept alleges that plaintiff’s claim for refund was received on July 24, 1973, rather than the date alleged in the com- plaint and denies each and every allegation contained in the claim for refund unless specifically admitted herein. 6. Admits the allegations contained in paragraph 6 Whererore, defendant pravs for judgment in allowing the defendant its costs, and for such othe lef as this Court may deem just and proper W. H. Dirtamuyry United States Attorney By: Assistant United States Att Demanpd For Jury Trial Defendant demands a trial by jury of all issues of! arising out of this action IN THE UNITED STA RICT Ct EASTERN DISTRICT « ANSAS WESTERN DIVISION (Caption Omitted in Printing) Stipulation [ Filed September 16, 1974] ; | if . hereby stipulated my and hHerween ait part OS that for the purpose of this case the follow act he taken As true, subject tr Tiive ric ; ot ‘ ti) Dat} ob pen grounds ot materiality O] relevance: prov that either party may intro luce other and fu net inconsistent with the facts herein st pula |. This is an action for the recovery of nue taxes, with interest thereon. .Juriscdiet upon this Court by Title s, Lnited States lj46(a)(1) as amended ’ cy to the admission of such facts in evidences hae, irtie evi ted Internal » is ‘ Co Si | ac : + 4 ; a - . ; . - “ 4 ; “ 3 : 3 J . f - 4 - . ane f ,¢ / f . — ¢ , = A w > , . tt = , a oe j S 4 » & . : ; . , P 7 . - , , . y 7 ” A A ‘ va a va i => A - a x x “, = " of _ 7 / _ = - : . ; on - - . ~ ee Pe : ‘ = , / - i - = P - 7 - . > 4 2 = > o - ' 7 -+ ; - : - “ 7 os ' - > _ , - j - : ‘ . ; 1 , , P ; = : ‘ ~- . . - . ; . 7 ‘ - —— " : = x - A ‘ =“ « ‘ - . " . . , " - . - - . ‘ ~~ + a, ‘ . “ -- “ - — = = - . . a ‘ a - . - ¢ - rn - » pes f > - _ - —_ o = - L- . ~ _— — 4 . — . o . > - > > - = . > . . “ * s - — . - i = ’ — = - “ . ~ ~ - . ofl a - - 3 ' - - > ‘ - ° - " ' . ~ = . ~— > . . J 7 _ ” ‘ . > . -- v - - ; ~~ ~ . * “ : ass : —_ = —~ . - . = - -— - . , , - . = - -» > “ - ‘ - : = = . - - .- - ; " . 4 —— > ~ = = 7 _ . e e -_ ~ "as - . - a - “ tn ~~ a " — — — — a > . . - , - - . _ - ie Napeeele he ele Pe eT nee ee vere Sadat Rom .. athe Mae ee. s ; 7 7 3 ? 4 ” G | 217 By that, just what did you mean! A. Well, we would be paying it indirectly in the form of rent over the term of the loan. Mr. Williamson: No further questions. Recross ExaMINATION By Mr. Sayre: Q. With regard to that last question I asked you to [340] at Defendant’s Exhibit No. 11 and 12. Defendant’s Exhibit No. 11 is a copy of a letter written on the station- ery of the bank and signed by Mr. Frank T. McGehoe. Who is he, please, sir? A. He was the building ccordi- nator. @. It is dated November 28, 1969 to the New York Life Insurance Company. It says: ‘‘ Attention Vice President, Real Estate and Mortgage Loans’’ and it refers, of course, to this building transaction. ‘This is to certify to New York Life Insurance Com- pany that as of October 31, 1969 the records of Worthen Bank and Trust Company show that it has paid in connec- tion with the total cost of the mortgage property as de- iined in paragraph 2E of the consent and agreement dated May 1, 1968 between Worthen Bank and Trust Company aud the New York Life Insurance Company as follows:’’ There is a breakdown of the payment to Matson Bel- lows, architectural fees, construction consulting fees, in- terior design consulting fees, so forth. Under ‘‘other ma- terial’’—on the last page it’s got ‘‘legal and accounting fees and interim interest on construction funds borrowed’’. Do those construction funds of $399,000.00 pertain to traoney borrowed on the building itself? A. I would as- sume that they do. I’m not exactly familiar with it. [341] Q. If the testimony has been that Frank Lyon Company has paid—drawn the money down and paid it. 218 why would the bank certify in this letter to New York Life in accord with the agreement and—consent and agreement which is an exhibit here—that it had paid this interim interest? A. Well, I think this letter dealt with the re- quirement of the New York Life Insurance Company in the final closing and certification from us as to exactly the total cost that had gone into the building. Q. Then what you are saying is that—— A. I think it is a mistake in the way it is written because the total cost in the building and these—the interim construction loan ran to the Frank Lyon Company. Q. Now we talked about the interest was arranged, or the terms of the loans were arranged by Worthen Bank prior to the time that even Frank Lyon Company, had got into this arrangement. Because you said the bank would be paying the interest indirectly through the rent; is that cor- rect’ A. Right. Q. What about the same agreement was made with re- card to the interim interest, the interest on the interim loan? A. I’m not sure whether we paid the interest on the interim loans or not. We did not. I’m—— Q. Then the total amount of miscellaneous expenses claimed with regard to the building: this is fees of the [342] accountant and attorneys under the various agree- ments and the claim for interim interest to Frank Lyon, approximates $500,000.00. Was it contemplated that the $500,000.00 that Frank Lyon was going to put into the venture would cover ex- penses? A. No. There was no inter-relation between those two at all. Q. It’s just coincidence? A. If it turned out that way it is coincidence. Q. And on Exhibit No. 12, which is the independent certified accounting firm of Cotham, Wyman and Howland also certifying to New York Life that the interim interest on the construction loans were paid, that was, again—it was : | | : 219 not paid by Worthen Bank and that is a mistake in the certification? A. Well, I don’t know exactly how the books were handled on that. These certificates were not so much how they were paid but what the total cost went into the building. Q. You stated that the Worthen Bank had covered its risk, ultimate risk with regard to damage or repair or any- thing to do with the operation of the building is borne by Worthen Bank rather than Frank Lyon Company; is that correct? A. Through the insurance. [343] Q. Then the insurance premiums that go into this are paid for by Worthen Bank; is that correct? A. That's correct. Q. Now you stated that the bank had contested the treat- ment made by the Internal Revenue Service. Before lunch you said you didn’t know what treatment had been made. Have you checked since that time? A. Yes. Q. The Internal Revenue Service has allowed the bank a depreciation deduction and an interest deduction for the New York Life loan; is that correct? A. I checked on whether or not we had contested it and I have the comp- troller of the bank who would speak to that better than I could. The Court: It is immaterial whether the IRS is being consistent with another taxpayer or not. I am assuming that it is. Mr. Sayre: I have no further questions, Your Honor. Mr. Williamson: Mav I just ask one further question? Furtner Repirect Examrxation By Mr. Williamson: Q. Referring again to Defendant's Exhibit 12, prepared by the certified public accountant firm of Cotham, Wyman and Howland, as stated in the letter itself pursuant to paragraph 2™ of the consent and agreement, under that particular [344] agreement, consent and agreement be- tween Worthen Bank and New York Life, that paragraph 2E required the accounting firm to certify as to the total cost of the building, not who paid for it. A. Yes, sir. Q. And this certificate is being made pursuant to that. A. Total dollar amount that went into the building. Q. And in showing that the interim interest on construc- tion funds borrowed were paid in the amount of three ninety-nine and legal and accounting fees paid in the amount of $53,000.00, is not a certification that Worthen Bank paid them is it? A. It is not intended to be. The Court: Did Worthen pay them? The Witness: Sir? The Court: Did Worthen pay them? The Witness: No. Frank Lyon Company paid. The Court: All you paid Frank Lyon so far is a rent— you call a rent, and the government calls interest. At least it equals the amount of the obligation to the New York Life? The Witness: Yes, sir. The Court: And if anything else was paid it was not paid by Worthen? The Witness: That’s right. Yes, sir. {345} The Court: I am just talking about dollars. I as- sume these bills were paid by somebody: the interim in- terest and the legal expenses and the bills, I think it is un- disputed they came out of the bank account of the plaintiff, is it not? Mr. Williamson: That’s correct. The Court: And they weren’t indirectly paid in the sense that nothing in excess of the rental payments were paid by Worthen Bank to the plaintiff. 221 The Witness: This is a requirement by the New York Life Insurance Company as to the total cost of the build- ing. We had to certify as to the total cost of the building, not who paid it. By Mr. Williamson: Q. And, of course, Mr. Cotham has already testified that Frank Lyon Company paid for the interim interest monthly out of its own fund? A. Yes, sir. Q. Consequently, in Defendant's Exhibit No. 11, in which Frank McGhee—would you explain who Frank McGhee was in connection with this project? A. Frank McGhee was the Worthen Bank staff member who carried tim re- sponsibility as building coordinator, who coordinated all aspects of the building and to be in charge of renting the building. Q. As I understand it, the loan agreement also required [346] Worthen Bank to certify as to the cost of the build- ing. A. Yes, sir. (). So in this DX 11 in which Frank McGhee is certifying that Worthen paid these costs to the extent that he is certifying that Worthen paid the interim interest and the legal and accounting fees, it is simply an error, is it not? A. Yes, sir. Q. Really what he should have said is that the total cost of the building was this, not that Worthen paid this amount; is that correct? A. That’s correct. Q. And only to that extent is this certification of Me- Ghee in error? A. Yes. Mr. Williamson: No further questions. The Court: All right, Mr. Penick, I think they are going to let you go. (Witness excused.) The Court: Call your next witness. Mr. Williamson: Mr. Cotton Barnes. The Court: Mr. Barnes, come forward, raise your right hand and be sworn. Thereupon, C. V. Barnes [347] having been called as a witness by and on behalf of plaintiff, and having been first duly sworn, was examined and testified as follows: Direct ExaMInaTION By Mr. Williamson: Q. Would you please state your name and address? A. C. V. Barnes, 22 Wingate Drive, Little Rock, Arkansas. Q. How old are you, Mr. Barnes? A. How old am I? Q. Yes. A. Fifty-seven. Q. Fifty’? A. Seven. Q. What is your occupation and present employment? A. I’m a realtor, real estate counselor. Q. How long have you been engaged in the real estate business? A. About 25 years. Q. With what firm are you presently associated? A. Barnes, Quinn, Flake and Anderson. Q. What is your position with that firm? A. President. Q. What higher education did you have after high school years, Mr. Barnes? [348] A. I attended Little Rock Junior College and Oklahoma State College. Q. How long have you been a real estate appraiser? A. About 20 years. Q. Of what professional associations are you a member? A. Well, a member of the American Society of Real Estate Counselors. I’m a senior member of the National Associ- ation of Independent Fee Appraisers. I belong to the local, state and national association of realtors. Q. Incidentally, how many members are there in this American Society of Real Estate Counselors? A. There are about 430 members, I believe, nationwide. Q. How many in Arkansas? A. Four. Q. Have you in your professional career served as an official appraiser or designated appraiser for any govern- ment agencies? A. Veterans Administration, General Services Administration at the federal level. At the state level almost any state—well, that’s not literally true—but a whole lot of the state agencies. City of Little Rock, hous- ing authorities of both Little Rock and North Little Rock. Q. Have you been appointed in any official position as a member of a federal land commission appointed by Judge Henley? [349] A. Yes, sir, I served as a member of a federal land commission on properties on the Cadron Creek under appointment by Judge Henley several years ago. Q. Mr. Barnes, without going into any great detail, would you simply explain the more common methods of financing real estate need for someone who wants a building? How would he go about the various methods he would use to meet those needs. A. By financing—I’m assuming you are speaking in the broad generic sense of how you would go about arranging for all of the money necessary, whether by a loan or by other methods. Q. That is correct. That’s what I mean when I talk about financing arrangements. A. Of course, the simplest ar- rangement would be for an owner to just make a direct mortgage for a part of the money with a balance of the money being equity put up on the part of the owner. That’s the simplest form I presume. But today, particularly on larger type developments, it’s unusual to find a development that’s done on that simple premise. Generally, they use a multiple of different meth- ods. They will probably start off with a ground lease and then it could—the leasehold could be mortgaged and lessor’s interest could be mortgaged. You can just take it about as many steps as you want to take it. [350] Q. What generally dictates the particular form in which a financing of a real estate venture occurs? A. The form that’s most favorable to the developer. 224 Q. Is it unique in real estate investment that a potential tenant would want to build himself a facility and then sell it and lease it back? A. No, sir. Particularly among na- tional concerns this is probably more nearly the pattern than the other way around. People like Safeway stores, IBM and other national concerns will get the control of the property, build the property, may or may not arrange for the financing—some do and some don’t—and then when it’s all said and done sell it and lease it back or have a pre- arranged agreement before they do it to sell it and lease it back. But the main thing is that anyone like that wants to keep control of the development all the way through. Q. Why does he want to keep control of the development? A. Well, he wants to keep control of the development be- cause he’s going to be the user of the property and he wants to be assured that what—the end result meets his needs. Q. But then when he sells the property, does this mean that he hasn’t really disposed of the ownership even though he may lease it back? [351] Mr. Sayre: I object to that. It is a legal determina- tion. The Court: I think the objection is proper. By Mr. Williamson: Q. Mr. Barnes, you mentioned Safeway as a national concern that frequently uses a sale leaseback. Are you fa- miliar with the Safeway sale leaseback forms? A. Yes, sir. Q. Have you ever been involved in any sale leaseback transaction representing the property owner in your own experience? A. Yes, sir. Q. The plaintiff has already introduced as exhibits in this case a particular transaction involving a T. M. Mayer and Safeway. Is that his name? A. It’s Teddy Mayer and Nick Mayer. — ee 225 Q. Without going into any great detail in that transac- tion, would you explain who the Mayers were and just how the transaction developed and what the terms were? A. Well, the Mayers are—well, I should say, I guess, were local residents of Little Rock. One of them has since moved outside the city. They owned property at Markham and Rodney Parham Road. They retained me as their agent to see about leasing the property. I made a ground lease with Safeway Stores and with Magie Mart. Safeway Stores, after [352] executing a ground lease Q. Just briefly, what were the terms of the ground lease? Mr. Sayre: Again, I’m going to object as I did at the start to the introduction of the specific document into evi- dence and the testimony about the specific transactions which has nothing to do with our transaction under the sale and leaseback. He obviously is a realtor and an ex- pert as a realtor. If he has knowledge generally, he can testify, but I don’t think as to specific transactions that they have anything to do with the specific terms that we have here and, therefore, it is immaterial to this action. Mr. Williamson: Your Honor, [ think it is material for this reason: Safeway is one of the pioneers in this whole field of sale leaseback. This arrangement he has is a typical Safeway—they call their program buy, build, sale and lease program. They had a whole setup for this. It parallels this situation almost exactly and I would like to show that this is a very widely used device and wel] known to ail realtors of a type of financing which is recognized by the govern- ment as a true sale leaseback. The government allows Safeway the rental deduction. It allows the investor the depreciation and the deduction for the depreciation. It is just simply a typical sale leasehack transaction in the general real estate trade and then draw [353] parallels between that situation and this, which are almost identical on the face of it except for the dollars involved. Mr. Sayre: Your Honor, we have not had any evidence or testimony of whether or not Safeway leases have been challenged by the Internal Revenue Service. We’d be more than willing to stipulate that sales and leasebacks are ways of financing construction and in the letier I believe of East- man Dillon which is in evidence, they have stated they have placed ‘‘X”’ million dollars in sale and leaseback financing, but I don’t think any particular transaction with regard to a Safeway store here in Little Rock has anything to do with the issue in the suit with regard to this partic- ular taxpayer as the cases have shown which both plaintiff and defendant have cited. The facts in each one vary and are slightly different. I don’t think this Safeway transaction, which to my understanding was never even culminated—— Mr. Williamson: It was culminated, Your Honor, and the testimony will bring this out. The Court: Of course, I think the objection really is weil taken. Whether or not this type of transaction has been used by others, whether or not the government has ac- cepted it would not prevent them from challenging it. Of course, the Court is very much interested in what there is in the usual situation that satisfies the government and how this [354] one differs-and makes it unsatisfactory. I am going to receive it subject to the objection because I want to inquire of him as an expert as to certain elements, see if I can find out the critical elements that are involved for tax purposes. So I will receive it subject to the objec- tion. By Mr. Williamson: Q. New you say Mr. Mayer first entered into a ground lease with Safeway? A. Yes, sir. Sean Tee ee ee 227 Q. Did Safeway first try to buy the land? A. Yes, sir. It was not for sale. Q. So Safeway leased it and for what period of time? A. I’d have to refer to the lease. As I recall, the lease option covers 65 years. Q. You can give him Plaintiff’s Exhibit 47. A. The original term was for 20 years. Q. And how many renewal options were there? {) \V; rthe 1} Wis esse ni al \ a shel] Mr. Giroir: With all the mechanical. electric 27 4 eters iral components, but not the interiol! Mr Sayre: Since there is li Mr. Penick to clear that up? rhe Court: If it does turn out there is any dispute. | w: trying to make it with relation to Mr. Barnes’ testimony as to what a reasonable rental would be on the local maz Ket. I wanted to know what he was renting, what he was thinking about Let me ask: Mr. Penick has been under oath. Just stand right there and tell me now. I know you put over a million dollars in terms of improvements in this. Are those im- provements not only improvements of the facilities that the bank uses and the floors and lease space the bank uses, but also facilities that you have made for your own tenants at their requests and as part of your arrangements with them? Mr. Penick: Yes, sir, which would be recaptured in the rent from the tenant. If a tenant was going to lease a whole floor, he had certain tenant allowances. He could have a certain quality of carpet, certain type of paneling. We would pay for so many lineal feet of partitions. Anything over that, he would have to pay for. For example, one tenant wanted a floor and a half and wanted to join the floors by an interior stairwell. They paid for that by an increase in rent and that went onto our books as leasehold improvements, which we will recapture in the rent to the particular tenants. [371] The Court: What did you rent from the Frank Lyon Company? Before you spent any of the million plus money on the building, what did you have? Mr. Pennick: Certified in that list about a total in our building of $7.6 million, which was a functional building: exterior walls, lights, heating and airconditioning, but not detailed tenant improvements except in some of the areas we were occupying. Basically, it was $7.6 million bank building and high-rise building. Mr. Sayre: Mr. Penick, with regard—you said at the time you got to move in, ready to move in, it was 90 per- cent leased or committed; is that correct? Mr. Penick: Letters of intent. Mr. Sayre: At that time did people start moving into the building about the time you did? Mr. Penick: No. I would say they started moving in two or three months after. Mr. Sayre: This would have been in January or Feb- ruary? Mr. Penick: Of 1970. Mr. Sayre: At that time their spaces were starting to become available. In other words, partitions had been put in, their rug, and this type of thing? Mr. Penick: Yes. Mr. Sayre: A short delay before—— [372] Mr. Penick: Two to six months. Mr. Sayre: How long was it before your building was _ rented to the point you are talking about, the 90 percent or the initial rent period? How long did it take to get the tenants in? Mr. Penick: By mid-1970. Mr. Sayre: Six months? Mr. Penick: Yes. The Court: I think my contention was right in the beginning as to what the Lyon Company is leasing to Worthen. Do you understand what it is that they are leasing when you are calculating these rents, Mr. Barnes? The Witness: I think I do, yes, but, Judge, let me say this: Again, this is a general practice in the industry. When you make a lease or sale leaseback you have to have some number on which the negotiations take place over. It’s very common in build-to-suit property for the parties to agree on a dollar figure and then for the lessee to pick up any additional expense in the form of leasehold im- provements. The Court: All right. 240 By Mr. Williamson: Q. And in the light of those facts that have just been disclosed through the question and answer period, is it still your opinion that the rent being paid by Worthen Bank to Frank [373] Lyon Company for the property they were renting was a reasonable rent? A. Yes, sir. Q. In the light of the then market? A. Yes, sir. Q. Some discussion has come up with respect to the ground lease only $50.00 a year for the first 25 years. Do you consider this unusual? A. Well, if the ground rent had been a fair market rental it would just have meant they would have had to increase the rental on the leaseback. Q. Turning now to the option prices, would you com- ment on what percentage the various option prices were at the various option periods, what percentage of total cost, and whether or not in your opinion these were unusual in these types of transactions? A. Well, the 1980 option was at 82.79 percent. Q. Of the cost? A. Of the original acquisition cost. The Court: What transaction are you talking about? The Witness: We are talking about the option price at which Worthen may repurchase the property. The Court: All right. The Witness: In 1980 they have the option to repurchase at 82.;9 percent of the purchase price. In 1984 [374] it’s 71.11 percent; in 1989 at 54.81 percent and in 1994 at 28.09 percent. Those periods are 11, 15, 20 and 25 years after the inception date of the transaction. By Mr. Williamson: Q. Would you comment as to whether or not there is anything unusual about those particular option prices? A. I don’t believe there are. Q. Is this type of way in estimating option prices usual in transactions of this sort? Are these out of line with the 241 usual sale and leaseback transaction’? A. Not in my opinion, no, sir. Q. Is there any way to accurately estimate the fair mar- ket value of just the building now, not counting the land which is not involved here, 25 years from now? A. Well, of course, presumably that’s possibly what they were try- ing to do when they set these option prices I'm sure. Of course, when you get to talking about what something is going to be worth 25 years from now, are you going tuo be talking in 1968 dollars or are you talking in 1974 dollars or are you talking in 1994 dollars? I mean, you know, how do you define it? Q. What would be the various considerations that would go into considering what might be the value of that Worthen Building 25 years from now vis-a-vis obsoles- eence? A. Well, I think the principal thing that would go into [375] determining its value at that time, 1994, 20 years from now, is its functional obsolescence, not its physi- cal situation. I know in my lifetime I have seen three of the down- town hanks move three times, all three of them—well, will be when First National moves. And also in my lifetime observing the office buildings in the community, surely the Boyle Building down here at Fifth and Main was /uilt right after the turn of the century, but by the same tuken those buildings that were built about that time after they were some 25 or 30 years old they had to have extensive money spent on them to cure a physical problem, and cer- tain functional problems you couldn't cure. So the result is that that type of age building rents for less money, which results in the value being less than it would if you could rent it for what a class A building would rent for. Q. Is there anything unusual in your experience that the parking facility next to an office building would be under a different ownership than the office building itself? A. Some are and some aren't. In fact, I'd say there is 242 only one in Little Rock, I guess, where it is the same owner- ship and that’s the Union Bank Building. The old Worthen Bank property, they did not own the parking deck behind it. The parking deck that was built next to the Tower Build- ing. Of course, in this particular case there is an actual difference in ownership [376] although the property is under the control of the same owner. Q. From the point of view of a real estate investment counselor and looking at these documents and knowing the transaction as you do, in advising an investor, who would you consider to be the owner of the building? Mr. Sayre: I renew my objection. The Court: I will sustain the objection. By Mr. Williamson: Q. Let me ask you this question: If this property had been offered to you to find an investor who would enter into this transaction, do you think you would have any difficulty in finding a group of investors who would have bought the building on the same terms? A. I think in 1968 I could have sold the building on the same terms and conditions to a group of investors. Mr. Wittiamson: No further questions, Your Honor. The Court: Mr. Sayre, you may cross examine. Cross ExaMINaTION By Mr. Sayre: Q. Mr. Barnes, you said you were familiar generally with the financing methods and sale and leasebacks. Have you ever been in on a transaction where sale and leaseback was consummated? A. A consummated deal? Q. Yes. [377] A. No, sir. Q. And what were the reasons that you advised the peo- ple on the Safeway deal not to get into the transaction? mei 243 You said they should not buy it except on a constant of 10.5, something like that, and it was offered on 9.34. A. Rate of return. Q. Their rate of return would not have been sufficient? A. The rate of return at that time. It ultimately sold at a rate of return that was higher than ten zero four. Q. And, again, you advised the client not to invest in it at that price because of the rate of return? A. Well, that’s right. Now wait a minute. I don’t think that’s quite right. I think the second time around the client is the one who decided he didn’t want to get involved. Q. The rate of return on the Worthen Building was six and three-quarters; is that correct? A. No, sir. That was the mortgage interest rate. Q. And the payment of rental which would cover that was exactly the same; is that correct? A. No, sir. \). The rental was not equal to the mortgage’? A. The rental payments start out less than the mortgage payment. if I remember correctly. Q. I don’t believe you remember correctly. The Court: The first, five years, I guess you could [378] say that. The Witness: That’s what I had reference to, Judee. By Mr. Savre: Q. What are you referring to? A. As I understand it, the first five years there was $21,000.00 a vear less annual rental than the annual debt service on the mortgage. Q. Have you checked the instrument to see if that was the case’? A. Sir? That’s the way I read it. Q. You read the building lease, Plaintiff's Exhibit No. 1%. | heheve. The Court: Mr. Sayre, there is no sense in pursuing it. We know what the situation is. The amount is paid, but I don’t know it is incorrect for him to so testify. Even at that stage of the record it would not support such a view. The 244 bank and the representative of the Lyon Company have indicated they acknowledge this obligation as a part of the original transaction so I suppose that is one way of looking at it: that it has the effect of reducing the amounts below the actual amount necessary during the first five years. By Mr. Sayre: Q. Mr. Barnes, the original offer of Frank Lyon Com- pany called for a payment of $21,000.00 less than the mort- gage [379] payment for the first five years. The New York Life Insurance Company requested and required that the payment be equal to the debt service. The rentals that have been paid are equal to the debt service. On that basis there is no before tax cash flow is that correct?) A. On that basis there would be no before tax cash flow; that’s correct. Q. And you said a higher bracket taxpayer would have incentive to get into an investment such as this but not a lower bracket taxpayer; is that correct? A. The higher the bracket the more incentive. Q. And that being that the main purpose or the main in- centive there would be the ability to write off other income from other sources that that individual or company or in- vestor had against those deductions that come from the interest and accelerated depreciation; is that correct? A. I presume so, ves, sir. Q. In your examination is that the way you would look at is’ A. Any higher bracket real estate investor then or now is looking at what he gets to keep after taxes. Q. And since there’s no before tax cash flow, what he’s buying then is the shelter; is that correct, of other income? A. He may or may not be depending on the property. ves, [380] sir. It’s not at all unusual then or now for an investor to buy ‘‘tax shelter’’. Q. In this instance the Frank Lyon Company would not receive any before tax cash flow for the first 25 years of this transaction; is that correct? A. I have not made a projec. tion to find out where the point is that it breaks over. ~~ wt 245 Q. Well, it’s quite simple. If the mortgage payment and rental payment are equal for 25 years, there is not going to be any before tax cash flow. A. You are talking about before taxes? Q. Yes. A. That’s correct. Q. So you are talking about a break-over point is what? A. Before tax cash flow? Q. You are talking about an after tax cash flow, I pre- sume, when you say you haven’t computed the break-over point. A. That’s correct; after tax cash flow. Q. Would that take into consideration using the double declining balance method of depreciation? A. Using any method of depreciation? A. Using any method of depre- ciation permitted under the regulations and statutes. Q. Under this type of deal it is normal to use an [381] accelerated amount of depreciation and, therefore, to create the shelter in the earlier vears? A. Some investors cdo and some don’t. Q. In this particular transaction, that was done; is that correct? A. I’m not familiar with what accounting meth- ods they have used to handle this transaction at all. If I were analyzing this or a similar facility for a client, I would probably present my analysis on both an accelerated and a straight line basis. Q. You just testified that vou had examined it and the matter Was reasonable and that you would have been able to sell it to anybody else. Did you make your computations based upon the accelerated depreciation’? we +8 = ii fi sl] money back from Worthen, the borrower? whether it would be effective or not on . . 4 : (>) Doesn ’t 5 SBinnada. , , sae The Witness: By Worthen exercising the option. : veou A uustrate the ridiculousness of vo a . crual? A. No. The Court: In other words, there is no way legally he Q. Let me ask you one question. One of vou: _— can get it back. It takes Worthen to make a decision for it the down payment and the return of the dow nar f . . — .* . . ai ‘ : ie to get any money Dack. Did you discover any evidence that indicated that F e sical lids aa | iA rrea rr \ . rrr " . ' ’ OT ha ’ : -} . . +¢ The W ifness: lo tne best of my knowledge. Ly = had aA li gal, written or unWritten, express or imt ed . right to de mand repayment of that 500. + lus intereet? \ The Court: And iT = the Saline thing in terms ol making No. Nothing W ritten that | saw . a any income in terms of what you call interest. It takes a O. Let nals : ° i .* ¢- ary me ask one other question now at is ft do wit decision by Worthen to exercise the option. 438) interim interest. = The Witness: Right. Did vou observe the interim interest was, in f; a . the | «yt + 720 West Third Street intention the parties, as ey denced hy their writte ‘ : ‘3 " ae ss : *N agreements "ges » ? » | —: : Little Rock, Arkansas 72201 cements, read in the light of the attending facts and cireumst: inces xisting r Ting ‘ Mr. Eugene G. Sayre the acreement was executed, that the trans ction he . 1 } ‘ + . Department ot Justice What he lancuage and form of the transact , . 1100 Commerce Street that is, a sale leaseback with option to rennrel ’ rr , —-. ‘ ‘ , } . ae pee : ss j a . Dallas, Texas (o202 Vas both the subjective intent of the par? ee. iT ’ + j : : tiene = . uso the ‘‘objeetive’’ intent ac evn: , Mr. W. TH. Dillathunty wee : intent as expressed by the clear. wr " att cr IoOus angis . + ] . 4s ‘ Ll nited States Attorney T) (: as ine { I tne Wri . n ins ru? ents n\ 7 , ie urt aiso finds and , 7 ly } + | 0) s0 . 229) . le CUCL UGes nat, oOnieecetiws : ne me 7 oOwy transaction was in substance, a well ; f Little Rock, Arkansas 722053 er ance, as well as in for ensenars n WITH option th rep ire} ase A one » . ‘ ’ . . "rise ‘ nl r > . - ‘ ’ Re: Frank Lyon Company v. United States of America te: vas oO! bring strange and untenabl . ° . yy »! } No | R.73.C'.247 nut vould ne hoth uniust and eontraryv to the inten — purpose of our tax laws a Gentlemen: , : ; r) d fend int concede ~ t} t VV Ney rned Circumstances will not permit the Court to file an elah leasehack arrangement } ‘ ail ‘ ivemne } PCATI se of the y + _ ‘ " *«€ " " " . M repaid its down payment plus interest” is through the exercise of the option. : A. I made a computation A. Made a computa- A. I 5 Now if that’s the only way that Frank Lyon Company . going to be repaid, I have got to think that you as- sumed that the option was going to be exercised ; Rlhenaton, aah» you assume the option was going to sod | ; Much don’t think I’m following you. I don’t : tow | can say that I assumed that. What I meant to say was at the time I wrote my report | determined th: Frank Lyon was not the owner of the building. " me Would yous report have been the same had there no option? A. Well, I don’t know how to answ that right now since it was there. I ean’t say for tian tag Q. If you had known all the facts that you nn and the option was there but vou were told by Fr “ar l.yon and confirmed by Ed Penick that w & tees j ‘as legally j S. sible for the [442] option to have been ee exercised, would your report have been the s ? , same? é 7 : a arth. 09 \. I’d have to study it Q. In other words, the likelihood of the exercise of the . cr bo ang date was not of material importance to vou ‘ting your report? A. It was a factor. I sure was option 286 Q. But not a major factor? A. Well, it was—I — t say it was the major factor re bade _ 24 was a factor. , you how much weight right now. . wae bee me ask you one final question: If, in want, Worthen Bank was a lessee of the building Frank Ly 7 was the owner of the building, would all of the a adjustments which you made in your RAR be incorrec All of them related to the building? A. If now—— -_ Q. If you assume there was open to Frank Lyon’s nershi building? A. All right. ; *"O. gre he poser it was truly leased to W orthen Bank and that the ownership of the building was in ap Lvon and all the economic risks and gain were in me Lyon, that Lyon borrowed money from First Nationa City, Lyon borrowed money from New York Life, owns the building subject to a lease, [443] then if that was your determination, would all of your adjustments as they re- late to the building be wrong? A. Yes. The Court: Certainly. By Mr. Giroir: . Q. One final question. How can you impute interest if vou don’t assume the exercise of the option? A. Well, IT don’t think I put it that way in my report. Could I + e just a second there? or ray ALI think in my—well, following this through, it would be the equivalent of the interest. This $500,000.00 that Lyon Company had loaned would be—— (). You would have predicated it on a theory of a loan: a loan from Lyon Company to Worthen Bank? A. Rather “2. Let ’s stav to the $500,000.00. You would have assumed that Frank Lyon loaned Worthen $500,000.00; is that cor- rect? Is that the basis on which you imputed interest? A. That would be the basis, right. 287 Q. Now when there is a loan there must be a repayment or else it is not a loan; it’s a gift. Is that correct? A. That’s right. Q. When, under your theory, was the payment to occur? A. Well, under this theory, under the government’s theory, since Worthen owned it all, the contract was-——- Q. I’m sorry. I missed that answer. [444] A. It would be—under the government’s theory, Worthen actually owned the building and all Frank Lyon would get out of it would be a return on his investment of $500,000.00—re- turn on his loan of $500,000.00. Mr. Sayre: Excuse me, Your Honor. We are belaboring this. We have agreed that the interest factor would come in only when the option was exercised. We wil] stipulate to that. Mr. Giroir: What’s bothering me is that the agent who wrote the report assumed a loan and a repayment and he’s now unable to explain how it is going to be repaid. 'That’s my question. Mr. Sayre: We will be glad to stipulate we assumed the exercise of the option to create the interest factor of six percent. Mr. Giroir: Your witness who wrote this report is not stating that was in his mind, and that’s what I’m trying to ask. Mr. Sayre: As far as that goes, the acts of the agent do not bind the commissioner and as far as the government is concerned in the matter we would agree that the assump- tion was made that the option would be exercised to come up with the interest factor. To belabor the point, whatever Mr. Richardson’s atti- tude is on it at the present time is not material. (445] Mr. Giroir: Mr. Richardson’s analysis of the en- tire transaction is what precipitated this lengthy and ex- 288 pensive trial. I think we are entitled to have his analyisis of how he got from there to here. ttting down to the The Court: I think we are almost ge iden just arguing. He stated how he arrived = _ idea that it was a loan and how he understood it wou the interest su-called—would be paid. The Witness: I think I misunderstood you, too. It — be on that same basis as I have written there, based on 11 year period, payable—then, By Mr. Giroir: Q. What is the 11 year period? A. The time period when the option—when Worthen’s option would come up to repurchase. . "Q. ‘So you assumed that would be an exercise at the end fll years? A. Yes. ; ° Q. Why did you pick 11 rather than 15 or 20 or 257 A. That was the first option period. » ne Q. Why did you make the assumption at all? A. ¢ that was the first option period and that was the logica riod for it to be exercised. . . "OQ. Why did you make the assumption that it — [446] exercised. On what basis did you make it? A. On the basis that it was a loan. ; Q. Can you allow interest as an expense or require - recognition of interest as a gain if the likelihood of real. izing that interest is uncertain? A. If the likelihood is uncertain? ae . Q. If there is no certainty that it will be paid. A. ns there is no certainty that it will repay, I wouldn’t thin so, no. Reprrect EXaMINATION By Mr. Sayre: :; - . Mr. Richardson, with regard to the issue of whet ous the party to this transaction who would bear the ease turned out to be very much as I anti walked into the courtroom yesterday n heard the parties at pretrial conference 289 economic loss or who would bear the economic burden of the wear and tear on the building, it was your testimony that—or your determination it was Worthen Bank rather than the Frank Lyon Company; is that correct?