Estate of Bradley v. Commissioner

T.C. Memo. 1997-341

UNITED STATES TAX COURT

ESTATE OF JACK L. BRADLEY, DECEASED, JOHN S. BRADLEY,
SUCCESSOR EXECUTOR, C.T.A., Petitioner v. COMMISSIONER
OF INTERNAL REVENUE, Respondent

Docket No. 16637-95. Filed July 28, 1997.

Mark E. Kellogg and William F. Krebs, for petitioner.

Elizabeth P. Flores and Steven M. Roth, for respondent.

MEMORANDUM OPINION

TANNENWALD, Judge: Respondent determined the following

deficiencies and additions to tax in Jack L. Bradley's

(decedent's) Federal income taxes:
 - 2 -

Additions to Tax Under Secs.

Year Deficiency 6653(a)(1)(A) 6653(a)(1)(B) 6661
1
1982 $134,733.00 $6,736.65 $33,683.25
1
1983 176,099.00 8,804.95 44,024.75
1
50 percent of the interest due on the deficiency.

Respondent has also determined increased interest under section

6621(c).1

The main issues for decision are: (1) Whether respondent

timely issued notices of deficiency, and if so, (2) whether

decedent was "protected against loss" within the meaning of

section 465(b)(4) with respect to his pro rata share of

partnership debt obligations arising from sale-leaseback

transactions engaged in by a partnership, and (3) whether

additions to tax under sections 6653(a) and 6661(a) and increased

interest under section 6621(c) are applicable.

This case was submitted fully stipulated. The stipulation

of facts and the accompanying exhibits are incorporated herein by

this reference.

1
Unless otherwise indicated, all statutory references are
to the Internal Revenue Code in effect for the years in issue,
and all Rule references are to the Tax Court Rules of Practice
and Procedure.
 - 3 -

Background

Petitioner is the Estate of Jack L. Bradley (the estate).

John S. Bradley, successor executor, C.T.A., of the estate was a

resident of the State of Washington at the time the petition

herein was filed.

Decedent (who died in 1989) and his wife (who died in 1986)

filed joint Federal income tax returns for the taxable years 1982

and 1983. Decedent claimed net operating loss carrybacks from

the taxable years 1985 and 1986 to the taxable years 1982 and

1983 attributable to deductions of loss and investment interest

expense (the claimed deductions) relating to Hambrose Leasing

1984-5 (the partnership) in the following amounts:

Original Year Carryback Year Amount

1985 1982 $309,869
1985 1983 150,730
1986 1983 386,066

This case involves two sale-leaseback transactions, among

the following entities: Hambrose Leasing 1984-5, a partnership

engaged in the equipment leasing business; Charterhouse Leasing

Associates Limited Partnership (Charterhouse); Hambrose Reserve

Ltd. (Hambrose); M & J Holding Corp. (M & J), the sole

shareholder of Hambrose and the general partner of Charterhouse;

CIS Leasing Corp. (CIS); and Comdisco, Inc. (Comdisco).
 - 4 -

The Sale-Leaseback Transactions

The transactions can be described in general as follows: CIS

and Comdisco purchased with a combination of cash and borrowed

funds IBM computer equipment, which they then sold to

Charterhouse, subject to the original financing. Charterhouse

then (1) leased the equipment to various operating companies who

actually used the equipment, and (2) sold the equipment to

Hambrose, subject to the original financing and the user leases.

Hambrose then sold the equipment to the partnership, subject to

the original financing and the user leases. At the end of the

day, the partnership owned the computers, the operating companies

used them, and Charterhouse, Hambrose, and the partnership traded

streams of financing payments and lease payments. The

transactions are described in more detail, as follows.

The Initial Equipment

CIS financed, on a nonrecourse basis, the purchase of

certain IBM computer equipment (the initial equipment), for a

total purchase price of $589,791.26. Charterhouse then paid CIS

$419,132.00 for the initial equipment, in the form of cash, a

note, and an assumption of liabilities. These liabilities were

nonrecourse as to Charterhouse. All of the initial equipment was

leased by Charterhouse to Fluor Corporation, the actual end user

of the equipment. On or about March 19, 1984, Hambrose purchased

the initial equipment from Charterhouse for $419,132.00, subject

to the liens of the original third-party lender, and the user
 - 5 -

lease. This $419,132.00 purchase price was payable as follows:

$47,000.00 in cash on May 8, 1984, and in 85 consecutive monthly

installment payments of $6,287.99 each, with the first payment

due on April 1, 1984. The purchase agreement between Hambrose

and Charterhouse contained the following provision:

6. Indemnification.

Seller will indemnify Purchaser and protect,
defend and hold it harmless from and against any and
all loss, cost, damage, injury or expense, including,
without limitation, reasonable attorney's fees,
wheresoever and howsoever arising which Purchaser or
its subsidiaries or stockholders, or any of its, or
their, directors, officers, agents, employees,
stockholders or partners, may incur by reason of any
material breach by Seller of any of the representations
by, or obligations of, Seller set forth in this
Agreement or by reason of the Bulk Sales Laws of any
jurisdiction. * * *

Hambrose then leased back the initial equipment to

Charterhouse pursuant to the terms of a wrap lease, which

provided for 85 consecutive monthly rent payments of $6,287.99

each, with the first payment due on April 1, 1984. Under the

wrap lease, the lessee waived "any right of set-off under state

or federal law, counterclaim, recoupment, defense or other right

which Lessee may have against Lessor or anyone else for any

reason whatsoever".

The lease agreement contained the following provision:
 - 6 -

18. Indemnification

18.1 Lessee will indemnify Lessor and protect,
defend and hold it harmless from and against any and
all loss, cost, damage, injury or expense, including,
without limitation, reasonable attorneys' fees,
wheresoever and howsoever arising which Lessor or its
subsidiaries or shareholders, or any of its or their
directors, officers, agents, employees, stockholders or
partners, may incur by reason of any breach by Lessee
of any of the representations by, or obligations of,
Lessee contained in this Lease or in any way relating
to or arising out of this Lease, the Equipment, claims
of holders of the Lien or Underlying Leases; * * *

On March 19, 1984, the partnership purchased the initial

equipment from Hambrose for $419,132.00 subject to the liens of

the original third-party lender, a lien on and security interest

in the initial equipment on the part of Hambrose, and the user

lease and the initial equipment wrap lease. This $419,132.00

purchase price was payable as follows: $1,000.00 in cash on

May 8, 1984, $48,000.00 in cash on December 31, 1984, and then in

85 consecutive monthly installment payments of $6,287.99 each,

with the first payment due on April 1, 1984. This note was

nonrecourse as to the partnership.2

These payments were subject to deferral until September 30,

1992, if the partnership did not receive amounts due it from

Charterhouse. The partnership anticipated that a substantial

portion of a limited partner's return would depend on the

residual value of the equipment (for resale or release purposes)

2
Hambrose Leasing v. Commissioner, 99 T.C. 298, 301, 312
(1992); see infra note 9.
 - 7 -

at the end of the wrap lease and user lease. The purchase

agreement contained the identical indemnification provision as

the Hambrose-Charterhouse purchase agreement.

In conjunction with the partnership's purchase of the

initial equipment, Hambrose assigned to the partnership the

initial equipment wrap lease, as a result of which the 85

consecutive monthly rent payments of $6,287.99 each would be paid

to the partnership.

The Additional Equipment

Comdisco purchased certain additional IBM computers (the

additional equipment). It financed the purchase of some of the

additional equipment, amounting to $10,581,596.75 on a

nonrecourse basis through five different third-party lenders.

Comdisco paid cash for the rest of the additional equipment, but

the parties have no record of the exact amount of this payment.

Comdisco leased the additional equipment to seven different end

users.

Charterhouse purchased the additional equipment from

Comdisco for a total purchase price of $14,993,873.3 The

purchase price was a combination of cash payments, promissory

notes, and the assumption of Comdisco's financial obligations

with respect to some of the additional equipment. These notes

3
Presumably the difference between this figure and the
amount of Comdisco's financing is accounted for by the cash
payments for the additional equipment.
 - 8 -

and assumed liabilities were nonrecourse obligations as to

Charterhouse.

Hambrose then purchased the additional equipment from

Charterhouse for $14,421,478, subject to all other liens and

leases, including the liens and leases of the original third-

party lenders, Comdisco, and user leases. The $14,421,478

purchase price was payable by $1,700,000 in cash and by a note,

payable in nine installments of principal and interest as

follows:

Year Amount

1984 $ 412,833
1985 1,696,747
1986 1,883,388
1987 2,090,561
1988 2,320,522
1989 2,575,780
1990 2,859,116
1991 3,173,618
1992 2,571,326

The purchase agreement contained the identical indemnification

provision as the Hambrose-Charterhouse purchase agreement

relating to the initial equipment.

Hambrose then leased the additional equipment back to

Charterhouse pursuant to a wrap lease. As with the initial

equipment, the wrap lease provided for no rights of set-off. The

lease agreement contained the identical indemnification provision

as the wrap lease of the initial equipment. The annual payments

due Hambrose from Charterhouse under the wrap lease were
 - 9 -

identical to the installment payments due Charterhouse from

Hambrose under the note, described above.

The partnership purchased the additional equipment from

Hambrose for $14,421,478, subject to all other liens and leases,

including those of the original third-party lenders, Comdisco,

and Hambrose. The $14,421,478 purchase price was paid by

$1,442,148.00 in cash, and by an installment note secured by the

additional equipment, and payable as follows:

Year Amount4

1984 $ 519,173
1985 2,076,693
1986 2,076,693
1987 3,051,822
1988 2,320,522
1989 2,575,780
1990 2,859,116
1991 3,173,618
1992 2,571,326

This note was nonrecourse as to the partnership,5 and subject to

deferral if the partnership did not receive amounts due it from

Charterhouse, for up to 96 months, until September 30, 1992. As

with the initial equipment, the partnership anticipated that a

substantial portion of a limited partner's return would depend on

4
The first four amounts differ slightly from those rental
payments pursuant to the wrap lease and installments on the note
payable by Hambrose to Charterhouse. We do not consider these
differences significant. See Wag-A-Bag Inc. v. Commissioner,
T.C. Memo. 1992-581.
5
Hambrose Leasing v. Commissioner, 99 T.C. 298, 301, 312
(1992); see infra note 9.
 - 10 -

the residual value of the equipment (for resale or release

purposes) at the end of the wrap lease and user lease. The

purchase agreement contained the identical indemnification

provision as the Hambrose-Charterhouse purchase agreement with

respect to the initial equipment.

The additional equipment wrap lease, with the following

schedule of annual payments, was assigned to the partnership

pursuant to its purchase of the additional equipment:

Year Amount

1984 $ 412,833
1985 1,696,747
1986 1,883,388
1987 2,090,561
1988 2,320,522
1989 2,575,780
1990 2,859,116
1991 3,173,618
1992 2,571,326

The Partnership

Investments in the partnership were offered through a

private offering memorandum (POM),6 which expired at the latest

6
Petitioner objects to the receipt of the POM in evidence
on the ground that it is not an original. Fed. R. Evid. 1003
permits the admission of a duplicate "unless (1) a genuine
question is raised as to the authenticity of the original or (2)
in the circumstances it would be unfair to admit the duplicate in
lieu of the original." Petitioner has not shown either that
there is any question of authenticity, nor that it would be
unfair to admit what petitioner has conceded is a copy of what
decedent received. Fed. R. Evid. 1001(4); Keogh v. Commissioner,
713 F.2d 496, 500 (9th Cir. 1983), affg. Davies v. Commissioner,
T.C. Memo. 1981-438. Because we admit the exhibit under Fed. R.
Evid. 1003, we do not address arguments under Fed. R. Evid. 1004.
(continued...)
 - 11 -

October 31, 1984. The partnership offered 80 units of

partnership interest at a price of $45,000 each, payable in

$6,000 cash, and a $39,000 note bearing 11 percent interest

(payable semi-annually) payable in three installments of $13,000

on February 1, 1985, February 3, 1986, and February 2, 1987.

As a condition of becoming a limited partner, an investor

was also required to assume recourse debt of $92,363 per

partnership unit purchased, which represented his or her

proportionate share of the note executed by the partnership in

connection with the purchase of the equipment. The partnership

anticipated that the obligation assumed by the limited partners

6
(...continued)
Petitioner also makes a passing objection that, to the
extent the POM summarizes other documents, it represents
inadmissible hearsay. First, we find that the exhibit qualifies
for the "residual" exception under Fed. R. Evid. 803(24) for
statements which do not fit under any other specific hearsay
exception, but nonetheless are inherently trustworthy and
probative, and by whose inclusion justice would be served. See 3
Saltzburg, Fed. R. Evid. Manual at 1439 (1994). The POM
contained summaries of the agreements covering the transactions
involved, the opinion letter of a law firm, financial projections
by an accounting firm, and legally required disclosures for
residents of 26 different States. We are persuaded that the POM
reflected a high degree of competency and reliability on the part
of those involved in its preparation. See Hal Roach Studios,
Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1551-1553 (9th Cir.
1990) (upholding admission of SEC Registration Statement under
Fed. R. Evid. 803(24)). Moreover, its reliability is
corroborated by other supporting documents in the record herein.
See Osterneck v. E. T. Barwick Indus., 106 F.R.D. 327, 337 (N.D.
Ga. 1984).
Second, as can be seen from the discussion below, while the
exhibit does serve to illustrate the transaction at issue, the
elements upon which we rely in reaching our conclusion all have a
separate evidentiary basis.
 - 12 -

pertained to the last installments of the partnership note, due

between January 1, 1990, and January 1, 1992, and payable no

later than September 30, 1992. According to the subscription

agreement, Hambrose had the right to pursue a limited partner for

the amount of the unpaid balance of his or her pro rata share of

the assumed portion of the partnership note at maturity.

The POM included the following projection of tax benefits

per partnership unit for the first years of the transaction:

Projected Loss as a Percent
Year Investment Tax Loss of Investment

1984 $ 6,000 $24,547 409
1
1985 13,000 44,289 341
1
1986 13,000 40,050 308
1
1987 13,000 28,477 219

Total $ 45,000 $137,363 305
1
Does not include interest at 11 percent per annum.

The POM contained an opinion by the law firm of Friedman &

Shaftan, P.C. That opinion explained in considerable detail the

application of the at-risk provisions of section 465 and

concluded that the transaction would likely survive a challenge

by respondent.

Decedent's Decision to Invest

During the fall of 1984, decedent executed subscription

documents to purchase 10 units in the partnership, for which he

paid a total of $450,000 cash over the period from 1984 through
 - 13 -

1987. The amount of recourse debt which decedent was required to

assume totaled $923,630.

Decedent met Robert Michaels (Mr. Michaels) in the early

1980's. Mr. Michaels was a certified public accountant,

practicing income tax and general accounting since 1969, worked

in an accounting firm, and directed staff.

Mr. Michaels learned of the partnership from a client, then

told decedent about it. Decedent consulted with Mr. Michaels

concerning the investment in the partnership. Mr. Michaels

reviewed the POM, including the opinion letter; he also was of

the opinion that a partner would be at-risk for the amount of

partnership debt which a partner was required to assume.

Mr. Michaels consulted with decedent's tax counsel, David

Weinstein (Mr. Weinstein), about the investment. Based

on this consultation with Mr. Weinstein, the opinion letter in

the POM, and his own analysis, Mr. Michaels approved the

investment, which decedent then made.

Mr. Michaels prepared for decedent and Mrs. Bradley joint

Federal income tax returns for the taxable years which included

the deductions at issue, 1984, 1985, and 1986.

Procedural Background

Decedent filed Form 1045 (regarding loss carrybacks to

previous years) for the taxable year 1985 on or before

September 26, 1986, and filed Form 1045 for the 1986 taxable year

on or before October 5, 1987. Respondent issued a notice of
 - 14 -

final partnership administrative adjustment (the FPAA) to the

partnership for the tax years 1985 and 1986 on December 2, 1991.

On March 2, 1992, the partnership filed a petition with this

Court challenging the correctness of the FPAA, but making no

claim that it was not timely. That case was captioned Hambrose

Leasing 1984-5 Limited Partnership, Barry M. Goldwater, Jr., Tax

Matters Partner v. Commissioner, under docket number 4539-92, and

we will hereinafter refer to it as Hambrose II.

On September 1, 1992, this Court issued its opinion in a

related case, pertaining to the 1984 tax year, Hambrose Leasing

v. Commissioner, 99 T.C. 298 (1992), which we hereinafter refer

to as Hambrose I. In Hambrose I, we held that the issue of

whether a partner is at risk under section 465 must be decided in

a partner-level proceeding, not in a partnership-level

proceeding. In that opinion, we also decided that, for purposes

of any subsequent litigation involving the partnership, the

installment note for the additional equipment was nonrecourse as

to the partnership. Id. at 303, 312. The decision in that case

was entered on September 24, 1992, and became final on December

23, 1992.

On October 6, 1993, this Court granted respondent's motion

in Hambrose II to dismiss for lack of jurisdiction with respect

to the at-risk issue under section 465, and all references to

this issue were stricken from the pleadings. On May 27, 1994, we

entered a decision in Hambrose II based on a stipulated
 - 15 -

settlement agreement under Rule 248(a) in which respondent

accepted as filed the partnership items for the taxable years

1985 and 1986 of the partnership. This decision became final

August 25, 1994.

On June 23, 1995, respondent issued statutory notices of

deficiency to decedent, one for the 1982 tax year, and one for

the 1983 tax year, in which the carryback of claimed deductions

for 1985 and 1986 with respect to the partnership were

disallowed, and additions to tax and increased interest were

asserted. Courtesy copies of these notices were erroneously

addressed to counsel for decedent's estate at 4157 Chain Bridge

Road, Fairfax, Virginia 22030, but were delivered to the correct

address of 4153 Chain Bridge Road, Fairfax, Virginia 22030.

Discussion

Untimely Notice

Petitioner makes a two-pronged argument that the notices of

deficiency herein were untimely because they were not issued

within 3 years from the dates of filing of decedent's returns for

1982 and 1983 as provided in section 6501(a). First, it argues

that section 6501(a) applies because respondent did not issue a

timely FPAA pursuant to section 6229(a). That section provides

that respondent has 3 years from the date of the filing of the

partnership return in which to assess the tax based on any
 - 16 -

partnership or "affected" item.7 If an FPAA is issued before the

end of the 3-year period of limitations of section 6229(a), that

period is suspended for the time during which a partnership-level

proceeding is brought and a decision in that proceeding becomes

final, and for 1 year thereafter. Sec. 6229(d).

Petitioner's argument is without merit. It is well

established that the issue of the timeliness of an FPAA must be

raised during the partnership-level proceeding, and thus may not

be raised subsequently by petitioner in this partner-level

proceeding. Crowell v. Commissioner, 102 T.C. 683, 693 (1994).

Second, petitioner argues that the notices were untimely

because respondent artificially extended the partnership

proceeding by needless delay and thus should be estopped from

issuing the notices. This argument is equally meritless.

Estoppel constitutes an affirmative defense with the result that,

in respect of its impact on the timeliness of the notices of

deficiency, the burden of proof is on petitioner. Rules 39,

142(a); Hofstetter v. Commissioner, 98 T.C. 695, 701 (1992).

We see no need to detail the various elements which are

essential to a successful assertion of equitable estoppel. See

Lignos v. United States, 439 F.2d 1365, 1368 (2d Cir. 1971);

Norfolk S. Corp. v. Commissioner, 104 T.C. 13, 59-61,

7
Consistent with our decision in Hambrose Leasing v.
Commissioner, 99 T.C. 298 (1992), the deductions at issue are
"affected" items.
 - 17 -

supplemented 104 T.C. 417 (1995); Hofstetter v. Commissioner,

supra at 700-701 (1992), and cases cited thereat. It is

sufficient to note that estoppel of the Government is applied

with great restraint, Hofstetter v. Commissioner, supra, and that

petitioner has failed to show that it has met any of these

conditions. In this connection, we note that, as our findings of

fact show, decedent was aware at an early date of the at-risk

problem, i.e., before the expiration date of the POM, October 31,

1984, at the latest, and that he was presumably aware by way of

notice from respondent and from the tax matters partner of the

proceeding in Hambrose I where a petition was filed in 1988.

Sec. 6223(a), (g). We fail to see how petitioner can claim

surprise, hardship, or prejudice sufficient to cause us to

sustain a defense which would require us to hold that petitioner

should totally prevail herein. See and compare Vermouth v.

Commissioner, 88 T.C. 1488 (1987).

It is clear that respondent complied with the statute and

that the notices were timely under section 6229(a) because (1)

there was an FPAA issued to the partnership, (2) a proceeding was

instituted in this Court based on that FPAA, (3) that proceeding

was decided on May 27, 1994, and became final on August 25,1994,8

8
A stipulated decision, though generally not subject to
appeal except on jurisdictional grounds, Clapp v. Commissioner,
875 F.2d 1396 (9th Cir. 1989), is still considered a reviewable
decision which becomes final 90 days after entry of decision.
Pesko v. United States, 918 F.2d 1581 (Fed. Cir. 1990); Sherry
(continued...)
 - 18 -

and (4) the notices of deficiency were mailed within one year

thereafter, on June 23, 1995.

At-Risk

We must now decide whether decedent was at risk for his

assumed liability in the context of the sale-leaseback

transactions. Because respondent first raised the at-risk issue

in the answer, respondent bears the burden of proof, and so

concedes on brief.

Section 465(a) provides that deductions with respect to the

type of leasing activity represented by this case are only

allowable to the extent of the amount for which the taxpayer is

at risk. Generally, a taxpayer will, subject to the exception in

section 465(b)(4), discussed below, be considered at risk for the

amount of any cash investment. Sec. 465(b)(1)(A). Also, a

taxpayer will be considered at risk for the amounts borrowed with

respect to the activity, to the extent that the taxpayer is

personally liable for the repayment of such amounts. Sec.

465(b)(2)(A).

Respondent concedes that the partnership's transaction had a

business purpose with economic substance, was engaged in for

profit, and that the partnership's equipment was correctly

8
(...continued)
Frontenac, Inc. v. United States, 868 F.2d 420 (11th Cir. 1989);
Security Indus. Ins. Co. v. United States, 830 F.2d 581 (5th Cir.
1987) (all cited in Ripley v. Commissioner, 105 T.C. 358, 362
(1995), revd. on other grounds 103 F.3d 332 (4th Cir. 1996)).
 - 19 -

valued. Respondent has also conceded that decedent was at risk

in the amount of his $450,000 cash investment and was personally

liable for the debt which decedent assumed upon purchasing his

interest in the partnership. Nevertheless, respondent contends

that decedent was not at risk, for the amount of assumed

partnership debt under section 465(b)(4), which provides:

(4) Exception.--Notwithstanding any other
provision of this section, a taxpayer shall not be
considered at risk with respect to amounts protected
against loss through nonrecourse financing, guarantees,
stop loss agreements, or other similar arrangements.

Respondent does not contend that decedent was protected by

guarantees or stop loss agreements, but rather by nonrecourse

financing and "other similar arrangements".

When analyzing a transaction under section 465(b)(4), we use

the "realistic possibility" or "economic reality" test set forth

in American Principals Leasing Corp. v. United States, 904 F.2d

477, 483 (9th Cir. 1990) (sometimes cited as Baldwin v. United

States), and approved by this Court in Levien v. Commissioner,

103 T.C. 120, 126 (1994), affd. without published opinion 77 F.3d

497 (11th Cir. 1996).

This test asks:

whether there is any realistic possibility that the
taxpayer ultimately will be subject to economic loss on
the investment at issue. * * * [Levien v.
Commissioner, 103 T.C. at 126]

In applying this standard, we are guided by the substance of the

transaction, not its form. Id. at 129. We look not to any
 - 20 -

single factor, id. at 127, but to whether the combination of

factors and characteristics of the transaction rises to the level

of an "other similar arrangement" with the effect of protecting

decedent against risk.

Respondent first stresses the nonrecourse nature of the

indebtedness involved in the transaction. In Hambrose Leasing v.

Commissioner, 99 T.C. at 301, 303, 312, we decided that, for

purposes of any subsequent litigation involving this partnership,

the partnership's indebtedness involved in the purchase of both

the initial and additional equipment was nonrecourse.9 Where

decedent is personally liable for his share of partnership debt

by virtue of his assumption of the nonrecourse liability, the

presence of that same nonrecourse liability cannot also be said

to be a factor insulating him from risk. See Hayes v.

Commissioner, T.C. Memo. 1995-151; Wag-A-Bag Inc. v.

Commissioner, T.C. Memo. 1992-581, and cases cited therein.

9
Petitioner insists we must not carry over the findings
from one case into another. However, any affected items
proceeding will necessarily involve determinations made at the
partnership level. Sec. 6231(a)(5); see Brookes v. Commissioner,
108 T.C. 1 (1997); Kafka & Cavanagh, 1 Litigation of Federal
Civil Tax Controversies par. 9.04[1], at p. 9-5 (2d ed. 1997).
To that extent, petitioner's argument that it ought not be bound
by our findings in a "separate" proceeding is without merit.
Petitioner also presents argument as to why res judicata by
Hayes v. Commissioner, T.C. Memo. 1995-151 (a case dealing with a
similar partnership organized by Hambrose and Charterhouse)
should not apply in this case. Respondent has not asserted res
judicata, and we do not apply it.
 - 21 -

We next look to see whether there were other elements of the

transactions which protected decedent against loss. We note

initially that respondent's argument that the financial solvency

and good credit rating of the various parties to the transaction

made decedent less at risk was specifically rejected in Gefen v.

Commissioner, 87 T.C. 1471 (1986).

Respondent next emphasizes the circular nature of the

payments--the partnership's debt payments were exactly offset by

the rental payments it received from Hambrose. This circularity

is set forth in the stipulation and the stipulated documents as

well as the POM. As we have previously held, circular payments

do not per se constitute "other similar arrangements" for

purposes of section 465(b)(4). Krause v. Commissioner, 92 T.C.

1003, 1024 (1989). Nevertheless, they are a factor to be

considered. Levien v. Commissioner, 103 T.C. at 126.

Respondent also contends that the deferral provisions

operated to protect decedent against loss. The sale or re-

leasing of the equipment at the end of the transactions, which

could have provided funds to satisfy deferred liabilities, was

viewed as a significant source of return on the investment. It

is clear that debt obligations payable in the future are included

in the amount for a which a partner is considered personally

liable for purposes of section 465(b)(2). Melvin v.

Commissioner, 88 T.C. 63, 73 (1987), affd. 894 F.2d 1072 (9th

Cir. 1990). Thus, we cannot simultaneously propose a rule that
 - 22 -

the deferral of debt obligations into the future represents per

se an "other similar arrangement" for section 465(b)(4).

However, the presence of deferral provisions is another factor to

be considered in deciding whether a taxpayer is protected against

loss. See Santulli v. Commissioner, T.C. Memo. 1995-458.

One other element needs to be taken into account. As set

forth in our findings of fact, the purchase agreement and lease

agreement between Charterhouse and Hambrose, and the purchase

agreement between Hambrose and the partnership, each contained

provisions for indemnification. We think that these provisions

constitute collateral agreements under American Principals

Leasing Corp. v. United States, 904 F.2d at 482; see Wag-A-Bag

Inc. v. Commissioner, supra. We see the indemnification

agreements as constructing a "fire wall" which would have stopped

the spread of losses at Hambrose, with the effect of protecting

the partnership and decedent from loss.

In Hayes v. Commissioner, T.C. Memo. 1995-151, we analyzed a

similar partnership (Hambrose Leasing-5) involving Comdisco,

Hambrose, and Charterhouse. In that case, Comdisco was the

original purchaser of computer equipment, which was transferred

through Charterhouse and Hambrose to a partnership, subject to

third-party liens, and user and wrap leases. The transactions

contained the same type of circular payments, and the same type

of deferral provisions as in this case, and a functional

guarantee similar to the indemnification provisions herein. In
 - 23 -

holding that the taxpayer was not at risk for purposes of section

465(b)(4), we found that the differences between that case and

the other cases applying the "economic reality" standard were

simply window dressing. See Hayes v. Commissioner, supra; Moser

v. Commissioner, T.C. Memo. 1989-142, affd. 914 F.2d 1040 (8th

Cir. 1990). We see the facts of this case similarly. While one

could certainly distinguish the instant case on certain points

from many of the cases cited by the parties,10 we do not, in the

final analysis, find it sufficiently distinguishable, so that we

could find that decedent was at risk for the amounts of assumed

indebtedness.

Petitioner points out that the decisions supporting

respondent's position herein, including those which we have cited

and many others, have been decided on the basis of the taxpayers'

failure to carry their burden of proof that they were at risk and

do not hold that the taxpayers were not at risk. On this ground,

petitioner argues that those decisions are not sufficient to

permit us to conclude herein that respondent has carried the

burden of proving that the decedent was not at risk in respect of

his share of the partnership obligations which he assumed.

10
In particular, we find many cases where this Court has
held for the taxpayer on the at-risk issue in similar
transactions unhelpful because the Court used a "worst case
scenario" standard instead of the "realistic possibility"
standard now used by this Court. See Levy v. Commissioner, 91
T.C. 838 (1988); Emershaw v. Commissioner, T.C. Memo. 1990-246,
affd. 949 F.2d 841 (6th Cir. 1991); Brady v. Commissioner, T.C.
Memo. 1990-626.
 - 24 -

We think petitioner oversimplifies the situation. It is

technically correct that those decisions only went as far as

determining that the taxpayers had not carried their burden that

they were at risk. But it does not follow that the elements

which formed the foundation of those decisions were not

sufficient to support a decision that a taxpayer is in fact not

at risk, a position on which respondent has the burden of proof

herein. Our task is to decide whether the record herein contains

sufficient evidence to enable us to hold that respondent has

carried that burden.

We think that the circularity of payments, the deferral

provisions, and the indemnity provisions, each of which

independently might not have risen to the level of "other similar

arrangements" under section 465(b)(4), when taken together, are

sufficient to satisfy respondent's burden that decedent, while

nominally "personally liable" for the assumed liabilities under

section 465(b)(2), was effectively immunized from any realistic

possibility of suffering an economic loss under section

465(b)(4), was not at risk, and is not entitled to the deductions

in question. Levien v. Commissioner, 103 T.C. 120 (1994). We so

hold.
 - 25 -

Additions

Section 6621(c)

Respondent seeks increased interest pursuant to section

6621(c). That section provides for an increase in the interest

rate to 120 percent of the statutory rate on underpayments of tax

if a substantial understatement is due to a tax-motivated

transaction. Certain transactions are deemed to be "tax

motivated" by section 6621(c)(3), including any loss disallowed

under section 465(a). Sec. 6621(c)(3)(A)(ii).

Petitioner contends that the notice did not include any

reference to section 6621(c) because such reference was contained

only in the worksheet, and not on the first page of the notice

itself. The worksheet, which was dated several days before the

statutory notice, and was attached to the statutory notice,

explained the deficiencies. However, a notice of deficiency

includes the cover page and all attached pages and documents.

Goldman v. Commissioner, T.C. Memo. 1993-480, affd. 39 F.3d 462

(2d Cir. 1994). Furthermore, the purpose of a notice of

deficiency is to advise the taxpayer of respondent's assertions.

The worksheets attached to the notices of deficiency, each a Form

1902C (Report of Individual Income Tax Examination Changes),

clearly gave petitioner notice that respondent would be seeking

to charge interest "to be computed at 120% of normal rates, Per

IRC Section 6621(c), for Tax Motivated Transactions." The fact

that this line was not printed on the first page of the notices
 - 26 -

of deficiency is insufficient to support petitioner's position.

Thus, petitioner's arguments that respondent never raised the

section 6621(c) issue are without merit.11

Since we have concluded that the loss deductions in issue

are disallowed under section 465(a), it follows that the

activities were tax-motivated transactions under section

6621(c)(3). We therefore sustain respondent on this issue.

Section 6653(a) (Negligence)

Respondent has determined an addition to tax under section

6653(a) for negligence. Petitioner claims it should not be

liable for the addition because decedent reasonably relied on the

advice of his accountant, Mr. Michaels, in making the investment.

We see no need to explore the details of how decedent sought

and obtained professional advice in respect of the tax

consequences attaching to his investment in the partnership. We

are satisfied that he recognized the necessity of seeking such

advice, that he sought it from his accountant, Mr. Michaels, who

had sufficient experience to render such advice, and with whom

decedent discussed the tax implications. He received that advice

from Mr. Michaels, advice based upon reasonable investigation and

analysis of all relevant information, including consultation with

11
In this context, we consider and reject petitioner's
argument based on Fowler v. Commissioner, 6 B.T.A. 250 (1927).
That case involved the attempt by respondent to supplement the
Answer with a letter predating the notice of deficiency, not a
letter attached to the notice.
 - 27 -

decedent's tax lawyer.12 That advice was also consistent with

the opinion of counsel set forth in the POM. We also note that,

at the time decedent made his investment, as our subsequent

discussion in respect of the addition to tax under section 6661

reveals, most of the pertinent decisions had not been handed down

so that there was at best a shortage of authority setting forth

legal principles governing the tax consequences arising from the

at-risk provisions of section 465.13

We think the foregoing circumstances meet the standard

established in United States v. Boyle, 469 U.S. 247, 251 (1985),

where the Supreme Court stated: "When an accountant or attorney

advises a taxpayer on a matter of tax law, such as whether a

liability exists, it is reasonable for the taxpayer to rely on

that advice."

12
Respondent objects to portions of Mr. Michaels'
testimony on the grounds of inadmissible hearsay. In many
respects, respondent's objections appear to be well taken.
Accordingly, we have confined our findings to those elements of
Mr. Michaels' testimony which clearly involve facts as to his
views and actions, and not to what others said. Under these
circumstances, we find it unnecessary to dissect Mr. Michaels'
testimony and detail the portions in respect of which
respondent's objection might be sustained. Respondent also
objects to the testimony of Mr. Michaels that he thought decedent
would be at risk as a legal conclusion. It is precisely that
conclusion for which decedent consulted Mr. Michaels. It is the
fact that it was rendered, and not its substantive correctness,
that we find relevant here.
13
See discussion in Andrews v. Commissioner, T.C. Memo.
1985-380 (no negligence under sec. 6653(a) because the fact that
a type of transaction was universally disapproved by courts not
clear at the time taxpayers entered into transaction).
 - 28 -

We conclude that decedent made a reasonable effort to

obtain, and in fact received, appropriate advice in respect of

his investment and that he therefore was not negligent within the

meaning of section 6653(a).

Section 6661(a) (Substantial Understatement)

Respondent has asserted additions to tax under section

6661(a) for substantial understatement. Petitioner contends that

there was substantial authority for decedent's return position

that would operate to eliminate the substantial understatement.

Sec. 6661(b)(2)(B)(ii).

In this case, resolution of the at-risk issue is based

primarily on a conclusion drawn from complex and interrelated

contractual documents. See Waters v. Commissioner, T.C. Memo.

1991-462, affd. 978 F.2d 1310 (2d Cir. 1992). The facts of this

case are similar to the facts of a number of other cases in which

taxpayers prevailed and were found by this Court to be at risk

with respect to sale-leaseback transactions. See, e.g., Levy v.

Commissioner, 91 T.C. 838 (1988); Gefen v. Commissioner, 87 T.C.

1471 (1986); Brady v. Commissioner, T.C. Memo. 1990-626; Emershaw

v. Commissioner, T.C. Memo. 1990-246, affd. 949 F.2d 841 (6th

Cir. 1991). We have also found that many similarly situated

taxpayers, who did not prevail and were found to be not at risk,

nevertheless had substantial authority for positions taken on

their returns. See Waters v. Commissioner, supra; Epsten v.

Commissioner, T.C. Memo. 1991-252; Moser v. Commissioner, T.C.
 - 29 -

Memo. 1989-142, affd. 914 F.2d 1040 (8th Cir. 1990); B & A

Distributing Co. v. Commissioner, T.C. Memo. 1988-589.

On the facts of this case, with regard to the at-risk issue,

we find that there existed substantial authority for decedent's

return position. We therefore hold that petitioner is not liable

for the section 6661 additions to tax.

To reflect the foregoing,

An appropriate decision

will be entered.