109 T.C. No. 13
UNITED STATES TAX COURT
ROBERT L. WHITMIRE, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 21849-84. Filed October 29, 1997.
Held: Notwithstanding the recourse nature of a
third-party bank loan, due to various loss-limiting
features associated with a computer equipment leasing
transaction, petitioner is not to be regarded as at
risk under sec. 465, I.R.C., with regard to related
partnership debt obligations.
Stephen D. Gardner, for petitioner.
Elizabeth P. Flores, Martin L. Shindler, Marcie B. Harrison,
Brian J. Condon, Victoria J. Kanrek, and David A. Williams, for
respondent.
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OPINION
SWIFT, Judge: This matter is before the Court on the
parties’ cross-motions for partial summary judgment. Rule
121(b). This is a test case, and the motions for partial summary
judgment raise an issue that will affect the outcome of other
cases.
These cross-motions raise the general question of whether
petitioner is to be regarded as at risk within the meaning of
section 465 with regard to partnership debt obligations
associated with a computer equipment leasing transaction. More
specifically, these motions raise the question as to whether,
notwithstanding the recourse nature of a third-party bank loan,
certain guaranties, commitments, suspension and setoff
provisions, and matching payments, among other features of the
transaction, should be treated as protecting petitioner against
any realistic possibility of realizing a loss on the transaction.
For 1980, respondent determined a deficiency in petitioner's
Federal income tax in the amount of $21,399.
Unless otherwise indicated, all section references are to
the Internal Revenue Code of 1954 as in effect for the year in
issue, and all Rule references are to the Tax Court Rules of
Practice and Procedure.
When the petition was filed, petitioner resided in Marina
Del Ray, California.
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Original Purchase Transaction and End-User Lease
On or about February 15, 1980, International Business
Machines Corp. (IBM) sold for $2,056,060 certain computer
equipment to Alanthus Computer Corp. (ACC), an equipment leasing
corporation. Approximately 1 month later, on March 13, 1980, ACC
sold the computer equipment to Alanthus Corp. (Alanthus), its
parent corporation, for the same consideration of $2,056,060.
In connection with its purchase of the computer equipment,
Alanthus borrowed $1,868,657 from Manufacturers Hanover Leasing
Corp. (MHLC) in an arm's-length credit transaction. The loan
proceeds were used by Alanthus, with additional cash of $187,403,
to pay ACC the full purchase price of the computer equipment.
ACC apparently used the proceeds received from Alanthus to pay
IBM the full purchase price due on ACC’s purchase of the computer
equipment.
Under Alanthus’ 7-year promissory note issued in favor of
MHLC (Alanthus Note), beginning June 1, 1980, monthly payments of
$33,875 representing principal and interest at 13.25 percent per
annum were due and payable to MHLC. As collateral for the loan,
MHLC received security interests in the computer equipment and in
lease payments due under all end-user leases of the computer
equipment until the full amount of the loan plus interest was
repaid.
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The Alanthus Note and security agreement do not expressly
indicate whether MHLC’s $1,868,657 loan to Alanthus was made on a
recourse or a nonrecourse basis. The parties, however, agree and
we so find that as a secured loan, under New York Uniform
Commercial Code (N.Y.U.C.C.) section 9-504(2) (McKinney 1990),
this loan is to be treated as made on a recourse basis.
On February 11, 1980, in anticipation of its acquisition of
the above computer equipment, ACC entered into a lease agreement
with Manufacturers and Traders Trust Co. (MTT) under which ACC
leased the above computer equipment to MTT. Under this end-user
lease, MTT was obligated to pay monthly rent of $33,875
commencing June 1, 1980, and continuing for a term of 7 years.
During the 7-year term, MTT was required to make the lease
payments directly to MHLC in payment of the monthly payments that
were due to MHLC on the Alanthus Note.
On March 13, 1980, in connection with the sale of the
computer equipment from ACC to Alanthus, ACC assigned to Alanthus
its interest as lessor in the end-user lease with MTT.
Purchase by Partnership and Related Transactions
On June 30, 1980, three additional and essentially
simultaneous transactions occurred involving the computer
equipment with the apparent ultimate objective, among other
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things, of transferring ownership1 of the computer equipment
(subject to the secured interests therein of MHLC) to Petunia
Leasing Associates (Petunia), the equipment leasing partnership
in which petitioner invested and through which petitioner now
claims the losses and expenses at issue in this case.
In the first transaction, Alanthus sold the computer
equipment and assigned its interest as lessor in the end-user
lease to F/S Computer Corp. (F/S Computer). Immediately
following that transaction, F/S Computer resold the computer
equipment to F.S. Venture Corp. (F.S. Venture). F.S. Venture
then resold the computer equipment to the Petunia partnership.
MHLC’s security interests in the computer equipment and in the
payments due from the end user under the end-user lease were not
affected by any of these transactions.
Alanthus sold the computer equipment to F/S Computer for the
stated price of $2,122,329, of which $267,288 was paid in cash.
As payment for the balance of the purchase price, F/S Computer
assumed the $1,868,657 principal amount of Alanthus’ debt
obligation to MHLC and the monthly payment obligations to MHLC on
the Alanthus Note.
1
Use in this opinion of “ownership”, “purchase”, “sale”, and
other words that normally suggest economic and legal ownership of
property, or the transfer of same, is for convenience only and
does not constitute any finding or conclusion as to which entity
should be regarded, for income tax purposes, as the owner of the
computer equipment.
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In the second transaction, F/S Computer sold the computer
equipment to F.S. Venture for the stated price of $2,056,060.
F.S. Venture paid $20,000 in cash to F/S Computer, issued to F/S
Computer a promissory note in the amount of $1,982,289, and
assigned to F/S Computer the right to receive an additional
$53,771 due from Petunia.
The loan documentation and the promissory note of F.S.
Venture in favor of F/S Computer do not indicate whether this
loan was made on a recourse or nonrecourse basis. F/S Computer
did not receive a security interest in the computer equipment or
any other collateral with regard to the $1,982,289 promissory
note it received from F.S. Venture.
F.S. Venture did not assume the debt obligation of Alanthus
or of F/S Computer with regard to the $1,868,657 loan of MHLC.
Further, under a commitment agreement dated June 30, 1980,
between F/S Computer and F.S. Venture (Commitment Agreement), F/S
Computer agreed, for the benefit of F.S. Venture and all
subsequent purchasers of the computer equipment including
Petunia, to satisfy all principal and interest payment
obligations relating to the $1,868,657 MHLC loan and all monthly
lease payments relating to the end-user lease. The Commitment
Agreement expressly provided as follows:
In order to induce * * * [F.S. Venture] to acquire the
Equipment subject to the * * * [MHLC loan] * * * [F/S
Computer] hereby agrees, for the benefit of * * * [F.S.
Venture] and any subsequent purchaser of the Equipment
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* * * [that F/S Computer] will satisfy all obligations
due under * * * [the MHLC loan] * * *. * * *
In the third transaction, F.S. Venture sold to Petunia the
computer equipment for the stated price of $2,056,060 represented
by a cash downpayment of $34,268 and a promissory note from
Petunia in the total principal amount of $2,021,792 (Partnership
Note).
Petunia did not assume the debt obligation of Alanthus or of
F/S Computer with regard to the MHLC $1,868,657 loan, nor did
Petunia assume the debt obligation with regard to F/S Computer’s
loan of $1,982,289 to F.S. Venture.
Petunia’s $2,021,792 stated debt obligation to F.S. Venture
on the Partnership Note is referred to generally in loan
documents as a limited recourse obligation of Petunia. Under
terms of the Partnership Note and Petunia’s partnership
agreement, each limited partner is stated to be personally and,
on a recourse basis, liable for stated principal on the
Partnership Note to the extent of 434.75 percent of each limited
partner’s total capital contributions to the partnership (subject
to certain adjustments pursuant to the partnership agreement).
Under an agreement between Petunia and F.S. Venture (that
accompanied Petunia's Partnership Note), F.S. Venture was
obligated to make any outstanding payments (or to make provision
for such payments) due to a senior lienholder, such as MHLC, in
order to prevent the senior lienholder from foreclosing on the
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computer equipment. In the event that F.S. Venture failed to
make such payments or to make provision for such payments,
Petunia’s obligations under the Partnership Note would be
suspended until the last installment of the Partnership Note was
due and payable. At that point in time, if the loan from the
senior lienholder remained in default, Petunia would be entitled
to set off any amounts it owed on the Partnership Note against
any amounts that F.S. Venture owed to the senior lienholder as a
result of this security agreement.
Under the $2,021,792 Partnership Note, interest accrued at
12 percent per annum and payment of prepaid interest in the
amount of $308,409 was due and payable on July 30, 1980, of which
$188,472 was immediately payable in cash and the balance was
represented by delivery of a promissory note with a principal
amount of $119,937. Also under the Partnership Note, on July 1,
1980, an interest payment of $674 was due and payable by Petunia
to F.S. Venture, and from July 1, 1980, to December 1, 1982,
monthly interest payments of $9,938 were due and payable to F.S.
Venture. From January 1, 1983, through December 1, 1989, monthly
principal and interest payments totaling $35,690 on the
Partnership Note were due and payable to F.S. Venture.
Petunia's monthly payment obligations to F.S. Venture (of
$9,938 that were due from July 1, 1980, to December 1, 1982, and
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of $35,690 that were due from January 1, 1983, through December
1, 1989) matched F.S. Venture’s monthly payment obligations owed
to F/S Computer under F.S. Venture's promissory note to F/S
Computer.
In connection with Petunia’s purchase of the computer
equipment from F.S. Venture, F.S. Venture assigned its rights
against F/S Computer under the Commitment Agreement to Petunia.
Further, on June 30, 1980, MHLC, F/S Computer, F.S. Venture,
and Petunia entered into a separate side agreement (Side
Agreement) that expressly provided that Petunia and the partners
of Petunia had no liability whatsoever with regard to MHLC’s
$1,868,657 recourse loan that was made to Alanthus and that was
assumed by F/S Computer. The Side Agreement expressly provided
as follows:
* * * [MHLC] agrees that * * * [Petunia] has no
personal liability whatsoever for payment of the
amounts due under * * * [the loan from MHLC to
Alanthus] or [for] satisfaction of * * * [Alanthus']
obligations thereunder. * * *
Leaseback Transaction to F/S Computer
Simultaneous with the above three sale transactions and with
the other agreements that were entered into on June 30, 1980,
Petunia leased the computer equipment back to F/S Computer for a
term of 9½ years beginning on June 30, 1980, and ending on
December 31, 1989. Under the leaseback transaction, F/S
Computer’s monthly rent payments of $9,938 that were payable to
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Petunia from July 1980 to December 1982, matched Petunia’s
monthly debt obligations owed to F.S. Venture under the
Partnership Note. From January 1983 through December 1989, F/S
Computer’s monthly rent payments of $35,935 that were payable to
Petunia slightly exceeded Petunia’s monthly debt obligations of
$35,690 owed to F.S. Venture under the Partnership Note.
Pursuant to the lease agreement with F/S Computer, and in
addition to the lease payments mentioned above, Petunia also was
entitled to receive from F/S Computer, 40 percent of all net
rental income until June 30, 1989, with respect to the end-user
lease after end-user lease payments had been applied to payments
due MHLC under the Alanthus Note. Thereafter, Petunia was
entitled to receive 90 percent of all net rental income with
respect to the end-user lease until termination of the lease
period.
At the time of the above transactions, F/S Computer and F.S.
Venture were wholly owned by Funding Systems Asset Management
Corp. (Funding). Funding in turn was wholly owned by FSC Corp.
(FSC).
In order to induce Petunia to enter into the above purchase
and lease transactions with F.S. Venture and F/S Computer, FSC
unconditionally and on a full recourse basis expressly guaranteed
Petunia and its limited partners the full performance of all
obligations of F/S Computer under F/S Computer’s leaseback of the
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computer equipment from Petunia. The written guaranty from FSC
(Guaranty Agreement) provided, in relevant part, as follows:
FSC CORPORATION (the “Guarantor”) * * * does hereby
unconditionally guarantee to [Petunia] * * * the prompt
and full performance and observance of all of the
covenants, conditions and agreements of [F/S Computer]
* * * including, without limitation, the full and
prompt payment when due, whether by acceleration or
otherwise, in accordance with the terms of the Lease,
of rent and all other sums payable by * * * [F/S
Computer] to * * * [Petunia], whether absolute or
contingent, secured or unsecured, matured or unmatured,
and without regard to any grace periods provided for in
the Lease, including, without limitation, payment of
any stipulated loss value, deficiency payments, and all
other sums due upon an Event of Default by * * * [F/S
Computer] * * *. * * *
Under the Guaranty Agreement, FSC also expressly guaranteed F/S
Computer’s obligations to Petunia under the Commitment Agreement
that had been assigned by F.S. Venture to Petunia.
Petitioners’ Investment in Petunia and Losses Claimed
On June 27, 1980, petitioner executed a subscription
agreement pursuant to which petitioner became obligated to
contribute $25,032 to the capital of Petunia in exchange for a
limited partnership interest in the partnership. Petitioner’s
contribution was reflected by $16,282 in cash that was paid to
Petunia and by an $8,750 recourse promissory note issued by
petitioner in favor of Petunia.
During June of 1980, petitioner and other investors executed
subscription agreements obligating them to contribute a total of
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$339,173 to the capital of Petunia. Petunia received $339,173 in
capital contributions of which $220,611 was contributed in cash
and the remainder of which was represented by promissory notes.
On Schedule E of his Federal income tax return for 1980,
petitioner reported flow-through losses from Petunia totaling
$40,623.
On audit, respondent disallowed the $40,623 in partnership
losses claimed by petitioner.
Discussion
Summary judgment or partial summary judgment may be granted
if the pleadings and other materials demonstrate that no genuine
issue exists as to any of the material facts and that a decision
may be rendered as a matter of law. Rule 121(b); Sundstrand
Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965
(7th Cir. 1994).
In Levien v. Commissioner, 103 T.C. 120, 125-130 (1994),
affd. without published opinion 77 F.3d 497 (11th Cir. 1996),
Thornock v. Commissioner, 94 T.C. 439, 447-449 (1990), and Levy
v. Commissioner, 91 T.C. 838, 862-865 (1988), we explained
generally legal principles applicable to the at-risk issue
involved in this case. Under section 465, where individual
investors or closely held corporations engage in the leasing of
depreciable property, any loss with respect to the leasing
activity is allowed only to the extent the investors are
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financially at risk with respect to the leasing activity at the
close of the taxable year. Sec. 465(a)(1), (c)(1)(C).2
Investors generally are considered to be financially at risk
with respect to investments in leasing activities to the extent
they contribute money to the activities. Sec. 465(b)(1)(A).
Investors also are considered to be financially at risk with
respect to debt obligations of leasing activities to the extent
they are personally liable for repayment of the debt obligations
or to the extent they have pledged property, other than the
property used in the activities, as security for the borrowed
amounts. Sec. 465(b)(2).3
2
Sec. 465 was added to the Internal Revenue Code by the Tax
Reform Act of 1976, Pub. L. 94-455, 90 Stat. 1520, 1531, and
applies to tax years beginning after Dec. 31, 1975.
3
Sec. 465(b)(2) provides as follows:
(2) Borrowed Amounts.n-For purposes of this
section, a taxpayer shall be considered at risk with
respect to amounts borrowed for use in an activity to
the extent that he--
(A) is personally liable for the
repayment of such amounts, or
(B) has pledged property, other than
property used in such activity, as security
for such borrowed amount (to the extent of
the net fair market value of the taxpayer’s
interest in such property).
No property shall be taken into account as security if
such property is directly or indirectly financed by
indebtedness which is secured by property described in
paragraph (1).
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With respect to particular debt obligations, investors will
be regarded as personally liable for such obligations within the
meaning of section 465(b)(2)(A) if they are ultimately
economically liable to repay the obligations in the event funds
from the investment activities are not available to repay the
obligations. The fact that other investors or participants
remain in the “chain of liability” does not preclude investors
who have the ultimate economic liability from being treated as at
risk. In determining which investors or participants in a
transaction are ultimately financially responsible for the debt
obligations, the substance of the transaction controls.
Pritchett v. Commissioner, 827 F.2d 644, 647 (9th Cir. 1987),
revg. and remanding 85 T.C. 580 (1985); Follender v.
Commissioner, 89 T.C. 943, 949-950 (1987); Melvin v.
Commissioner, 88 T.C. 63, 75 (1987), affd. per curiam 894 F.2d
1072 (9th Cir. 1990); see also Raphan v. United States, 759 F.2d
879, 885 (Fed. Cir. 1985).
The above limitation on debt obligations with respect to
which investors will be considered at risk is expressly reflected
in the statutory scheme. Section 465(b)(4)4 provides that even
4
Sec. 465(b)(4) provides as follows:
(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.
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though investors nominally may be personally liable with respect
to debt obligations, for income tax purposes they will not be
considered at risk for debt obligations if their ultimate
liability with respect to the debt obligations is protected
against loss through “nonrecourse financing, guarantees, stop
loss agreements, or other similar arrangements.”
The language “other similar arrangements” is not
specifically defined in the Code or in the legislative history,
but the legislative history evidences concern with situations in
which investors are effectively immunized from any realistic
possibility of suffering an economic loss even though the
underlying transaction is not profitable. Levien v.
Commissioner, supra at 125-130; Larsen v. Commissioner, 89 T.C.
1229, 1272-1273 (1987), affd. in part, revd. and remanded in part
sub nom. Casebeer v. Commissioner, 909 F.2d 1360 (9th Cir. 1990);
Bennion v. Commissioner, 88 T.C. 684, 692 (1987); Melvin v.
Commissioner, supra at 70-71; Porreca v. Commissioner, 86 T.C.
821, 838 (1986); S. Rept. 94-938 at 49 (1976), 1976-3 C.B. (Vol.
3) 49, 87.
As applied particularly to a highly leveraged, tax-oriented
equipment leasing transaction (and depending on the issues
raised), the above principles require us to analyze the substance
and commercial realities of all material aspects of the
transaction. Neither the form chosen, the labels used, nor a
single feature of the transaction generally will control.
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In American Principals Leasing Corp. v. United States, 904
F.2d 477 (9th Cir. 1990), it was stated with regard to section
465(b)(4), as follows:
the purpose of subsection 465(b)(4) is to suspend at
risk treatment where a transaction is structured--by
whatever method--to remove any realistic possibility
that the taxpayer will suffer an economic loss if the
transaction turns out to be unprofitable. A
theoretical possibility that the taxpayer will suffer
economic loss is insufficient to avoid the
applicability of this subsection. We must be guided by
economic reality. If at some future date the
unexpected occurs and the taxpayer does suffer a loss,
or a realistic possibility develops that the taxpayer
will suffer a loss, the taxpayer will at that time
become at risk and be able to take the deductions for
previous years that were suspended under this
subsection. [Id. at 483; citations omitted.]
The potential bankruptcy or insolvency of entities providing
guaranties or loss protection to investors is not considered in
applying section 465(b)(4) unless it creates a realistic
possibility of economic loss. Thornock v. Commissioner, 94 T.C.
439, 454 (1990); Capek v. Commissioner, 86 T.C. 14, 52 (1986).
In this regard, the report from the Senate Finance Committee with
respect to section 465 states as follows:
For purposes of this rule [i.e. section
465(b)(4)], it will be assumed that a loss-protection
guarantee, repurchase agreement or insurance policy
will be fully honored and that the amounts due
thereunder will be fully paid to the taxpayer. The
possibility that the party making the guarantee to the
taxpayer, or that a partnership which agrees to
repurchase a partner’s interest at an agreed price,
will fail to carry out the agreement (because of
factors such as insolvency or other financial
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difficulty) is not to be material unless and until the
time when the taxpayer becomes unconditionally entitled
to payment and, at that time, demonstrates that he
cannot recover under the agreement. [S. Rept. 94-938 at
50 n.6 (1976), 1976-3 C.B. (Vol. 3) 49, 88.]
In Thornock v. Commissioner, 94 T.C. 439 (1990), a case with
facts similar to the instant case, we held that no realistic
possibility existed that limited partners would be ultimately
liable on partnership debt obligations. Our holding was based
primarily on the presence of rent guaranties, the essentially
offsetting nature of the various lease and note payments, the
nonrecourse nature of the underlying third-party loan, and other
insulating features of the equipment leasing transaction. We
emphasized that no one feature of the transaction controlled our
analysis.
The parties have agreed that under New York commercial law
the underlying $1,868,657 third-party loan from MHLC to Alanthus
should be treated as a recourse loan. See N.Y.U.C.C. section 9-
504(2) (McKinney 1990), which provides that a secured loan
generally is to be treated as a recourse loan where the parties
to the loan fail to designate the loan as either recourse or
nonrecourse.5
5
N.Y.U.C.C. sec. 9-504(2) (McKinney 1990) provides in part
as follows:
(2) If the security interest secures an
indebtedness, the secured party must account to the
debtor for any surplus [after proceeds from the sale of
(continued...)
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In an attempt to distinguish the instant case from Thornock
v. Commissioner, supra, and other similarly decided cases,
petitioner emphasizes the recourse nature, under New York law, of
the underlying third-party secured loan of MHLC. Petitioner
describes various scenarios under which petitioner alleges that
there would exist a realistic possibility that petitioner
ultimately would be required to make actual payments on the
partnership loan if MHLC, the third-party creditor, pursued
collection from F/S Computer, F.S. Venture, or from Petunia.
Petitioner argues that, primarily because of the recourse nature
of the Alanthus promissory note to MHLC, petitioner was not
insulated from liability on Petunia’s debt obligations.
Petitioner further argues that section 465(b)(4) should not apply
to rent guaranties.
We disagree with each of petitioner’s arguments. Analyzing
the substance of the equipment leasing transaction before us, we
conclude that petitioner and the other limited partners of
Petunia are not to be treated as at risk under section 465 with
respect to the debt obligations of Petunia. The limited partners
of Petunia were protected from any realistic possibility of
economic loss on this transaction.
5
(...continued)
collateral are applied to the outstanding debt], and,
unless otherwise agreed, the debtor is liable for any
deficiency. * * *
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Assuming that MTT defaulted on its lease obligations under
its end-user lease and that MHLC commenced collection efforts
that broke the circle of payments (or accounting entries) between
F/S Computer, F.S. Venture, and Petunia jeopardizing Petunia’s
ability to make payments due on its debt to F.S. Venture, before
any liability of the limited partners would be triggered, FSC
would have been required to honor its obligations under the
Guaranty Agreement, thereby providing funds needed by Petunia to
pay F.S. Venture. FSC, through its guaranties--not the limited
partners of Petunia--would be required to provide funds (or
accounting entries) necessary to keep payments current on the
debt obligations of Petunia.
The obligations of FSC and F/S Computer under the Guaranty
and Commitment Agreements, the suspension and setoff provisions
under the purchase agreement between F.S. Venture and Petunia,
the fact that F.S. Venture and Petunia did not assume Alanthus’
recourse promissory note to MHLC, the provisions of the Side
Agreement (to which MHLC itself was a party) that expressly
immunized Petunia from any liability on Alanthus’ recourse
promissory note to MHLC, and the matching payments under the
various essentially offsetting obligations effectively immunized
Petunia from any realistic possibility for loss in connection
with the transaction in issue.
Petitioner suggests a scenario under which FSC would not
honor its guaranties, and petitioner suggests that under that
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scenario the limited partners of Petunia likely would be required
to make payments on Petunia’s debt obligations to F.S. Venture.
In that scenario, on the basis of the relationships between the
various parties, the guaranties of FSC, the Commitment and Side
Agreements, and the suspension and setoff provisions of the
agreement between F.S. Venture and Petunia, we believe the
limited partners of Petunia would have legal defenses against
FSC, F/S Computer, F.S. Venture, and MHLC that would protect the
limited partners of Petunia from any realistic obligation to make
any actual payments under the Partnership Note.
Further, the hypothetical inability of a guarantor such as
FSC to satisfy guaranty obligations due to bankruptcy or
insolvency generally is not to be considered in applying section
465(b)(4) unless it contributes to a realistic possibility of
economic loss. Thornock v. Commissioner, 94 T.C. 439, 454
(1990); Capek v. Commissioner, 86 T.C. 14, 52 (1986); S. Rept.
94-938 at 50 n.6 (1976), 1976-3 C.B. (Vol. 3) 49, 88; see also
Van Roekel v. Commissioner, T.C. Memo. 1989-74, 56 T.C.M. (CCH)
1297, 1307-1308, 1989 T.C.M. (P-H) par. 89,074, at 89-341; Young
v. Commissioner, T.C. Memo. 1988-440, affd. 926 F.2d 1083 (11th
Cir. 1991), with regard to the significance of a parent
corporation’s guaranty of its subsidiary’s debt obligation.
We do not believe that under any of petitioner’s suggested
scenarios Petunia and its limited partners would be held liable
for the debt obligations associated with this transaction.
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Petitioner's scenarios are so remote and theoretical as to be
commercially unrealistic and improbable. See Casebeer v.
Commissioner, 909 F.2d 1360, 1369 (9th Cir. 1990), affg. in part,
revg. and remanding in part Larsen v. Commissioner, 89 T.C. 1229
(1987); American Principals Leasing Corp. v. United States, 904
F.2d 477, 483 (9th Cir. 1990); Waters v. Commissioner, T.C. Memo.
1991-462, affd. 978 F.2d 1310 (2d Cir. 1992).
Finally, we do not agree with the argument petitioner makes
that section 465(b)(4) should be restricted only to loss
protection guaranties that relate directly to the particular debt
obligations for which a taxpayer claims to be at risk. The total
integrated transaction and all of its associated guaranties,
commitments, and setoff provisions are to be taken together.
FSC’s guaranties constituted an integral part of the loss-
limiting arrangement that insulated Petunia and its limited
partners from any realistic risk of loss associated with this
transaction. FSC’s obligations under the Guaranty Agreement
should not be disregarded. See Thornock v. Commissioner, supra
at 451.
Due to the offsetting nature of the lease and note payments,
the presence of the Guaranty, Commitment and Side Agreements, the
presence of the suspension and setoff provisions, and the
relationships of the parties involved in the transaction, we
conclude that Petunia participated in a loss-limiting arrangement
under section 465(b)(4) and that no realistic possibility existed
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that petitioner would be ultimately liable to make payments on
Petunia’s debt obligations to F.S. Venture.
Notwithstanding the recourse nature of the underlying third-
party loan between MHLC and Alanthus, other significant features
of the transaction, as explained above, immunized petitioner and
the other limited partners of Petunia from any realistic
possibility of liability with regard to the Partnership Note. We
conclude that petitioner is to be treated as not at risk within
the meaning of section 465 with respect to his allocable share of
the Partnership Note.
To reflect the foregoing,
An appropriate order will
be issued.