T.C. Memo. 1999-130
UNITED STATES TAX COURT
LOWELL L. AND MARILYN A. ROBERTSON, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent*
Docket No. 15586-88. Filed April 20, 1999.
Albert H. Turkus and Frederick T. Goldberg, for
petitioners.
Michael D. Wilder and Paulette Segal, for
respondent.
SUPPLEMENTAL MEMORANDUM FINDINGS OF FACT AND OPINION
WHALEN, Judge: This case is before the Court to
reconsider that part of our opinion in Robertson v.
*This opinion supplements our opinion in Robertson v.
Commissioner, T.C. Memo. 1994-424.
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Commissioner, filed at T.C. Memo. 1994-424 (hereinafter
Robertson I), holding petitioners liable for additions
to tax under sections 6653(a)(1) and (2) and 6661. All
section references are to the Internal Revenue Code, as
amended and in effect during the years in issue. It is
also before the Court to resolve the dispute between the
parties over the correct amount of the deficiencies to be
entered in accordance with the findings and conclusions
of the Court in Robertson I, pursuant to the procedure
specified in Rule 155 of the Tax Court Rules of Practice
and Procedure. In this opinion, all Rule references are
to the Tax Court Rules of Practice and Procedure unless
otherwise stated.
Robertson I dealt with petitioners' income tax return
for 1984 in which they claimed a loss from a sale-leaseback
transaction, involving computer equipment, that had been
entered into by the Roscrea Trust (hereinafter sometimes
referred to as the Trust) of which Lowell L. Robertson
(petitioner) was a unitholder. We held that the trans-
action was a sham because it lacked economic substance and
was not entered into with a business purpose. Accordingly,
we sustained respondent's disallowance of the loss. We
also sustained respondent's determination of petitioners'
liability for additions to tax under sections 6653(a)(1)
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and (2) and 6661 and for increased interest under section
6621(c).
Following the release of Robertson I, the Court and
counsel for the parties in 47 other cases that were filed
by the other unitholders of the Roscrea Trust and by
petitioners for the years 1982, 1983, and 1985 agreed that
petitioners and the other unitholders of the Trust were
bound by Robertson I as to the losses claimed from the
Trust, a determination made at the entity level, but that
the other unitholders were not bound by Robertson I as to
a unitholder's liability for the additions to tax under
sections 6653 and 6661, a determination made at the unit-
holder level. See Merino v. Commissioner, T.C. Memo. 1997-
385; Webb v. Commissioner, T.C. Memo. 1990-556, remanded
without published opinion 17 F.3d 398 (9th Cir. 1994).
The other unitholders advised the Court that they wished
to present evidence on the issue of their liability for
the additions to tax under sections 6653 and 6661 but
represented that such evidence would not be taxpayer
specific. After discussions, the parties in each of
the related cases agreed to be bound by the result in
the instant case, and the Court reopened the record and set
it for further trial to permit petitioners to introduce
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additional evidence concerning petitioners' liability for
the additions to tax that were determined by respondent.
In connection with that further trial, petitioners
submitted to the Court and served on respondent the
"expert" witness reports of Mr. Paul M. Raynault, founder
and chairman of Computer Leasing, Inc., a firm specializing
in computer lease financing and management, and Professor
George Mundstock, a professor of law at the University of
Miami. In response, respondent filed a motion in limine
asking the Court to exclude that "expert" testimony on
the ground that it is neither relevant nor helpful to
the trier of fact. At the further trial, the Court took
respondent's motion in limine under advisement and
permitted both experts to testify subject thereto.
Petitioners presented no other testimony or evidence.
FINDINGS OF FACT
The facts are set forth in Robertson I and are
incorporated herein by reference. We restate only those
facts necessary to address petitioners' position that "the
Court should vacate those portions of its decision [sic]
relating to additions to tax and hold that Petitioner is
not liable for any such additions pursuant to Sections
6653(a) and 6661."
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Petitioner is a unitholder of the Roscrea Trust that
was formed by 24 partners and principals of a major
national accounting firm specifically to facilitate their
participation in the subject sale-leaseback transaction.
Pursuant to a Purchase, Sale and Assignment Agreement dated
December 28, 1982 (Sale Agreement), the Trust purchased an
interest in certain computer equipment from Systems
Leasing, Inc. (Systems). The Sale Agreement describes the
equipment as Domestic Equipment and Foreign Equipment. The
Domestic Equipment consisted of equipment manufactured by
IBM and leased to Burroughs Wellcome Co., the initial user,
for a 60-month term beginning on or about June 1, 1982, and
equipment manufactured by Control Data Corp. and leased to
First Computer Corp., the initial user, for a 37-month term
beginning on or about August 31, 1982. The Foreign Equip-
ment was manufactured by IBM and was leased to DuPont de
Nemours (Deutschland) GmbH, the initial user, part of
it for a 48-month term beginning on or about November 1,
1982, and part of it for a 36-month term beginning on or
about the same date.
At the time the Trust entered into the Sale Agreement,
the equipment was subject to two master leases, one cover-
ing the Domestic Equipment between Systems and Equilease
Associates I Limited Partnership, and one covering the
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Foreign Equipment between Systems and Equilease C.V. We
shall refer to all Equilease entities as Equilease. Under
each master lease, Systems, as lessor, leased the equipment
to Equilease, as lessee, and assigned to Equilease all of
the lessor's rights under the initial user leases. The
term of both master leases was 96 months. In return,
Equilease agreed to pay fixed rent, contingent rent, and
taxes. Generally, fixed rent refers to the rent to be paid
by Equilease. The amount of the fixed rent was equal to
the payments the Trust was required to make under the Trust
Note, as further discussed below. Contingent rent refers
to the rent that might be received from re-leasing the
equipment between expiration of the initial user leases
and the end of the master leases. Under the terms of the
master leases, the Trust and Equilease shared any
contingent rent.
Under the Sale Agreement, the Trust purchased an
interest in the subject computer equipment and received
assignment of Systems' interest in the master leases.
The stated purchase price was $5,170,392. The Trust
paid Systems $954,000 in cash, of which $917,392 was
characterized as a downpayment and $36,608 was
characterized as a prepayment of interest due on the
Trust Note in 1983. The Trust issued a promissory note
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to Systems in the principal amount of $4,253,000 (Trust
Note) that bore interest at the rate of 16¾ percent per
annum compounded quarterly and was secured by a security
interest in favor of seller in the rents from the master
leases and the equipment. The Trust Note required payment
of interest only for each of the first 4 quarters, in
arrears in the amount of $168,942.50 per quarter, and pay-
ment in the amount of $260,781.95 for each of the remaining
28 quarters.
As mentioned above, each payment due from the Trust
under the Trust Note was exactly offset by the aggregate
quarterly payments of fixed rent that the Trust was
entitled to receive from Equilease under the master leases.
The Investment Memorandum states as follows:
The term of each [Master] Lease coincides
with the term of the Trust Note. Payment of
fixed rent under each Lease will be due quarterly
in arrears commencing with the end of the first
quarter following the Closing and thereafter on
the last day of the calendar quarter to which
each such payment relates, and, if paid, all such
payments will be sufficient to pay the quarterly
installments under the Trust Note as and when
due. Any distributable cash flow to the Trust
will be dependent on the re-leasing of the
Equipment after the expiration of the initial
term of the User Leases, although the fixed rent
payments during that time, if paid, will be
sufficient to pay all installments on the Trust
Note as and when due.
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The Investment Memorandum further states as follows:
If [fixed] rent is timely paid by each
Lessee over the eight years of the [Master]
Leases, the Trustee will receive, in the
aggregate, minimum payments, in arrears, of
$168,942.50 ($1,689.42 per unit) per quarter
for the first four quarters and $260,781.95
($2,607.82 per unit) per quarter for the
remaining twenty-eight quarters. The Trustee
will be required to apply all of such minimum
receipts to interest payments and debt
amortization under the Trust Note.
The Declaration of Trust provided that the Trust would
terminate shortly after the expiration of the master
leases. While it was possible for the unitholders to agree
to establish a new trust and re-lease the computer equip-
ment, it was anticipated that the equipment would be sold
after expiration of the master leases. The Investment
Memorandum states as follows:
At the expiration of the Leases, all of the
Unitholders may direct the Trustee to remarket
the Equipment on their behalf. If the Equipment
is re-leased and not sold, the Unitholders, as
co-owners of the Equipment, must provide for the
payment to each owner of his share of the rent
and may elect to establish a new trust. The
Declaration of Trust provides that the Trust will
terminate for all purposes 8 years and 3 months
after its creation, unless it has been terminated
at an earlier date, for example, following a sale
of the Equipment. (See "Acquisition and Lease
Terms--Marketing arrangements".) In the absence
of unanimity among the Unitholders as to any
proposed remarketing of the Equipment, the
Declaration of Trust provides that the Equipment
will be sold at auction and the net proceeds of
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such sale will be distributed to the owners in
accordance with their respective ownership
interests in the Equipment. (See "Risk Factors
--Termination of the Trust.")
In view of the fact that the quarterly payments of
fixed rent equaled the quarterly installments under the
Trust Note, any economic benefit to the unitholders from
this transaction could arise from only two sources:
Contingent Rents and the proceeds from the sale of the
equipment after expiration of the 96-month master leases.
The Investment Memorandum states as follows:
Economic benefits to the Unitholders during the
term of the Leases will arise out of rents
payable under the Leases by Lessees, which rent
will consist of both fixed rent and certain
"Additional Rents" [i.e., contingent rents]
based on a percentage of revenues, if any from
the re-leasing of the Domestic Equipment by
Domestic Lessee and the re-leasing of the Foreign
Equipment by Foreign Lessee following the
expiration of the initial term of the Domestic
User Leases and the Foreign User Lease (the "User
Leases"). Fixed rents payable under the Leases
together with the investor's cash contributions
to the Trust will be sufficient to service the
installment obligations under the Trust Note.
* * * * * * *
Apart from Additional Rent, if any, which
the Trustee may receive (see "Acquisition and
Lease Terms"), the residual value of the
Equipment after the expiration of the [Master]
Leases is the sole source of funds to which a
Unitholder will have to look for a return of
his capital investment in the Trust.
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The Investment Memorandum also states:
Except for the Trustee's right to collect
the Additional Rent [i.e., Contingent Rent], any
ultimate economic return to the Unitholders is
dependent upon the residual value of the Equip-
ment, if any, at the expiration of the terms of
the [Master] Leases.
OPINION
This case involves a garden-variety computer leasing
tax shelter similar to others that the Court has held to be
shams. See Estate of Strober v. Commissioner, T.C. Memo.
1992-350; Mele v. Commissioner, T.C. Memo. 1988-409;
Dobbs v. Commissioner, T.C. Memo. 1987-361; cf. Rubin v.
Commissioner, T.C. Memo. 1989-484. There is nothing novel
in the transaction or the Court's opinion in response to
it. In Robertson I, we held that petitioners had failed
to meet their burden of proving that the subject sale-
leaseback transaction was not a sham as had been determined
by respondent. We considered both the economic substance
of the transactions, i.e., whether they offered a reason-
able opportunity for profit exclusive of tax benefits, and
petitioner's subjective business purpose for entering the
transactions, i.e., whether he had a profit objective or
purchased an interest in the trust solely to acquire tax
benefits. See generally Gilman v. Commissioner, 933 F.2d
143, 147-148 (2d Cir. 1991), affg. T.C. Memo. 1990-205;
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Casebeer v. Commissioner, 909 F.2d 1360, 1363 (9th Cir.
1990), affg. in part, revg. in part and remanding T.C.
Memo. 1987-628, Larsen v. Commissioner, 89 T.C. 1229
(1987), Sturm v. Commissioner, T.C. Memo. 1987-625,
Moore v. Commissioner, T.C. Memo. 1987-626; Sochin v.
Commissioner, 843 F.2d 351, 354 (9th Cir. 1988), affg.
Brown v. Commissioner, 85 T.C. 968 (1985); Rice's Toyota
World, Inc. v. Commissioner, 81 T.C. 184, 201-204 (1983),
affd. in part, revd. in part, and remanded 752 F.2d 89
(4th Cir. 1985).
On the basis of all of the facts and circumstances
presented, we found that petitioner's purchase of an
interest in the Trust was without economic substance.
That finding was based upon factors commonly reviewed
in determining whether a computer leasing transaction
possesses economic substance, including the presence or
absence of arm's-length price negotiations, the reason-
ableness of the income and residual value projections,
the structure of the financing, the degree of adherence
to contractual terms, and, of particular significance in
this case, the relationship between the sale price and
fair market value of the property acquired. See Levy v.
Commissioner, 91 T.C. 838, 856 (1988). In considering the
last factor, we took note of "the limited nature of the
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interest acquired" by the Trust. Robertson I states as
follows:
It is apparent that the Trust purchased
interests from Systems that were stripped of much
of their value. The Trust held no right to the
use of, or the proceeds from, the equipment until
the expiration of the Initial User Leases.
Further, the Trust held the right to receive only
approximately half of the net rental proceeds
from the equipment between the end of the Initial
User Leases and the end of the Master Leases.
The other half of the net rental proceeds would
flow to the Equilease entities under the Master
Leases. Thus, the interests in the subject
equipment were limited residual interests.
Thus, for purposes of evaluating the economic substance
of the transaction, we focused on the limited interest
acquired by the Trust rather than on the full fair market
value of the equipment involved. We described that
interest as follows:
that interest was essentially the ownership of
the equipment after the expiration of the Master
Leases plus the right to approximately half of
the net rental stream between the end of the
Initial User Leases and the end of the Master
Leases.
This accords with the Investment Memorandum, quoted above,
and the testimony of petitioners' witnesses that the
economic benefit to the unitholders could arise only from
contingent rents and the residual value of the equipment at
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the end of the master leases. For example, Mr. Eli Gerver,
one of the unitholders, testified as follows:
Our expectation of profit came from two
sources: the rents which might achieve, or our
share of the rents that might be achieved after
the--looking at that chart, that 60-month lease
in the case of the Burroughs equipment, the 37-
month in the First Computer, and the--whatever
the other one is in the case of the foreign
equipment, at the end of that, the possibility
of renting to somebody else after that period
time, or if that--and in addition to that, the
residual, the ultimate opportunity to sell the
equipment itself.
The trustee, Mr. Alan Bernikow, expressed the same idea as
follows:
The only way you can make money in this
deal, when you go through the numbers, and we
went through the numbers pretty quickly, is to
recognize that the re-leasing program was very
important, the value at the end was very
important, because, if you don't have those
pieces, all you have is taxes, that you pay in
early years and you get back--you get in the
early years and you pay back in the later years.
* * * * * * *
We had gone through a due diligence and,
once these numbers hit you, as you go through
this package and recognize that if you believe
in--in the rental incomes and the residual value,
then it became a, what I would call--for the
deals we saw at the time, a very good deal.
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The experts who testified at the first trial on behalf
of each of the parties valued the contingent rents and
residual value of the equipment at the end of the master
leases as follows:
Lyons Lyons
Minimum Maximum Blumenthal
Contingent rent $659,363 $925,877 $417,179
Residual value 8,135 470,074 10,000
Total 667,498 1,395,951 427,179
We adopted the view of respondent's expert, Mr. S. Paul
Blumenthal, that $427,179 was the maximum amount that would
be recouped by the unitholders. Accordingly, we found that
they could not recoup their cash payment of $954,000 and,
thus, could not realize an economic profit. This analysis
is similar to that applied in other court cases. See
Rice's Toyota World, Inc. v. Commissioner, 752 F.2d 89
(4th Cir. 1985); Estate of Strober v. Commissioner, T.C.
Memo. 1992-350; Mele v. Commissioner, T.C. Memo. 1988-409;
Dobbs v. Commissioner, T.C. Memo. 1987-361.
There are several aspects of the testimony of
petitioners' expert, Mr. Esmond C. Lyons, Jr., that should
be noted. First, the aggregate minimum economic benefit,
$667,498, and the aggregate maximum economic benefit,
$1,395,951, are both substantially less than the economic
benefit set forth in the Projections that accompanied the
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Investment Memorandum (reproduced as appendix B hereto),
summarized as follows:
Projections Projections Projections
20% 25% 30%
Contingent rent $914,175 $914,175 $914,175
Residual value 930,671 1,163,338 1,396,006
Total 1,844,846 2,077,513 2,310,181
Second, the minimum residual value of the equipment
determined by petitioners' expert, $8,135, is less than
the residual value determined by respondent's expert,
$10,000.
In Robertson I, we also found that there was "a
complete lack of business purpose" for the transaction.
In that connection, we noted that petitioners and the
other unitholders "were partners and principals in a
major accounting firm * * * [and] Petitioner, as well as
other unitholders, had extensive experience with leasing
transactions." Thus, we found that petitioner and the
other unitholders "should have understood that they were
agreeing to a grossly inflated price for their limited
interest in this equipment."
As stated above, the issue to be resolved in this
proceeding is whether the expert testimony presented on
petitioners' behalf during the second trial, together with
petitioners' arguments, convince us that we were mistaken
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in Robertson I and that we should hold that petitioners are
not liable for the additions to tax under sections 6653(a)
and 6661. Petitioners' arguments require an analysis of
the Appraisal of the subject computer equipment furnished
by Mr. John R. Wilkins, president, Communigraphics, Inc.,
dated December 14, 1982, the Projections that were
furnished to the unitholders, the Tax Opinion rendered by
Austrian, Lance & Stewart, and the Investment Memorandum.
The Appraisal
Mr. Wilkins' appraisal is broken into five sections:
I. Scope of Study; II. Industry Background; III. Valua-
tions; IV. Exhibit A: Equipment Appraised; and V.
Background & Qualifications of John R. Wilkins. The
"Equipment Appraised" section consists of four exhibits,
lettered A through D, which enumerate each item of computer
equipment and state the manufacturer's list price for each.
Set out below is a description of the equipment appraised
as set forth in IV. Exhibits A through D:
Exhibit A: Burroughs Wellcome
Quantity Unit Model Description IBM List Price
1 IBM 3081 D16 Central Proces $3,260,000
1 IBM 3082 16 Processor Cont 220,000
1 IBM 3087 1 Coolant Dist. U 60,000
1 IBM 3278 A02 Console 2,505
3,542,505
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Exhibit B: Du Pont de Nemours (Deutschland) GmbH
Quantity Unit Model Description IBM List Price
2 IBM 4341 L01 Central Proces 450,000
450,000
Exhibit C: Du Pont de Nemours (Deutschland) GmbH
Quantity Unit Model Description IBM List Price
2 IBM 3350 A02 Disk Drive 83,200
1 IBM 3350 A2F Disk Drive 51,910
6 IBM 3350 B02 Disk Drive 197,640
3 IBM 3350 B2F Disk Drive 129,750
2 IBM 3803 2 Tape Control 68,860
4 IBM 3420 8 Tape Drive 110,380
641,740
Exhibit D: First Computer Corp.
Quantity Unit Model Description CDC List Price
1 CDC 38340 2 Controller --
w/2 Channel Sw.
2 CDC 33502 A2 Disk Drive --
6 CDC 33502 B2 Disk Drive --
418,891
Grand total 5,053,136
We note that the Roscrea Trust allegedly agreed to purchase
the equipment for $5,170,392.
The "Valuations" section of the appraisal, the most
significant portion of the document for our purposes and
the one that we refer to herein as the Appraisal, states
as follows:
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III. Valuations
BURROUGHS WELLCOME COMPANY
DU PONT DE NEMOURS (DEUTSCHLAND) GmbH
FIRST COMPUTER CORPORATION
The IBM 3081 and 4341 Central Processors and the IBM and
Control Data Corporation disk are the latest model in their
price and capacity ranges, and should have an economic life of
not less than twelve years.
Below is the anticipated residual value for the equipment
described in Exhibits A-D upon the expiration of the initial
user lease term and upon the expiration of 96 months:
March, 1987 (Exh A) - $1,062,751
November, 1986 (Exh B) - 179,800
November, 1985 (Exh C) - 261,855
June, 1985 (Exh D) - 188,502
The user leases are for 52 months at a rental of $92,676
per month (at a 16% debt interest rate) for Exhibit A; for 47
months at a rental of $8,659 per month (at a 12% assumed debt
rate and a currency conversion rate of 2.496) for Exhibit B; 35
months at a rental of $10,375 per month (at a 12% assumed debt
rate and a currency conversion of 2.496) for Exhibit C; and
for 31 months at $7,500 per month (at a 16.75% debt rate) for
Exhibit D. The present value of the user lease is $4,331,327.
In our opinion, the assessed value of the equipment
described in Exhibit A [sic] should be the sum of the present
value of the user lease plus the present value of the residual
value of such equipment upon expiration of the initial user
lease term. We have discounted such residual value at 16% and
calculated the appraised value as follows:
Present value, user lease: $4,331,327
Present value, residual: March, 1987 (Exh A) - $519,763
November, 1986 (Exh B) - 112,763
November, 1985 (Exh C) - 181,205
June, 1985 (Exh D) - 122,657
Sum of present values: $5,267,715
Since the sum of the Present Values exceeds the Acquisi-
tion Cost of the equipment, we will limit the appraisal to such
Acquisition Cost.
Appraised Value: $5,170,392
Respectfully submitted,
John R. Wilkins
President
Communigraphics, Inc.
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It is readily apparent that the Appraisal is similar
to another appraisal prepared by Mr. Wilkins that was in
issue in Mele v. Commissioner, T.C. Memo. 1988-409. The
appraisal in that case is virtually identical to the
Appraisal at issue in this case, and it is worthwhile to
compare the two. In that case, we described Mr. Wilkins'
appraisal as "a summary of conclusory assertions [that]
provides no substantial basis for measuring the soundness
of projected residual values." Id. We also stated that
"on its face Wilkins' appraisal was not a document worthy
of reliance * * * [because it] is nothing more than a
listing of unsupported conclusions as to the Equipment's
value." Id.
The same is true in the instant case, but there are
also glaring errors in Mr. Wilkins' Appraisal in this case
that are apparent on its face and make reliance on it
unreasonable. First, the second paragraph of the Appraisal
states that there is set forth "the anticipated residual
value for the equipment described in Exhibits A-D upon the
expiration of the initial user lease term and upon the
expiration of 96 months". To the contrary, however, the
Appraisal provides only one set of values and makes no
clear statement about whether the values provided are the
residual values of the equipment upon expiration of the
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initial user leases or the residual values of the equipment
upon expiration of the 96-month term of the master leases.
Presumably, Mr. Wilkins did not intend to say that the
residual value of the equipment is the same on both dates.
Each of the values set forth in paragraph 2 of the
Appraisal is accompanied by a month and year which appear
to be the month in which each of the initial user leases
terminates. From that, we assume that the values set out
in paragraph 2 are the "residual" values of the equipment
upon the expiration of the initial user leases. Thus, it
appears that the Appraisal fails to provide residual values
for the equipment upon expiration of the 96-month terms of
the master leases.
By failing to set forth the residual value of the
equipment upon expiration of the master leases, it is
evident that Mr. Wilkins' Appraisal is based on a mistaken
premise and is wrong. After setting forth the anticipated
"residual" values of the equipment upon expiration of the
initial user leases, Mr. Wilkins discounts those values in
order to arrive at their present value in 1982, as follows:
Present value, residual: Mar. 1987 (Exh A) - $519,763
Nov. 1986 (Exh B) - 112,763
Nov. 1985 (Exh C) - 181,205
June 1985 (Exh D) - 122,657
Total 936,388
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To that amount, Mr. Wilkins adds the present value of the
payments due under the initial user leases, $4,331,327, to
arrive at the aggregate present value of the equipment,
$5,267,715, an amount slightly in excess of the alleged
acquisition cost of the equipment, $5,170,392. Thus, the
premise of the Appraisal is that the fair market value of
the equipment sold to the Roscrea Trust is equal to the
present value of the payments due under the initial user
leases, $4,331,327, plus the aggregate present value of the
residual values of the equipment upon the expiration of
the initial user leases, $936,388.
However, upon expiration of each of the initial user
leases, the computer equipment covered by that lease
remained subject to one of the two master leases, and the
unitholders could do nothing with that equipment until
expiration of the master leases in 1990, other than to
share with Equilease, the lessee under the master leases,
any contingent rents realized. Thus, in view of the fact
that all of the equipment is subject to one of the two
master leases, the Appraisal is wrong in valuing the
equipment at the expiration of the initial user leases.
Significantly, there is no evidence in the record that
petitioners, the Trustee, or any of the other unitholders
raised an issue with the seller of the equipment, the
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appraiser, or any other person about the fact that the
Appraisal is wrong on its face.
Furthermore, the failure of the Appraisal to set forth
the residual value of the equipment upon expiration of the
master leases is a serious omission because, as discussed
above, the economic return on the investment to the
unitholders depends primarily upon the residual value of
the equipment at that time and not upon expiration of the
initial user leases. As petitioner testified:
the only way to make a profit in this trans-
action, is to sell the Equipment at the end of
the lease term [in 1990]; and that's what I was
trying to do in becoming an investor in Roscrea
Trust.
Before expiration of the master leases in 1990, the
unitholders could receive fixed rents, equivalent in amount
to the payments that the trust was obligated to make under
the Trust Note, and a share of contingent rent. They could
not realize the residual value of the equipment until after
expiration of the 96-month master leases. By failing to
provide the residual value of the equipment upon expiration
of the master leases, the Appraisal is of limited assis-
tance in computing the economic return on the investment
to the unitholders. Once again, there is no evidence in
the record that petitioners, the Trustee, or any of the
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other unitholders raised an issue with the seller of the
equipment, the appraiser, or any other person about the
failure of the Appraisal to provide the residual value
of the equipment at the expiration of the master leases.
We note other errors in the Appraisal. As stated
therein, the residual values of the equipment upon
expiration of the initial user leases are discounted "at
16%" in order to obtain the present values. In reviewing
those computations, we noted two inconsistencies. Our
computations are set forth below:
"Residual" Interest Present
Value Months Rate Value
Exh A $1,062,751 54 16.00% $519,763
1
Exh B 179,800 47 12.00 112,638
Exh C 261,855 37 12.00 181,205
Exh D 188,502 31 16.75 122,657
1,692,908 936,263
1
This amount is $125 more than the amount in the
appraisal, $112,763, which we were not able to duplicate.
From the above, the first inconsistency is that Mr. Wilkins
used three interest rates in discounting the "residual"
values at the expiration of the initial user leases, 16,
12, and 16.75 percent (referred to in the Appraisal as debt
interest rate or assumed debt rate), rather than the single
rate of 16 percent. The second inconsistency is that
- 24 -
Mr. Wilkins used 54 months rather than 52 months and 37
months rather than 35 months for the number of months
remaining before expiration of the initial user leases
for Exhibits A and C, respectively.
Projections
The record contains two sets of financial projections
that purport to summarize possible investment results to
the Trust, one set dated December 10, 1982, reprinted
herein as appendix A, and a second set dated December 16,
1982, reprinted herein as appendix B. We refer to either
set or both sets as the Projections. The Projections
dated December 10, 1982, were reviewed by petitioner and
are described in Robertson I. The Projections dated
December 16, 1982, were included as an attachment to the
Investment Memorandum.
Both sets of Projections convey essentially the same
information. They show that income would flow to the Trust
from three sources: Rental income, referred to as fixed
rent in the master leases, to be paid by Equilease over
the 8-year term of the master leases; additional income,
referred to as contingent rents in the master leases, to be
derived from re-leasing the equipment after expiration of
the initial user leases; and the "sale proceeds" from the
sale of the equipment after expiration of the master
- 25 -
leases. As mentioned above, the fact that the quarterly
payments under the Trust Note equaled the fixed rent to be
paid by Equilease meant that the Trust's income was
effectively limited to two sources: (1) The Trust's share
of contingent rents and (2) the proceeds from the sale of
the computer equipment at the end of the 96-month master
leases.
The Projections show the cumulative after-tax benefit
to the Trust on an aggregate basis assuming that the Trust
realized additional income from contingent rents through
the end of 1990 in the aggregate amount of $914,175 and
further realized the proceeds from the sale of the computer
equipment at the expiration of the master leases in the
amounts set forth. For example, if the Trust realized sale
proceeds amounting to 20, 25, or 30 percent of original
cost of the equipment less a 10-percent sales commission
(i.e., $930,671, $1,163,333, or $1,396,006, respectively),
the Projections dated December 16, 1982, show that the
Trust would realize in 1990 a cumulative after-tax benefit
of $950,507, $1,072,657, and $1,194,808, respectively.
Significantly, the forecasted sale proceeds used in
the Projections are not based upon Mr. Wilkins' Appraisal
or on the appraisal of any other independent appraiser.
At the first trial, Mr. Scott Binder, who prepared the
- 26 -
Projections on behalf of the seller, could not explain why
the anticipated sale proceeds of the equipment in 1990 are
not set forth in the Appraisal, as was normally the case.
Mr. Binder testified as follows:
Q. Now with respect to the line that says Sales
Proceeds, where was that number or those
numbers derived from?
A. I think the first number, the 20-percent
number, comes from the appraisal.
Because there is a possibility that it would
be worth more and a possibility that it
would--let me just see.
He normally gave the estimated value.
[Pause.]
THE WITNESS: I can't find it in here.
Normally that was based on his--
MR. WINNINGHAM: Your Honor, could we ask
what document the witness is referring to?
THE WITNESS: 7-G [the Appraisal].
MR. WINNINGHAM: 7-G, thank you.
[Pause.]
THE WITNESS: I can't find it but it is
supposed to be and it was based on appraisal
at 20 percent and he somewhere comments I
think that that's a fair number but anyway
that's my answer--that it's based on Jack
Wilkins.
Even more significantly, there is a critical
discrepancy between the value of the computer equipment
- 27 -
used in the Projections and the value computed by the
Appraisal. According to Mr. Wilkins' Appraisal, the
"present value" of the computer equipment in 1982 is
$936,388. On the other hand, the Projections assumed
that, if the equipment were sold in 1990 at the end of the
96-month master leases, the proceeds from the sale would
be $930,671, $1,163,338, or $1,396,006. Clearly, if the
proceeds from the sale of the equipment in 1990 are
$930,671, $1,163,338, or $1,396,006, as contemplated in the
Projections, then the equipment could not be worth $936,388
in 1982, as Mr. Wilkins opined in his Appraisal. If we
discount the three sale proceeds used in the Projections at
16 percent, the present values of the sale proceeds in 1982
are $260,959.20, $326,198.79, and $391,438.66. Thus, there
is a significant discrepancy between the value of the
equipment as determined by Mr. Wilkins and the value of the
equipment assumed in the Projections. There is no evidence
in the record that petitioners, the Trustee, or any of the
other unitholders raised an issue about this discrepancy
between the value of the equipment in the Projections and
the Appraisal.
In passing, we note that the Projections contain a
footnote D which states: "At zero residual value the
cumulative benefit amounts to 461905." In the Projections
- 28 -
reprinted herewith as appendix B, we have added a column
entitled "1990(D)" which shows the computation of that
amount. We also note that there is no evidence that any
of the unitholders considered the after-tax return to the
Trust assuming that the Trust realized no contingent rents
or proceeds from the sale of the equipment upon expiration
of the master leases.
Tax Opinion
Petitioner and the other unitholders claim to have
negotiated for and relied upon the Tax Opinion letter
written by Austrian, Lance & Stewart to the Trustee that
was attached as an exhibit to the Investment Memorandum.
The Tax Opinion states that, in the opinion of Austrian,
Lance & Stewart, "it is more likely than not that": (1)
The Trust will be classified as a trust for Federal income
tax purposes; (2) the master leases should not preclude the
unitholders from being considered the owners of the equip-
ment; (3) the unitholders' aggregate income tax basis in
the computer equipment will be its purchase price
represented by the cash downpayment and the face amount of
the Trust Note; and (4) each unitholder will be "at risk"
in an amount equal to his contributions when made plus the
share of the Trust Note for which he is personally liable.
- 29 -
In rendering their opinion, Austrian, Lance & Stewart
relied heavily upon the Appraisal prepared by Mr. Wilkins,
described above. For example, the Tax Opinion relies upon
the Appraisal for the proposition that "the current fair
market value of the Equipment is at least equal to the
purchase price to be paid by the Trust". The Tax Opinion
also relies upon the Appraisal for the proposition that the
equipment "should have a value at the end of the terms of
the [Master] Leases (the 'residual value'), without regard
to inflation, equal to or exceeding 20 percent of its
cost." Austrian, Lance & Stewart recite these facts in
connection with their assumptions and representations at
the beginning of the Tax Opinion in the following passage:
Seller has provided the Trustee with a
projection with respect to the present and
anticipated future value of the Equipment (the
"Appraisal") prepared by Communigraphics, Inc.
(the "Appraiser"). The Appraiser believes that
the current fair market value of the Equipment is
at least equal to the purchase price to be paid
by the Trust and will exceed the aggregate amount
of the Trust Note and that the Unitholders can
expect the Equipment to have a useful life
extending beyond the terms of the Leases and that
it should have a value at the end of the terms of
the Leases (the "residual value"), without regard
to inflation, equal to or exceeding 20 percent of
its cost. We are aware, however, that the data
processing industry has been and is likely to
continue undergoing rapid technological advances,
some of which may substantially depress the
economic value of the Equipment and limit its
useful life. We note specifically that the terms
of the Leases, 96 months, is longer than most
- 30 -
leases of such equipment and may indicate that
the anticipated residual value will not be
realized. In this regard, we have assumed that,
as set forth in the Subscription Agreement, each
of the Unitholders is investing in the Trust with
a reasonable expectation of making a profit from
his investment. For purposes of the analysis
that follows, we have assumed that the Appraisal
is reasonable given all the facts and circum-
stances. [Emphasis added.]
The fact that "the current fair market value of the
Equipment is at least equal to the purchase price to be
paid by the Trust" is essential to Austrian, Lance &
Stewart's "understanding" concerning the reasonableness
of earning an "economic profit" from the transaction as
set out in the Tax Opinion as follows: "It is our under-
standing that: * * * (ii) the Unitholders can reasonably
expect to earn an economic profit from the Transaction
based upon the Appraisal and the anticipated cash flow
during and after the terms of the Lease". This fact is
also essential to Austrian, Lance & Stewart's conclusion
that the amount of the Trust Note will be included in the
unitholders' basis in the equipment, expressed in the Tax
Opinion in the following passage:
Based upon our review of the proposed
documents set forth above and our reliance upon
the Appraisal indicating the fact that the
Equipment will be sold by Seller for an amount
not in excess of its then fair market value, we
do not believe that there is a reasonable basis
for concluding that the Service could success-
fully apply the principles of Marcus, May or the
- 31 -
Revenue Rulings to the Trust's indebtedness on
the Trust Note to Seller.
* * * * * * *
In contrast to the facts in Franklin, (i)
the Unitholders will be personally obligated to
pay the Trust Note, (ii) the Transaction will
generate cash flow, if Additional Rent is paid,
to the Trust and, therefore, to the Unitholders,
(iii) the Trust Note will require no lump sum
payments in the event of a default thereunder,
in order completely to amortize the principal and
(iv) in the opinion of the Appraiser, the fair
market value of the Equipment when purchased
will not be less than its purchase price and the
estimated residual value of the Equipment at the
end of the Leases could be expected to be at
least 20 percent of the purchase price.
[Emphasis added.]
As discussed above, however, it is apparent from the
face of the Appraisal that the value determination made by
the Appraisal is wrong. It is based upon the present value
of the aggregate residual values of the equipment upon the
expiration of the initial user leases, rather than upon the
expiration of the 96-month master leases. Accordingly, the
Appraisal cannot reasonably be relied upon to establish the
fact that "the fair market value of the Equipment when
purchased will not be less than its purchase price."
Second, the fact that the equipment "should have a
value at the end of the terms of the [Master] Leases (the
'residual value'), without regard to inflation, equal to
or exceeding 20 percent of its cost" is one of the key
- 32 -
factors on which Austrian, Lance & Stewart based their
opinion that the unitholders would be considered the owners
of the equipment. Furthermore, it is an important fact in
Austrian, Lance & Stewart's opinion that the Trust Note
would be included in the unitholders' basis in the equip-
ment. However, as discussed above, Mr. Wilkins fails to
set forth the residual value of the computer equipment as
of the end of the master leases in the Appraisal.
Third, the Tax Opinion relies upon the Appraisal to
establish "the anticipated cash flow during and after the
term of the [Master] Lease." In addressing the issue of
whether the unitholders would be considered the owners of
the equipment, the Tax Opinion discusses whether the lease
transaction would be recharacterized as a conditional sale
of the equipment to the lessee or whether the Trust had
retained a sufficient interest in the leased equipment to
entitle it to depreciation deductions. In concluding that
the leases "should not preclude the unitholders from being
considered the owners of the Equipment", the Tax Opinion
states the following as one of six factors on which that
conclusion is predicated:
the decision to acquire the Equipment has been
made in reliance upon the Appraisal from an
expert of the view that the Equipment would have
a useful life beyond the end of the [Master]
- 33 -
Leases and have a residual value of not less
than 20 percent of the purchase price.
In that connection, the Tax Opinion further states as
follows:
The Trustee anticipates receiving no positive
cash flow during the initial term of the User
Lease, additional cash flow thereafter depending
upon receipt of any Additional Rent, which cannot
be anticipated but may be significant. Upon
expiration of the [Master] Lease [sic], the
Equipment will be owned free and clear of all
debt and the Appraisal anticipates the Unit-
holders deriving a cash flow thereafter.
However, the Appraisal does not discuss the anticipated
cash-flow from the computer equipment after expiration of
the 96-month master leases.
Finally, the Tax Opinion relies upon the Appraisal
to conclude that the equipment will have "a useful life
extending beyond the terms of the [Master] Leases".
Throughout the Tax Opinion, Austrian, Lance & Stewart note
the importance of the useful life of the equipment in view
of the 96-month terms of the master leases which "is longer
than most leases of such equipment and may indicate that
the anticipated residual value will not be realized."
However, the only statement in the Appraisal that can be
construed as addressing the "useful life" of the subject
equipment is the following: "The IBM 3081 and 4341 Central
- 34 -
Processors and the IBM and Control Date [sic] Corporation
disk are the latest model in their price and capacity
ranges, and should have an economic life of not less than
twelve years." This statement concerning the "economic
life" of the equipment is not formulated in terms of
Mr. Wilkins' considered opinion but appears to be an off-
hand conclusory comment without anything to support it.
In summary, therefore, the Tax Opinion relies upon the
Appraisal without question, even though there are glaring
errors that are evident on the face of the Appraisal and a
discrepancy between the value of the equipment in the
Appraisal and in the Projections. The Tax Opinion also
relies upon the Appraisal to establish facts, such as the
residual value of the equipment upon expiration of the 96-
month master leases, and the cash-flow from the equipment
upon the expiration of the master leases, that are not
stated in the Appraisal. Finally, the Tax Opinion relies
upon the Appraisal to establish the "useful life" of the
equipment, even though the statement in the Appraisal
regarding the "economic life" of the equipment does not
define the term "economic life" and appears to be an off-
hand comment, rather than the considered opinion of the
appraiser.
- 35 -
Investment Memorandum
Like the Tax Opinion, the Investment Memorandum relies
upon the Appraisal's determination of the residual value of
the equipment at the termination of the master leases even
though the Appraisal does not provide such a value. For
example, the Investment Memorandum states as follows:
Based on the prices being paid for new and used
data processing equipment and the terms of the
end-user leases thereof, an appraisal by
Communigraphics, Inc. which has been furnished
by Seller projects that the Equipment will have
value at the termination of the [Master] Leases
more than sufficient to return to an investor
his capital contribution to the Trust. * * *
Similarly, the Investment Memorandum states as follows:
Unitholders are urged to review the Appraisal
attached hereto as Exhibit E, which concludes
that the Equipment will have a market value of
not less than 20% of cost at the end of the
terms of the [Master] Leases. There is, how-
ever, no assurance that such value will exist
or be realized at that time. (See "Equipment
Appraisal--Exhibit E".)
These statements from the Investment Memorandum are
obviously wrong and raise a red flag to any prudent
investor reviewing the Investment Memorandum.
The Investment Memorandum also relies upon the
Appraisal for the proposition that the fair market value
of the equipment in 1982 is equal to the price paid by the
- 36 -
Trust. For example, the Investment Memorandum states as
follows:
The Trustee has received an appraisal that
the fair market value of the Equipment as of
December 14, 1982, is $5,170,392.00, which
exceeds the amount of the Trust Note. The debt
will be includible in the basis of each Unit-
holder to the extent of his liability therefor,
but if the IRS should determine that the fair
market value of the Equipment is less than its
purchase price, the basis of the Unitholders in
the Equipment would not include any part of the
Trust Note. The Unitholders' anticipated tax
losses would be reduced almost entirely or
totally eliminated.
The Tax Opinion concludes that it is more
likely than not that the Trust Note will be
includible in the Unitholders' basis in the
Equipment, but that opinion is based upon the
opinion expressed in the Appraisal that the fair
market value of the Equipment exceeds the amount
of the Trust Note.
Similarly, the Investment Memorandum states as follows:
"The appraisal indicates that the fair market value of the
Equipment as of December 14, 1982, exceeds the face amount
of the Trust Note but there can be no assurance that such
valuation will not be challenged by the IRS. * * *"
The Investment Memorandum also warns that investors
must be able to demonstrate that the fair market value of
the computer equipment is at least equal to the purchase
price, because, otherwise, "the IRS could disallow all of
the deductions expected to be available to him, including
depreciation and interest on the Trust Note, on the theory
- 37 -
that the Trust and the Unitholders do not have a deprecia-
ble interest in the Equipment and that the indebtedness has
no economic significance." Notwithstanding the importance
of this issue, however, the Investment Memorandum relies
solely on the Appraisal to establish the fair market value
of the equipment, despite the obvious errors in the
Appraisal and the discrepancies between the Appraisal and
the Projections.
Finally, the Investment Memorandum relies upon the
Appraisal to establish the "useful life" of the equipment,
as follows:
Further, the Appraisal indicates that the
Equipment will have a residual value sufficient
for the Unitholders to realize a profit and that
the Equipment will have a useful life in excess
of the terms of the [Master] Leases.
The Investment Memorandum notes that the useful life of the
equipment is especially important because "the 96 month
term of the [Master] Leases may be challenged by the IRS as
being for a term which is substantially all of the useful
life of the Equipment." Nevertheless, as discussed above,
the Appraisal merely states that the computer equipment
"should have an economic life of not less than 12 years"
and fails to define the term "economic life".
- 38 -
Section 6653(a)(1) and (2)
Robertson I held petitioners liable for the additions
to tax under section 6653(a)(1) and (2) that were
determined by respondent in the notice of deficiency.
Petitioners bear the burden of proving that respondent's
determination of negligence is wrong. See Rule 142(a);
Hansen v. Commissioner, 820 F.2d 1464, 1469 (9th Cir.
1987).
Section 6653(a)(1) imposes an addition to tax equal
to 5 percent of the underpayment if any part of any under-
payment is due to negligence or intentional disregard of
rules or regulations. For purposes of this section,
negligence is defined as the "lack of due care or failure
to do what a reasonable and ordinarily prudent person would
do under the circumstances." Neely v. Commissioner, 85
T.C. 934, 947 (1985) (quoting Marcello v. Commissioner, 380
F.2d 499, 506 (5th Cir. 1967), affg. in part and remanding
in part per curiam T.C. Memo. 1964-299).
Section 6653(a)(2) imposes an additional amount "equal
to 50 percent of the interest payable under section 6601
* * * with respect to the portion of the underpayment
described in paragraph (1) which is attributable to
* * * negligence". This addition applies to "the period
beginning on the last date prescribed by law for payment
- 39 -
of such underpayment * * * and ending on the date of the
assessment of the tax". Sec. 6653(a)(2)(B).
Section 6661
Robertson I also held petitioners liable for the
addition to tax under section 6661 that was determined by
respondent in the notice of deficiency. Petitioners bear
the burden of proving that respondent's determination is
wrong. See Rule 142(a).
Section 6661(a) provides that, if there is a
"substantial understatement of income tax", there shall
be added to the tax an amount equal to 25 percent of any
underpayment attributable to such understatement. An
"understatement" is the amount by which the tax required
to be shown on the return for the taxable year exceeds the
amount of tax shown on the return. Sec. 6661(b)(2)(A).
An understatement is substantial if it exceeds the greater
of 10 percent of the tax required to be shown on the return
or $5,000. See sec. 6661(b)(1)(A). As determined in
Robertson I, the understatement of tax in this case,
$16,135, is greater than both of those amounts.
Generally, the amount of the understatement is reduced
by that portion of the understatement which is attribut-
able to the tax treatment of any item if there is or was
substantial authority for such treatment, or the tax
- 40 -
treatment of any item with respect to which the relevant
facts affecting the item's tax treatment are adequately
disclosed in the return or in an attached statement. See
sec. 6661(b)(2)(B). In the case of a tax shelter, however,
the reduction for adequate disclosure does not apply, and
the reduction based upon substantial authority for the
treatment of the item does not apply unless the taxpayer
reasonably believed at the time the return was filed that
the tax treatment claimed "was more likely than not the
proper treatment." Sec. 6661(b)(2)(C)(i). A taxpayer can
establish such a reasonable belief if the taxpayer in good
faith relies on the opinion of a professional tax adviser
that unambiguously states that the tax adviser "concludes
that there is a greater than 50-percent likelihood that the
tax treatment of the item will be upheld in litigation if
the claimed tax treatment is challenged by the Internal
Revenue Service." Sec. 1.6661-5(d)(2), Income Tax Regs.
Therefore, in the case of an understatement attributable to
a tax shelter, a taxpayer must prove that: (1) There was
substantial authority for the tax treatment of an item; and
(2) the taxpayer reasonably believed that the tax treatment
of an item was more likely than not the proper treatment.
See sec. 6661(b)(2)(C)(i); Mele v. Commissioner, T.C. Memo.
1988-409.
- 41 -
Petitioners argue that the Court should vacate that
portion of Robertson I relating to the additions to tax
under sections 6653(a) and 6661 and hold that petitioners
are not liable for those additions to tax. As to the
additions under section 6653(a)(1) and (2), petitioners
assert that the Court should hold that petitioners are
not subject to liability under those provisions because:
(1) Petitioners reasonably relied in good faith on the Tax
Opinion contained in the Investment Memorandum and on the
tax advice of one of their partners, Mr. Gerver; (2) they
"conducted an independent evaluations [sic] [of the
investment] that corroborated the information provided in
the memorandum, the Projections, and the Appraisal"; (3)
the information provided to petitioners and the other
unitholders reasonably could not have been expected to
suggest that the unitholders did not have a reasonable
prospect of qualifying for the expected tax consequences
of the transaction; and (4) at the time they entered into
the investment there was a substantial market for equity
investments in computer equipment leasing transactions with
many offering tax benefits exceeding those anticipated from
the investment in issue.
As to the additions to tax under section 6661, peti-
tioners assert that the Court should hold that petitioners
- 42 -
are not subject to liability under that provision for two
reasons. First, petitioners argue that the amount of the
"understatement" should be reduced by the entire under-
statement because petitioners satisfied the substantial
authority and reasonable belief requirements of section
6661(b)(2)(B) and (C). To establish substantial authority
and reasonable belief, petitioners rely on the same
arguments, summarized above, that they advanced to show
that they are not liable for the negligence additions under
section 6653(a)(1) and (2). Second, petitioners maintain
that they meet the standards for waiver of the addition to
tax under section 6661(c), which provides that the
Secretary may waive all or any part of the section 6661
addition if the taxpayers prove that there was reasonable
cause for the understatement and they acted in good faith.
Finally, as to the additions to tax under both
sections 6653(a) and 6661, petitioners argue that the Court
should vacate those portions of our opinion relating to
additions to tax under sections 6653(a) and 6661 because
the Court's holding that the investment did not have
economic substance was based upon the novel theory that
petitioners acquired a limited or partial interest, rather
than an entire ownership interest, in the computer
equipment.
- 43 -
In their testimony, petitioner and the other unit-
holders paint a picture of a close-knit group of partners
in a major national accounting firm joining together to
investigate and negotiate an investment in computer
equipment that was the subject of the sale-leaseback
transaction described above. Under this view of the facts,
one of petitioner's fellow unitholders, Mr. James Crumlish,
negotiated the terms of the purchase of the computer
equipment, including an appraisal of the equipment by an
independent appraiser and a tax opinion. Petitioner and
his fellow unitholders then relied upon the professional
expertise of various members of the group to "corroborate"
the economic benefits and tax consequences of the
investment described in the Investment Memorandum,
Appraisal, Projections, and Tax Opinion.
Petitioners argue that they relied upon the Tax
Opinion supplied by the seller, the tax advice of
Mr. Gerver, and the expertise of other partners of the
accounting firm, such as Messrs. William Atkins and Charles
Biggs. Petitioners assert that Messrs. Atkins and Biggs
were responsible for reviewing and corroborating the value
and the useful life of the computer equipment to be
purchased, and that Mr. Gerver and others were responsible
for reviewing the Tax Opinion and corroborating the tax
- 44 -
consequences of the transaction. Petitioners argue that
nothing in the Investment Memorandum, Tax Opinion,
Projections, or Appraisal should have caused petitioners
or any of the unitholders to doubt the reasonableness of
their expectation of profit from the transaction. In fact,
according to petitioners, the subject transaction offered
fewer tax benefits than those offered by other computer
leasing transactions at the time. Furthermore, according
to petitioners, an investor would not have entered into the
subject investment solely for tax purposes because the
investor would suffer a loss if there were no contingent
rents or proceeds from the sale of the equipment.
We are unable accept petitioners' view of the facts
for the following reasons. First, as discussed above,
our review of the Appraisal, Projections, Tax Opinion,
and Investment Memorandum shows that there are serious
questions that would have been evident to a reasonable
investor reviewing those documents. For example, among
other things, an investor would have certainly questioned
the fact that the Appraisal fails to provide the residual
value of the equipment upon expiration of the master
leases, the fact that there is a discrepancy between the
value of the computer equipment determined by the Appraisal
and the value used in the Projections, and the fact that
- 45 -
the Tax Opinion states that it relies upon the Appraisal
regarding the residual value of the equipment and cash-
flow therefrom on or after the end of the master leases,
despite the failure of the Appraisal to provide any such
determination. Considering the problems that we noted in
the documents relating to this transaction, which are
described above, we do not believe that it would be
reasonable for an investor to rely on the Tax Opinion,
nor do we believe that an investor who did so would be
acting in good faith. See Mele v. Commissioner, T.C.
Memo. 1988-409.
Second, according to the testimony of petitioner
and five other unitholders, at least 10 partners of the
accounting firm were actively involved in analyzing the
Investment Memorandum and the other documents relating to
the subject investment. Mr. Crumlish also testified that
"associates" of the accounting firm were involved in
"looking at the projections and making sure that those
projections were, you know, properly calculated and that
the assumptions weren't unreasonable and that type of
thing." Notwithstanding that alleged scrutiny by
sophisticated accountants and lawyers, none of the unit-
holders who testified at the first trial detected any
of the problems with the Appraisal, the Tax Opinion,
- 46 -
the Projections, or the Investment Memorandum that are
described above. None of the unitholders noted the fact
that the Appraisal fails to set out the residual value of
the computer equipment at the expiration of the master
leases and incorrectly values the equipment using the
"residual value" of the equipment upon the expiration of
the initial user leases. None of the unitholders noted the
discrepancy between the value of the computer equipment
determined in the Appraisal and the value of the equipment
used in the Projections. None of the unitholders noted the
fact that the Tax Opinion relies upon the Appraisal to
establish the fact that the amount paid by the Trust for
the computer equipment was the fair market value of the
equipment despite the obvious errors in the Appraisal.
Even more significant, none of the unitholders noted the
fact that the Tax Opinion relies upon the Appraisal to
establish facts that are not stated in the Appraisal,
such as the residual value of the computer equipment upon
expiration of the master leases and the cash-flow from
the equipment after expiration of the master leases.
We are simply unable to credit much of the testimony
of petitioner and his fellow unitholders regarding their
alleged "independent evaluation" of the subject investment.
We do not believe that petitioner and his fellow
- 47 -
unitholders could have given the Investment Memorandum
and related documents the level of scrutiny to which they
testified without noting the problems described above.
Third, there are numerous inconsistencies in the
testimony of petitioner and his fellow unitholders. For
example, Mr. Crumlish testified that, in his negotiations
with the seller, he insisted upon receiving an independent
appraisal of the equipment because of the importance of
the residual value of the equipment. Mr. Crumlish also
testified that the group "relied" on the Appraisal. We
find it hard to believe that Mr. Crumlish, having
negotiated with the seller to provide an appraisal, did
not raise an issue with the seller or anyone else about the
missing residual value of the equipment or raise a question
about the discrepancy between the value of the equipment in
the Projections and the Appraisal. It suggests that the
Appraisal and other documents were merely window dressing.
Mr. Crumlish also testified that he obtained the
Appraisal and provided it to another unitholder,
Mr. Atkins, who had expertise regarding computer equipment.
Surprisingly, Mr. Atkins testified that he "did not confer
with Mr. Crumlish" nor did he send him anything in writing.
Petitioner and his fellow unitholders testified that
they relied upon Messrs. Atkins and Biggs regarding the
- 48 -
value of the equipment and its useful life. Generally, we
found the testimony of both Messrs. Atkins and Biggs to be
vague and conclusory. For example, Mr. Atkins testified
as follows regarding his review of the Appraisal:
Q. Mr. Atkins, you said that you reviewed the
offering materials in connection with the
Roscrea Trust, in 1982. Did you look at any
appraisal information that was included with
that material?
A. There was an appraisal from a company,
Computer Graphics, or computer--something
like that.
Q. And what was your view of the appraisal that
you received from this company?
A. I feel that the appraisal was fair, given
the current situation of the equipment.
* * * * * * *
Q. Did you think it was appropriate to obtain
another appraisal, apart from the appraisal
that had been supplied with the offering
materials?
A. No.
Q. Why?
A. It looked--in my opinion, it looked
reasonable.
Q. As far as the price of the equipment; what
was your opinion about that?
A. The--in terms of the price of it, here
again, in my opinion, it looked realistic,
but one of the things about the group that
were investing in this thing, is that I
could seek other opinions, and which I did.
- 49 -
Q. Let me just focus on the cost of the IBM
equipment. How did you determine whether
that price was a fair price that was being
paid by the individuals involved in the
Roscrea Trust?
A. Well, by basically looking at the prices
that were in the--in the appraisal and
generally dealing with what my knowledge was
in the market place, and in conversations
with people.
* * * * * * *
Q. Just focusing on the pricing for the moment.
Who did you speak with in connection with
that, just with the cost of the equipment?
A. The cost of the equipment? With Biggs.
Q. And what was your determination about--view
about the cost of the equipment that was
going to be involved in the Roscrea Trust?
A. It was reasonable.
* * * * * * *
Q. You read the whole investment memo?
A. I read the investment memo, except for the
part that was a very technical tax piece of
the memo. I did not read that.
Q. Did you read the appraisal that came along
with the investment memo?
A. Yes.
Q. Did you question the appraisal?
A. Did I question it? No.
Q. You took it at face value?
A. I took it at the value after I applied
my judgment to it, yes.
- 50 -
Q. How do you--how did you come to a judgment?
A. As I've stated on--previously, in looking at
what I think the value of the equipment is
and the value of it being on lease, and the
fact that it was going to be a long-term
lease, that's the value that I placed on it.
Q. Did you look at any particular documents?
A. No.
Q. Reports?
A. No.
Q. Did you look at anything, such as the IDC
Services?
A. No.
Q. Did you look at any computer economic
residual value services?
A. No, I didn't.
Q. Did you look at Gartner Services?
A. Gartner. Not at that time.
Mr. Biggs testified that he paid little or no attention to
the Appraisal of the subject equipment.
The subject equipment included a large mainframe, the
IBM 3081, a smaller central processor, the IBM 4341, and
peripheral equipment, such as disk drives, that was
manufactured by Control Data Corp. Mr. Biggs testified
regarding the useful life of the subject computer equipment
as follows:
- 51 -
Q. Sir, you spoke about the particular equip-
ment that you were considering investing in.
Did you reach any conclusions with respect
to the potential useful life of that
equipment?
A. Well, my conclusions were that the useful
life would be in excess of 10 years for
the equipment that was in question.
Mr. Biggs did not explain whether his judgment regarding
the useful life of the equipment "in excess of 10 years"
applied to each piece of equipment or was an average of
some kind. He also did not state when the useful life
began. For example, a 10-year useful life of the IBM 3081
which, according to his testimony, was introduced in 1980
would mean that the end of the useful life was in 1990,
the expiration of the master leases. This suggests that
the IBM 3081 would have little or no residual value upon
expiration of the master leases.
Similarly, Mr. Atkins testified regarding the
"economic life" of the IBM 3081 as follows:
Q. Can you put a--Did you determine or have an
opinion about the length of the economic
life that could be forecast for this IBM
equipment; again focusing on the IBM 3081?
A. I think the 3081 will have a life cycle of
about 10 years in the market place. That
does not mean that all of them sold will be
there 10 years later, but there will be
enough in the market place there. They'll
still be on lease.
- 52 -
Q. And this was your view in 1982 I take it?
A. Right.
Mr. Atkins' opinion regarding the "economic life" of the
IBM 4341 is as follows:
Q. In 1982, did you have an opinion of the
economic life of the IBM 4341?
A. The 4341 is more easily replaced and, I felt
confident that at that time, at least
through the life of the lease, it was, it
would be a valuable product.
Mr. Atkins provided no testimony regarding the useful life
of the peripheral equipment manufactured by Control Data
Corp. Mr. Atkins acknowledged that he did no research in
arriving at his opinion regarding the "economic life" of
the IBM 3081 and the IBM 4341 but based his opinion on his
years of experience.
Furthermore, the testimony of Messrs. Atkins and Biggs
regarding the "economic life" of the equipment does not
corroborate petitioner's testimony that the "useful life"
of the IBM 3081 would range from 10 to 15 years.
Petitioner testified as follows:
Q. What part, or what did you consider the
economical life of the equipment that you
were acquiring or going to acquire to play
in the decision to invest?
- 53 -
A. Atkins and Biggs advised me that the 3081
useful life could be, and would likely be in
the range of 10 to 15 years. So, I believe,
in my mind, I was using 12 years, in my
assessment of what we might realize on the
residuals at the end of the leases.
We cannot find as a fact that petitioners relied
upon tax advice from petitioner's partner, Mr. Gerver.
Mr. Gerver testified as follows:
Q. Did you write that out, give that in
writing? Did you give the tax opinion in
writing?
A. If I'm giving an opinion, I have to put it
in writing. An oral opinion, as you know,
isn't worth the paper it's written on.
Q. Did you give a tax opinion in this case?
A. To who?
Q. To Petitioner?
A. No, we spoke about it. I discussed it with
him and I told him that, from what I could
see, the tax issues were the ones that were
familiar to me, I didn't think that there
was any tax issue that we had to be con-
cerned about that they did not cover, but
they didn't cover such as, for example, the
opinion, as I recall, makes no mention that
this is a transaction entered into for
profit. I said I felt that since that's
where we were going, everything was a
transaction entered into for profit, and I
didn't think we need an opinion to that
effect.
Q. So you gave nothing to the taxpayer in
writing, is that correct?
A. No.
- 54 -
Q. Did you give a tax opinion to the trust in
this case?
A. No I wasn't asked for an opinion from the
trust. When I came to the trust it was as
an investor.
Mr. Gerver further testified it was not necessary for him
to render a separate opinion regarding the tax consequences
of the investment because he "felt that everything was
covered more than adequately by the opinion that had been
provided by Austrian."
As we understand Mr. Gerver's testimony, he approached
the subject investment "as an investor" and, while he dis-
cussed the investment with petitioner, he did not undertake
to render professional advice to petitioner. He never put
his analysis of the investment in writing, and the record
does not suggest that petitioner paid Mr. Gerver to advise
him.
Moreover, there is no evidence in the record that
Mr. Gerver raised with petitioner or anyone else the
problems with the documentation of the investment that are
described above. To the contrary, he testified at trial
that he read the Tax Opinion "carefully" and that he also
read the Appraisal, the Projections, and the Investment
Memorandum. Despite the obvious problems and questions
that readily appear from a review of these documents,
- 55 -
problems and questions that should have been obvious to any
one of the unitholders, Mr. Gerver failed to note any of
them. For this reason, if Mr. Gerver undertook to advise
petitioner, we do not believe that reliance on his advice
would have been reasonable and in good faith.
For the above reasons, we also reject petitioners'
claim that they are not liable for the substantial under-
statement addition to tax on the ground that they meet the
standard for waiver under section 6661(c). We do not agree
that they have shown either a "reasonable cause for the
understatement" or that they "acted in good faith." Sec.
6661(c).
Finally, we do not agree with petitioners' assertion
that the additions to tax under sections 6653(a) and 6661
should not apply "because the Court's holding in Robertson
I is based upon the novel theory that Petitioner acquired
a limited or partial interest, rather than an entire
ownership interest, in the Computer Equipment."
Petitioners fail to recognize that in Robertson I we were
evaluating the economic substance of the transaction in
order to determine whether the transaction was a sham, as
had been determined by respondent. In that connection,
we noted the limited nature of the interest that had been
acquired by the trust and evaluated the economic substance
- 56 -
of the transaction accordingly by comparing the cash pay-
ment made by the Roscrea Trust, $954,000, with the maximum
amount that the unitholders could expect to recoup,
$427,179.
An analysis similar to our analysis in Robertson I
was made by the Court in Gilman v. Commissioner, T.C.
Memo. 1989-684, affd. 933 F.2d 143 (2d Cir. 1991). Gilman
involved a sale-leaseback of computer equipment that was
held to lack economic substance. In holding that the
transaction did not offer a reasonable opportunity for
economic profit exclusive of tax benefits, the Court made
the following analogy:
In essence, petitioner claims to have purchased a
Christmas tree, but actually only purchased the
right to hang some ornaments on a tree that was
already in place and serving its full useful and
economic purpose, and to take possession of the
tree after the Christmas holidays.
See also Estate of Strober v. Commissioner, T.C. Memo.
1992-350, where the Court makes the same analysis and
quotes extensively from Gilman v. Commissioner, supra.
For the reasons stated above, we sustain respondent's
determination of the additions to tax under section 6653
(a)(1) and (2) for negligence or intentional disregard of
rules or regulations and the additions to tax under section
6661(a) for substantial understatement of income tax.
- 57 -
Motion in Limine
Respondent objects to the testimony of petitioners'
"expert" witnesses, Mr. Raynault and Professor Mundstock,
on the ground that, if they are fact witnesses, then their
testimony is not acceptable under rule 602 of the Federal
Rules of Evidence, because they have no personal knowledge
of the facts at issue and, if they are "expert witnesses",
then their testimony is not admissible under rule 702 of
the Federal Rules of Evidence, because it would not assist
the trier of fact. We agree.
Rule 702 of the Federal Rules of Evidence provides as
follows:
If scientific, technical, or other specialized
knowledge will assist the trier of fact to
understand the evidence or to determine a fact
in issue, a witness qualified as an expert by
knowledge, skill, experience, training, or
education, may testify thereto in the form of
an opinion or otherwise.
The report and testimony of neither of the witnesses who
testified on petitioners' behalf at the second trial
involved "scientific, technical, or other specialized
knowledge" that would assist the Court as "the trier of
fact to understand the evidence or to determine a fact in
issue". Fed. R. Evid. 702. The burden of Mr. Raynault's
report and testimony is that the documents supplied to
- 58 -
the unitholders of the Roscrea Trust, consisting of the
Investment Memorandum, the Projections, the Tax Opinion,
and the Appraisal, were "reasonable and consistent" with
the documents supplied by other "packagers" of similar
investments, and the activities undertaken by the
unitholders to review and investigate the subject invest-
ment were "reasonable and consistent" with what other
investors did. Mr. Raynault does not acknowledge any of
the problems identified by the Court. His report and
analysis are simply an extension of the argument made by
petitioners' counsel.
Similarly, the gist of the report and testimony of
Professor Mundstock is that the Tax Opinion provided in the
Investment Memorandum "addressed the issues which were then
the focus of the community of tax professionals who advised
investors in such transactions" and the opinions stated
therein "were consistent with the opinions experienced
tax counsel were providing to investors in similar invest-
ments". Professor Mundstock also fails to acknowledge any
of the problems identified by the Court and described
above.
Our rejection of petitioners' position that they are
not liable for the additions to tax under sections 6653(a)
and 6661 is based entirely upon the factual record made
- 59 -
during the first trial in this case. Our opinion sustain-
ing respondent's determination of the additions to tax
would be the same whether we accept the subject testimony
in evidence or not. However, we find the report and
testimony of each of petitioners' "experts" during the
second trial, Mr. Raynault and Professor Mundstock, to
lack the objectivity and credibility which we expect from
experts who testify in this Court. Both witnesses became
advocates for the position argued by petitioners in their
reports and testimony, and we find them to be of no
assistance in making our findings of fact in this case.
In this situation, we agree with respondent that the
reports and testimony should not be received in evidence.
See Snap-Drape, Inc. v. Commissioner, 105 T.C. 16, 20
(1995), affd. 98 F.3d 194 (5th Cir. 1996); Laureys v.
Commissioner, 92 T.C. 101, 122-129 (1989).
Rule 155 Computation
As amended by an order of the Court, Robertson I
directed that the Court's decision be entered under Rule
155. In due course thereafter, respondent filed
respondent's computation for entry of decision under Rule
155, and petitioners filed petitioners' objection to entry
of respondent's decision under Rule 155. Both parties also
filed memoranda setting forth their positions.
- 60 -
Petitioners object to respondent's computation of the
deficiency in, and additions to, petitioners' 1984 tax on
two grounds. First, respondent failed to give petitioners
any credit in 1984 for taxes paid with respect to the
income from the Roscrea Trust reported on their returns for
the years 1987 through 1990. Petitioners refer to income
from the Trust that was reported on their returns for the
years 1987 through 1990 as "phantom income". Second,
respondent failed to recognize in computing petitioners'
1984 taxes the "economic loss" of $57,420 that petitioners
suffered by reason of their cash investment in the Roscrea
Trust.
Petitioners ask the Court to order respondent to take
those items into account (i.e., "phantom income" reported
for the years 1987 through 1990 and petitioners' cash
investment) in computing their liability for taxes,
interest, additions, and penalties with respect to the
year in issue in this case, 1984, and the years in issue
in other docketed cases, 1982, 1983, and 1985. According
to petitioners, their request "is consistent with this
Court's inherent powers, general equitable principles, and
clear Congressional intent--as well as common sense notions
of judicial economy and sound tax administration."
- 61 -
As to the phantom income, petitioners ask the Court
to order respondent to take into account "the income
Petitioners reported from the Roscrea Trust transaction
in later years and the overpayments that result from the
reporting of that income." (Emphasis added.) None of the
"later years", viz, 1987 through 1990, is before the Court
in this proceeding, however, and section 6214(b) deprives
us of jurisdiction to determine whether the tax for any
of those years has been overpaid or underpaid.
We do not agree with petitioners' argument that
application to 1984 of later years' overpayments (if
any) is necessary because otherwise "the amount of
the deficiency for 1984 will be incorrectly overstated
--in a manner inconsistent with this Court's Opinion".
The issue presented for decision in Robertson I was
whether petitioners were entitled to deductions in 1984
for accelerated depreciation on the computer equipment
purchased by Roscrea Trust and for the interest paid on
the indebtedness incurred by the Trust to purchase such
equipment. The deficiency computed in petitioners' 1984
tax, attributable to the disallowance of such deductions,
is not affected by the issue whether petitioners had
overstated their income in a later year by including rental
income from the equipment. In accordance with our annual
- 62 -
system of reporting income and expenses, the tax attribut-
able to each year stands on its own. See Security Flour
Mills Co. v. Commissioner, 321 U.S. 281, 286 (1944); Bank
of Commerce v. Commissioner, 10 B.T.A. 73 (1928).
Similarly, we do not agree that the additions to tax
"cannot be properly calculated without taking into account
income reported and taxes paid by Petitioners in subsequent
years." The additions to tax in this case, the negligence
additions under section 6653(a) and the addition to tax
for substantial understatement of liability under section
6661(a), are both computed without regard to the "income
reported and taxes paid by Petitioners in subsequent
years." In the case of the negligence additions under
section 6653(a), the amount of the additions is a
percentage of the "underpayment" as defined by section
6653(c). In the case of the addition to tax for
substantial understatement of liability under section
6661(a), the addition is 25 percent of "any underpayment"
attributable to an "understatement".
We disagree with petitioners' contention that in
order to give full effect to our holding that the
transaction was a sham in substance, we must compute
petitioners' tax liability on a transactional basis. Our
decision not to offset the deductions and losses in earlier
- 63 -
years (1982-85) against "phantom income" reported in later
years from the Trust transaction is consistent with our
holding in Robertson I. In Kazi v. Commissioner, T.C.
Memo. 1991-37, affd. without published opinion sub nom.
Massey v. Commissioner, 950 F.2d 723 (3d Cir. 1991), the
Court refused to accept the taxpayers' argument that the
deficiency attributable to a straddle loss should be
reduced by the amount of any tax paid on the corresponding
straddle gain reported in a subsequent year. The Court
stated:
Our holding * * * that the straddle transactions
were shams in substance does not imply that the
loss reported in one year must be offset by the
corresponding gain reported in a subsequent year.
Therefore, the elimination of the gain and loss
legs in the year each gain or loss was reported
gives full effect to our holding that the
straddle transactions were shams. [Id.]
As mentioned above, petitioners also argue that
respondent's computation is wrong because it fails to
recognize petitioners' cash investment of $57,420 in the
Roscrea Trust. They contend that, according to the Court's
opinion, petitioners acquired a partial interest in the
computer equipment, and they are entitled to depreciation
deductions with respect to the amount of their actual cash
investment. We disagree.
- 64 -
We agree with respondent that under our holding that
the transaction was a sham in substance, petitioners are
not entitled to recognition of their cash investment of
$57,420 in the form of depreciation deductions. See
Gilman v. Commissioner, T.C. Memo. 1989-684 (on the basis
of the Court's finding that the transaction lacked economic
substance and business purpose, all of the taxpayer's
depreciation deductions were disallowed with no offset
allowed for the taxpayer's cash investment of $45,000);
Mele v. Commissioner, T.C. Memo. 1988-409 (on the basis
of the Court's finding that the transaction lacked economic
substance, all of the taxpayer's depreciation deductions
were disallowed with no offset for taxpayer's cash invest-
ment of $88,700). Accordingly, we sustain the Rule 155
computation submitted by respondent.
Upon consideration of the foregoing,
An appropriate order will
be issued, and decision will
be entered in accordance with
respondent's Rule 155
computation.
Appendix A
ROSCREA TRUST
IBM, 3081, IBM PERIPHERALS, CONTROL DATA DISK DRIVES
COST $5,170,392
10-Dec-82 1982 1983 1984 1985 1986 1987 1988 1989 1990(D) 1990(E) 1990(F) 1990(G)
Rental income $820,445 $986,133 $986,133 $986,133 $986,133 $986,133 $986,133 $986,133 $986,133 $986,133 $986,133
Additional income (A) 1,675 30,000 117,500 260,000 260,000 245,000 245,000 245,000 245,000
Sale proceeds 930,671 1,163,338 1,396,006
Total income 820,445 986,133 987,808 1,016,133 1,103,633 1,246,133 1,246,133 1,231,133 2,161,804 2,394,471 2,627,139
Depreciation (B) $795,713 1,207,342 1,055,787 981,156 951,294 119,400 59,700
Interest 36,698 657,280 638,147 579,445 510,365 429,552 335,012 224,414 96,072 96,072 96,072 96,072
Total expenses 832,411 1,864,622 1,693,934 1,560,601 1,461,659 548,952 394,712 224,414 96,072 96,072 96,072 96,072
Taxable income (832,411) (1,044,177) (707,801) (572,793) (445,526) 554,681 851,421 1,021,719 1,135,061 2,065,732 2,298,399 2,531,067
Cash-flow
Tax benefit (Liability)(C) 416,205 522,089 353,900 286,396 222,763 (277,340) (425,710) (510,860) (567,531) (1,032,866) (1,149,200) (1,265,533)
Rental cash-flow 1,675 30,000 117,500 260,000 260,000 245,000 245,000 245,000 245,000
Sale proceeds 930,671 1,163,338 1,396,006
Gross benefit 416,205 522,089 353,900 288,071 252,763 (159,840) (165,710) (250,860) (322,531) 142,805 259,138 375,472
Less: capital invested 954,000
Annual benefit (537,795) 522,089 353,900 288,071 252,763 (159,840) (165,710) (250,860) (322,531) 142,805 259,138 375,472
Reinvest. @ 10% (27,675) 13,357 46,791 78,512 91,009 83,833 71,388 49,857 73,124 78,940 84,757
Cumulative benefit (D) (537,795) (43,381) 323,876 658,738 990,013 921,182 839,305 659,833 387,159 875,761 997,911 1,120,062
(A) THIS FIGURE ESTIMATES THE RELEASING REVENUES BEGINNING IN MONTH 37.
(B) CALCULATED USING ACCELERATED COST RECOVERY SYSTEM GUIDELINES FOR FOREIGN AND DOMESTIC PROPERTY.
(C) ASSUMES A 50% TAX RATE.
(D) AT ZERO RESIDUAL VALUE THE CUMULATIVE BENEFIT AMOUNTS TO 387,159.
(E) ASSUMES A SALE PRICE OF 20% LESS A 10% SELLING COMMISSION.
(F) ASSUMES A SALE PRICE OF 25% LESS A 10% SELLING COMMISSION.
(G) ASSUMES A SALE PRICE OF 30% LESS A 10% SELLING COMMISSION.
Appendix B
ROSCREA TRUST
IBM, 3081, IBM PERIPHERALS, CONTROL DATA DISK DRIVES
COST $5,170,392
16-Dec-82 1982 1983 1984 1985 1986 1987 1988 1989 1990(D) 1990(E) 1990(F) 1990(G)
Rental income $675,770 $1,043,128 $1,043,128 $1,043,128 $1,043,128 $1,043,128 $1,043,128 $1,043,128 $1,043,128 $1,043,128 $1,043,128
Additional income (A) 1,675 30,000 117,500 260,000 260,000 245,000 245,000 245,000 245,000
Sale proceeds 930,671 1,163,338 1,396,006
Total income 675,770 1,043,128 1,044,803 1,073,128 1,160,628 1,303,128 1,303,128 1,288,128 2,218,799 2,451,466 2,684,134
Depreciation (B) $795,713 1,207,342 1,055,787 981,156 951,294 119,400 59,700
Interest 27,901 712,377 688,706 625,506 551,037 463,289 359,893 238,060 94,502 94,502 94,502 94,502
Total expenses 823,614 1,919,719 1,744,493 1,606,662 1,502,331 582,689 419,593 238,060 94,502 94,502 94,502 94,502
Taxable income (823,614) (1,243,949) (701,365) (561,859) (429,203) 577,939 883,535 1,065,068 1,193,626 2,124,297 2,356,964 2,589,632
Cash-flow
Tax benefit (Liability)(C) 411,807 621,975 350,683 280,930 214,602 (288,970) (441,768) (532,534) (596,813) (1,062,149) (1,178,482) (1,294,816)
Rental cash-flow 1,675 30,000 117,500 260,000 260,000 245,000 245,000 245,000 245,000
Sale proceeds 930,671 1,163,338 1,396,006
Gross benefit 411,807 621,975 350,683 282,605 244,602 (171,470) (181,768) (272,534) (351,813) 113,522 229,856 346,190
Less: capital 954,000
Annual benefit (542,193) 621,975 350,683 282,605 244,602 (171,470) (181,768) (272,534) (351,813) 113,522 229,856 346,190
Reinvest. @ 10% (23,121) 23,200 57,185 89,264 101,847 94,369 81,091 57,983 81,250 87,066 92,883
Cumulative benefit (D) (542,193) 56,661 430,544 770,334 1,104,200 1,034,577 947,178 755,735 461,905 950,507 1,072,657 1,194,808
(A) THIS FIGURE ESTIMATES THE TRUST'S PORTION OF THE RELEASING REVENUES BEGINNING IN MONTH 37.
(B) CALCULATED USING ACCELERATED COST RECOVERY SYSTEM GUIDELINES FOR FOREIGN AND DOMESTIC PROPERTY.
(C) ASSUMES A 50% TAX RATE.
(D) AT ZERO RESIDUAL VALUE THE CUMULATIVE BENEFIT AMOUNTS TO $461,905.
(E) ASSUMES A SALE PRICE OF 20% LESS A 10% SELLING COMMISSION.
(F) ASSUMES A SALE PRICE OF 25% LESS A 10% SELLING COMMISSION.
(G) ASSUMES A SALE PRICE OF 30% LESS A 10% SELLING COMMISSION.