t c memo united_states tax_court james p shea and patricia h shea petitioners v commissioner of internal revenue respondent christopher m and kim a shea petitioners v commissioner of internal revenue respondent docket nos filed date joseph falcone for petitioners timothy s murphy for respondent memorandum findings_of_fact and opinion gale judge respondent determined deficiencies in petitioners’ federal income taxes and penalties as follows james p shea and patricia h shea docket no penalty year deficiency sec_6662 dollar_figure dollar_figure christopher m and kim a shea docket no penalty year deficiency sec_6662 dollar_figure dollar_figure because these cases present common questions of fact and law they were consolidated for purposes of trial briefing and opinion and hereinafter will be referred to in the singular the issues for decision are as follows whether certain expenditures deducted by petitioners on schedules c of their federal_income_tax returns were incurred_in_a_trade_or_business within the meaning of sec_162 alternatively whether petitioners are entitled to deduct all or any part of the losses claimed-- a as theft losses arising from a transaction entered into for profit under sec_165 ob as theft losses under sec_165 unless otherwise indicated all section references are to the internal_revenue_code in effect for the year in issue and all rule references are to the tax_court rules_of_practice and procedure for convenience all monetary amounts are rounded to the nearest dollar c as capital losses under sec_165 or d as business bad_debts within the meaning of sec_166 and whether petitioners are liable for accuracy-related_penalties authorized by sec_6662 findings_of_fact background some of the facts have been stipulated and are so found we incorporate by this reference the stipulation of facts and attached exhibits petitioners james p shea and patricia h shea were married and filed a joint federal_income_tax return for the taxable_year at the time their petition was filed petitioner james p shea resided in troy michigan and petitioner patricia h shea resided in ludington michigan petitioners christopher m shea and kim a shea were married and filed a joint federal_income_tax return for the taxable_year in their petitions petitioners asserted an additional ground for deducting the losses claimed contending that the losses qualified as small_business losses under sec_1244 however petitioners did not include the sec_1244 issue in either their trial memorandum or their posttrial briefs and presented no evidence at trial in support of their position consequently the petitioners are deemed to have abandoned the sec_1244 issue see 22_tc_1146 affd per curiam 230_f2d_603 2d cir james p shea and patricia h shea subsequently divorced at the time their petition was filed petitioners christopher m shea and kim a shea resided in rochester michigan petitioners james p shea james and christopher m shea christopher are brothers who during worked at a company called pk contracting pk contracting the company was in the business of painting lines on roads james a vice president of the company has worked for the company for more than years and is a part owner of the company as of the trial date christopher was the president of the company and ran the company’s day-to-day operations in christopher was the general manager with similar operational responsibility ’ none of the petitioners were in the trade_or_business of lending money the russian airplane deal sometime prior to date james was introduced to michael donnelly by a friend donnelly who claimed to be a retired u s army major general described a plan in which he and some others would buy russian airplanes ilyushin-72s for substantially less than their purported fair_market_value and resell them in the west for dollar_figure to dollar_figure million per airplane or use petitioners patricia h shea and kim a shea are involved in these consolidated cases only because they filed joint federal_income_tax returns with their husbands for them in an overnight air freight and mail business serving fastern and central europe and the commonwealth of independent states the plan others allegedly involved in the plan included e b leedy who claimed to be a retired u s army major general and brian wilcox a principal in a company called wilcox engineering with offices in great britain who was described in promotional materials as the owner of a large joint_venture timber operation in russia the promoters the plan which was supposed to turn a quick and substantial profit intrigued james sometime prior to date james went to england and met with the promoters of the plan either prior to or during his trip james agreed to provide the initial financing for the plan and subsequently did so transferring dollar_figure by cable transfer to a bank account of quotum international trading inc quotum at nordbanken on or about date in consideration for the transfer of funds james received the following the total amount provided by james is unclear the amounts allegedly provided varied from dollar_figure the amount reflected in a promissory note to dollar_figure a figure that appeared in at least one document admitted solely to establish james’ state of mind on cross-examination james was unable to reconcile or explain the conflicting amounts he was also unable to explain how he handled christopher’s investment of dollar_figure which was made by check dated date after the initial cable transfer of dollar_figure was made a promissory note dated date in the principal_amount of dollar_figure which was executed in favor of james ostensibly by brian wilcox and michael donnelly and stock certificate no dated date representing shares of stock in quotum which was issued to candid inc candid an s_corporation in which james was a shareholder the note was unsecured bore no interest and required_payment in full upon demand on date james understood that the money he had transferred to quotum would be used to purchase russian airplanes that the money would not be withdrawn from the bank account without his express authorization and that he would own a specified percentage of quotum’s stock’ and serve as quotum’s president in consideration for initially financing quotum’s operations conflicting testimony was given concerning james’ stock ownership in candid inc james testified that he was the sole shareholder of candid james’ accountant jeffrey j groen testified that james was the majority shareholder and that several professors owned stock in candid as well ’ in a letter dated date to michael donnelly james stated that he was supposed to receive a 25-percent ownership_interest in quotum and refers to a dollar_figure investment at trial however james testified that he was supposed to receive a 5l-percent ownership_interest at some point during his review of the plan james acquired additional documents regarding the plan participants and how they proposed to operate these documents showed the following the promoters intended to do business through quotum a liberian corporation that was formed on date on date a first meeting of incorporators and subscribers was held at the offices of wilcox engineering ltd located in hereford u k at the first meeting a transfer subscription of the capital stock of the corporation for one share of bearer stock was approved brian wilcox was elected board chairman and he and michael donnelly were elected directors at a meeting of the board_of directors of quotum held on date at wilcox engineering brian wilcox was elected president and board chairman michael donnelly was elected vice president and ian yemm was elected secretary treasurer at another meeting of the board_of directors of quotum held later in the day on date james was elected president e b leedy was elected chairman of the board ian yemm was elected secretary treasurer and michael donnelly brian wilcox byourn andersson and mladen kovatchev were elected directors a resolution giving james the right in his sole discretion to disburse the initial funding of dollar_figure and to be repaid immediately as soon as the lease back funds has been released to the corporation was unanimously approved and quotum planned to acquire the russian airplanes through a swedish company called truemax by contract with truemax dated date quotum agreed to acquire four units il76 aircraft fob western hemisphere airport and to deposit dollar_figure in blocked funds to an account on nordbanken as guarantee and handling fee james signed the contract as quotum’s president although james received repeated assurances that delivery of the airplanes was imminent the airplanes were not delivered as promised in date in early date james was advised that cash had to be delivered to the seller in russia in order to facilitate delivery james agreed to permit the withdrawal of dollar_figure from the nordbanken account so that the funds could be carried into russia in addition to the above james was advised and understood that quotum had deposited dollar_figure toward the cost of insurance with respect to the airplanes the insurance was to be placed the planned business activity seemed to change on a regular basis one of the proposals was to acquire russian airplanes immediately sell them at a substantial profit and lease them back for use in an air freight and mail service business other business activities mentioned were the purchase and sale of diamonds gold and a limited amount of sable the purchase of materials from military stores using an existing offshore company named cougar and the transport of relief goods and food the record suggests that more than one company was involved through an insurance broker m b quin-harkin of houlder insurance services aviation limited by the end of date the airplanes still had not been delivered to quotum ina letter dated date james’ secretary wrote to ian yemm requesting among other things a complete accounting to date of james’ original dollar_figure investment by telefax dated date yemm provided the following accounting deposited dollar_figure less bank charges dollar_figure houlder insurance dollar_figure truemax sweden dollar_figure michael e donnelly airplane deposit dollar_figure balance s dollar_figure james continued to send and receive various correspondence regarding the status of the venture throughout march and date by letter dated date on quotum stationery james replied to a communication from michael donnelly as follows surprised but glad to hear from you dollar_figure is a lot of money to waste dollar_figure is a fortune the dollar_figure from me was for a three day guaranteed purchase of existing planes per your representation and a ownership in the company purchasing the planes legally this money was not to fund your personal schemes none of my money was ever to be at risk and for a two year period every repeat every transaction was to be approved by me can i go to the bank and get my funds i want the written proof from lloyds that the dollar_figure deposit is refundable i also want a -- - guarantee and statement from them assuring me that it can only be exposed or converted at my written approval if this is not possible have funds returned to me immediately remember i was supposed to be the president of the company by telefax dated date from brian wilcox james was informed of the following as you are aware jim the whole operation was based on the ability of the swedish group who consistently told us that they had in their control a number of il aircraft the money you were so kind as to invest in quotum international was as i understood it to secure these planes once and for all through the swedish group after a number of weeks with mike out of circulation in russia it became apparent that jens and his partners had as much control_over the il planes as tom and jerry have over the world economy unfortunately a great deal of money was spent chasing non existent aircraft i would like to remind you that we do indeed have a contract between the swedish group and quotum international and as far as i can see they have not contributed in any way to the current planes for which we are negotiating i think a serious discussion will need to take place in due course i do not like to see people’s money being thrown away and as you know jim it has been extremely difficult for us to hold a deal together with no financial resources the status on your funds is as follows usd250 was put on insurance and was energised on the 4th january after we received two serial numbers from jens at this time the swedish group said that they were in possession of two il aircraft and that we would have to insure them to fly them out of russsia into sweden it also meant that we could move forward with the re-finance funding we expect michael to come out of russia this weekend and should then be able to get an up date on these funds we believe that the prospects are still favourable and have every confidence in our part of the operation even though we are working with only half truths at some point during james was repaid dollar_figure out of the funds that he had transferred to quotum james asked brian wilcox to take steps to obtain a refund of the dollar_figure insurance deposit paid_by quotum he also attempted to obtain information regarding the deposit himself but the insurance_company refused to provide any information by letter dated date thomas ziegler james’ lawyer wrote to sarah l argyle a british barrister setting forth some of the background information regarding james’ claim for return of his funds although ms argyle wrote back outlining her fee arrangements and enclosing a list of questions the record does not indicate whether any legal action was taken to recover additional_amounts from brian wilcox wilcox engineering or houlder insurance services aviation limited on date donnelly filed a chapter bankruptcy petition which listed an unsecured claim by james in the amount of dollar_figure on date the bankruptcy proceeding was closed christopher’s investment in the russian airplane deal the funds transferred on or about date to nordbanken by james for the benefit of quotum can be traced in part to dollar_figure contributed by james after he cashed certificates of deposit held by the james p shea living_trust the source of the additional dollar_figure transferred to nordbanken does not appear in the record on a date which also does not appear in the record christopher gave james a check dated date for dollar_figure christopher gave the money to james because james had an opportunity to do some overseas business that could possibly be profitable and christopher wanted to invest in it christopher did not know much about the venture or how his investment was to be used but he understood that if the venture was successful and he was needed he could get involved in the day-to-day operations the record does not show what james did with christopher’s dollar_figure petitioners’ returns and the notices of deficiency petitioners james and patricia shea filed a joint federal_income_tax return for on a schedule c to that return james reported no gross_income and a net_operating_loss of christopher’s check was dated days after james transferred the initial dollar_figure to quotum’s account at nordbanken dollar_figure from a business described as international transportation -- aircraft composed of the following advertising dollar_figure legal and professional service big_number office expense travel meals and entertainment less percent other direct_cost of sales big_number investment research misc bank charge sec_15 net_loss dollar_figure petitioners christopher and kim shea also filed a joint federal_income_tax return for on a schedule c to that return christopher reported negative gross_income of dollar_figure from a business described as international transportation consisting solely of cost_of_goods_sold in that amount in notices of deficiency respondent determined that petitioners had not shown that their schedule c activity was a trade_or_business and disallowed their respective losses petitioners filed timely petitions contesting respondent’s determination and alleging in the alternative that the schedule c losses were deductible under sec_165 sec_166 or sec_1244 opinion petitioners contend that they are entitled to deduct the losses claimed on their respective schedules c because they were engaged in the trade_or_business of international transportation alternatively petitioners contend that the amounts claimed on their schedules c qualify as either a theft_loss under sec_165 or a business_bad_debt under sec_166 or at a minimum a capital_loss under sec_165 respondent rejects the proposition that petitioners were actively engaged in a trade_or_business reportable on schedule c with respect to buying and selling russian airplanes in claiming instead that the business activity was conducted by a corporation quotum and that james participated in that activity as quotum’s president respondent also contests the alternative grounds for deducting the amounts at issue arguing that petitioners have failed to satisfy their burden_of_proof we consider each of petitioners’ arguments below did petitioners incur deductible losses ina trade_or_business as a general_rule ordinary and necessary expenses paid_or_incurred during a taxable_year in carrying_on_a_trade_or_business are deductible see sec_162 a taxpayer is engaged in a trade_or_business if the taxpayer is involved in the activity with continuity and regularity and with the primary purpose of making income or a profit see 480_us_23 petitioners have the burden of proving that they were involved in a trade_or_business with respect to the purchase and sale of russian airplanes see rule a 290_us_111 -- - in this case even if the activities in which james was involved qualified as a trade_or_business ’ the trade_or_business was not his the trade_or_business was that of quotum a corporation of which james was the president the record in this case while extremely sparse contradictory and confusing demonstrates that james’ attempts to facilitate the purchase and delivery of russian airplanes were on behalf of quotum he corresponded using quotum’s stationery he executed documents in his capacity as quotum’s president although he incurred travel_expenses during the expenses were incurred in connection with quotum’s business and james requested reimbursement for those expenses from quotum a corporation may not be disregarded for tax purposes if the corporation has a substantial business_purpose or it actually engages in business see 319_us_436 233_f2d_289 2d cir in this case quotum had a substantial business purpose--the purchase sale whether the alleged trade_or_business had actually commenced is debatable ordinarily expenses paid after a decision has been made to start a business but before the business commences are not deductible such preopening expenses are capital in nature see sec_195 72_tc_521 affd 633_f2d_512 7th cir 20_tc_511 -- - and use of russian airplanes in addition no party has contended that quotum’s corporate existence must be disregarded although we have found that james transferred substantial funds to or on behalf of quotum and paid some corporate expenses personally the fact that james supplied funds to pay quotum’s expenses and finance its operations does not make his investment or the expenses that he paid deductible by him see 373_us_193 47_tc_596 affd per curiam 400_f2d_584 9th cir in whipple v commissioner supra the supreme court held that a taxpayer’s advances to one of a number of corporations he owned did not result in a deductible business_bad_debt under sec_166 because the advances were not related to the taxpayer’s trade_or_business in contrast to the trade_or_business of the taxpayer’s corporation the supreme court’s reasoning in whipple is instructive devoting one’s time and energies to the affairs of a corporation is not of itself and without more a trade_or_business of the person so engaged though such activities may produce income profit or gain in the form of dividends or enhancement in the value of an investment this return is distinctive to the process of investing and is generated by the successful operation of the corporation’s business as distinguished from the trade_or_business of the taxpayer himself when the only return is that of an investor the taxpayer has not satisfied his burden of demonstrating that he is engaged in a trade_or_business since investing is not a trade_or_business and the return to the taxpayer though substantially the product of his services legally arises not from his own trade_or_business but from that of the corporation x id pincite see also 287_us_410 287_us_404 weigman v commissioner supra in this case james’ transfer of dollar_figure to quotum provided the necessary capital for quotum to embark on what with hindsight now appears to have been an ill-advised quest for russian airplanes it was however a corporate quest in which james was only one of several participants james’ involvement in the plan was as an officer and investor his investment of dollar_figure is not deductible by him as an expense of a trade_or_business of his own under sec_162 christopher has an even weaker position regarding the deductibility of his schedule c loss he simply gave dollar_figure to his brother his brother was supposed to invest it in the plan on christopher’s behalf if the plan worked and a viable business resulted christopher thought that he might get involved in operations and that his investment would generate a profit these facts simply do not establish that christopher was ina trade_or_business for purposes of sec_162 nor do they establish that his investment of dollar_figure is deductible as cost_of_goods_sold as claimed on his federal_income_tax return -- - petitioners have failed to prove that they were engaged in a trade_or_business involving international transportation as alleged on schedules c of their federal_income_tax returns for petitioners have conceded that they were not in the trade_or_business of making loans consequently they are not entitled to deduct the losses claimed on their respective schedules c for did petitioners incur theft losses under sec_165 or subject_to certain limitations any loss sustained during the taxable_year and not_compensated_for_by_insurance_or_otherwise is deductible see sec_165 in the case of individuals the losses deductible under sec_165 are limited to losses_incurred in a trade_or_business see sec_165 losses_incurred in any transaction entered into for profit see sec_165 and with respect to property not connected with a trade_or_business or a transaction entered into for profit a casualty or theft_loss see sec_165 as an alternate position petitioners argue that if they are not allowed to deduct the losses claimed on their respective schedules c attached to their returns because the losses were not incurred_in_a_trade_or_business they should be allowed to claim them as theft losses under sec_165 or respondent asserts that petitioners have failed to prove that the requirements for a theft_loss have been met we agree in order for a deduction to be allowed under sec_165 the loss must be evidenced by closed and completed transactions fixed by identifiable events and except as otherwise provided in sec_165 and sec_1_165-11 relating to disaster losses actually sustained during the taxable_year sec_1_165-1 income_tax regs for purposes of sec_165 a loss arising from theft is sustained during the taxable_year in which the taxpayer discovers the loss see sec_165 sec_1 a income_tax regs the term theft includes but is not limited to larceny embezzlement and robbery see sec_1 d income_tax regs whether a theft within the meaning of sec_165 has occurred depends upon the law of the jurisdiction wherein the particular loss occurred 34_tc_688 petitioners urge us to find that a theft occurred based primarily on the fact that they did not recover the funds which were transferred to quotum’s bank account in date they claim that they were defrauded since the funds advanced have vanished and they never acgquired any russian airplanes petitioners bear the burden of proving that a theft has occurred and that the requirements of sec_165 have been met see rule a 16_tc_163 in order - - to carry their burden petitioners must establish both the existence of a theft within the meaning of sec_165 and the amount of the loss see 40_tc_304 in allen v commissioner supra we described the operation of the burden_of_proof in theft_loss cases as follows petitioner has the burden_of_proof this includes presentation of proof which absent positive proof reasonably leads us to conclude that the article was stolen if the reasonable inferences from the evidence point to theft the proponent is entitled to prevail if the contrary be true and reasonable inferences point to another conclusion the proponent must fail if the evidence is in egquipoise preponderating neither to the one nor the other conclusion petitioner has not carried her burden id pincite the analysis described above when applied to the facts of this case leads to only one conclusion the record in this case is extremely sparse although both james and christopher testified at trial only james was directly involved in any way in the attempt to acquire the airplanes james’ testimony at trial was quite general and not very informative although he had some documents related to the airplane acquisition efforts that he introduced into evidence at trial many of the documents were not offered or admitted for the truth of their contents none of the other key participants such as michael donnelly e b leedy brian wilcox ora --- - representative of truemax were called as witnesses to establish whether a theft occurred and if so the date and place of the theft this unsatisfying factual record does not permit us to find that a theft occurred at most the record in this case suggests that of the dollar_figure transferred to quotum in date at least dollar_figure was returned to james dollar_figure was paid for insurance dollar_figure was paid for bank charges dollar_figure was given to truemax sweden and dollar_figure was taken by michael donnelly into russia to make a partial payment for the airplanes with james’ approval there is no proof that a theft occurred or if it did when it occurred or where the record suggests only that a very risky business deal was in process and that it went sour at some point in time and for unknown reasons petitioners have also failed to prove that they were the victims of any theft the record indicates that the funds advanced by james were transferred to quotum a corporation and that the funds were used at least in part for quotum’s business_expenses the record is devoid of evidence sufficient to ‘t although some of these participants may have resided overseas and consequently could not be compelled to attend trial in the united_states there has been no showing whatsoever as to where these individuals resided or that they were unwilling to provide testimony at least two of the participants michael donnelly and ee b leedy apparently were u s citizens according to michael donnelly’s bankruptcy file he resided in the united_states establish that quotum either obtained the funds under false pretenses embezzled the funds or otherwise stole the funds from petitioners petitioners have failed to prove that quotum obtained petitioners’ funds by deception cf martin v commissioner tcmemo_1988_369 petitioners have also failed to prove for what portion if any of the funds advanced there was no reasonable_prospect_of_recovery the record suggests that a deposit of dollar_figure was made toward the purchase of insurance for several russian airplanes under contract to quotum the sum was allegedly paid to an insurance broker to activate insurance coverage james testified that he was informed that the insurance deposit was refundable although james asserts that he attempted to obtain a refund of the dollar_figure paid and that the broker refused to deal with him there is no probative evidence that quotum made a claim for the return of the premium or that the claim was rejected for legally sufficient grounds the facts and circumstances surrounding the transfer of dollar_figure to james by christopher also fail to establish theft christopher voluntarily gave a check to james which was then deposited in a michigan bank at trial james was unable to explain what he did with christopher’s money and there is no proof elsewhere in the record that the money was ever transferred overseas or used in the guest for russian airplanes - - for all of these reasons we conclude that petitioners have failed to satisfy their burden of proving that they sustained a theft_loss in within the meaning of sec_165 do the amounts deducted qualify as business bad_debts under sec_166 as another alternative argument petitioners contend that they are entitled to a business_bad_debt deduction under sec_166 sec_166 permits a deduction for any debt that becomes worthless within the taxable_year nonbusiness bad_debts are treated as losses resulting from the sale_or_exchange of a short-- term capital_asset see sec_166 b b business bad_debts are deductible as ordinary losses to the extent of the taxpayer’s adjusted_basis in the debt see sec_166 petitioners base their claim to a business_bad_debt deduction on the promissory note allegedly executed in favor of james by michael donnelly and brian wilcox in the face_amount of dollar_figure the promissory note bore no interest and was payable on demand on or after date it is not clear whether petitioners are contending that this promissory note supports a business_bad_debt deduction for both james and christopher nor is it clear what amount petitioners are claiming whatever petitioners’ contentions are concerning this issue petitioners must first establish that a bona_fide debt existed between each of the petitioners and the alleged debtors which obligated the debtors to pay petitioners a fixed or determinable sum of money the debt was created or acquired in or in connection with a trade_or_business of petitioners and the debt became worthless in see sec_166 405_us_93 95_tc_257 55_tc_85 52_tc_147 a gift or contribution_to_capital is not debt within the meaning of sec_166 see calumet indus inc v commissioner supra pincite 91_tc_575 petitioners bear the burden_of_proof on this issue see rule a 290_us_111 our review of the record in this case confirms that petitioners have failed to prove any of the three elements necessary to establish their claim to a business_bad_debt deduction we address each of them below did a bona_fide debt exist in order for us to find that a bona_fide debt was created for purposes of sec_166 petitioners must prove that there was a genuine intention to create a debt with a reasonable expectation of repayment and that the intention was consistent with the economic reality of creating a debtor-creditor relationship litton bus sys inc v commissioner t c - - whether the requisite intention to create a true debtor-creditor relationship existed is a question of fact to be determined from a review of all the evidence see id factors considered in making the analysis include the names given to the certificates evidencing the indebtedness the presence or absence of a fixed maturity_date the source of payments the right to enforce payments participation in management as a result of the advances the status of the advances in relation to regular corporate creditors the ratio of debt to capital of the corporation the ability of the corporation to obtain credit from outside sources the use to which the advances were put the failure of the debtor to repay and the risk involved in making the advances see calumet indus inc v commissioner supra 93_tc_382 74_tc_476 no single factor is determinative and not all factors are applicable in each case see dixie dairies corp v commissioner supra the various factors are only aids in answering the ultimate question whether the investment analyzed in terms of its economic reality constitutes risk capital entirely subject_to the fortunes of the corporate venture or represents a strict debtor-creditor relationship 398_f2d_694 3d cir - - applying the above factors we find that the advance made by james to quotum was a capital_contribution and not a bona_fide loan in exchange for the advance of dollar_figure james received both a stock certificate issued in the name of his closely_held_corporation candid for shares of quotum’s stock and what purports to be a promissory note allegedly signed by brian wilcox and michael donnelly the promissory note did not contain an interest provision nor was it secured in fact it appears from this sparse record that there was no security to offer the advance was not made to brian wilcox and michael donnelly personally but instead was made directly into quotum’s bank account at nordbanken as further consideration for the advance james was elected president of quotum on the record before us it does not appear that quotum had any capital other than that provided by james although the promissory note on which petitioners rely had a fixed maturity_date enabling james to demand payment at any time thereafter it does not appear that quotum had any source of repayment available other than the funds provided by james the financial status of the two alleged debtors brian wilcox and michael donnelly is not in the record except insofar as it has been established that donnelly filed a bankruptcy petition in date it does not appear that quotum had any ability to obtain credit from outside sources although some of the money advanced by james was repaid it appears that the repayment came from the funds transferred by james to quotum’s nordbanken account in the face of competing documentation and on these facts we conclude that james advanced the funds in exchange for an ownership_interest in quotum and a management position with the corporation consideration of the relevant factors leads us inescapably to the conclusion that james made a capital_contribution to quotum as to christopher the record establishes only that christopher gave dollar_figure to james to invest in the quest to acquire russian airplanes petitioners have failed to prove that they lent funds to quotum or to brian wilcox and michael donnelly or that a true debtor-creditor relationship was ever established even if a debt was created was it a business_bad_debt even if we found that a bona_fide debt was created the debt was not created in proximate relation to a trade_or_business of petitioners as we concluded earlier in this opinion the trade_or_business in question if there was one was quotum’s not petitioners’ when the only return is that of an investor the taxpayer has not satisfied his burden of demonstrating that he is engaged in a trade_or_business whipple v commissioner u s pincite - - did petitioners demonstrate that the debt was worthless petitioners contend that they have demonstrated that the alleged debt is worthless because michael donnelly declared bankruptcy and the debt in guestion was discharged although bankruptcy of the debtor is generally an indication of the worthlessness of at least a part of an unsecured and unpreferred debt sec_1_166-2 income_tax regs the bankruptcy of michael donnelly does not establish the worthlessness of the alleged debt in this case petitioners’ argument that a bona_fide debt was created is based on the promissory note allegedly executed by both michael donnelly and brian wilcox petitioners have made no showing whatsoever regarding the ability of brian wilcox to pay the balance owed under the note regarding christopher’s transfer of dollar_figure to james the record shows only that christopher’s check was delivered to james after james had already transferred dollar_figure to quotum and the check was deposited ina local bank there is no evidence proving that james subsequently transferred christopher’s money to quotum or used the money in an effort to obtain russian airplanes ’ petitioners have not shown on these facts that christopher could not request and obtain repayment of his advance james could not recall or explain what he did with christopher’s funds - - from james absent such proof petitioners have failed to establish that the alleged debt was worthless in did petitioners sustain capital losses under sec_165 petitioners’ final argument is that at a minimum they should be entitled to a capital_loss under sec_165 sec_165 provides that losses from sales or exchanges of capital assets shall be allowed only to the extent allowed in sec_1211 and sec_1212 since we have concluded that the advance made by james was a contribution to the capital of quotum we treat petitioners’ argument as a claim for a capital_loss attributable to worthless securities under sec_165 sec_165 provides in pertinent part that if any security which is a capital_asset becomes worthless during the taxable_year the resulting loss shall be treated as a loss from the sale_or_exchange of a capital_asset the term security includes stock in a corporation see sec_165 a petitioners’ argument for a capital_loss like all of their other arguments fails for lack of proof the record reflects that in consideration of the advance of dollar_figure by james he was entitled to receive a specified amount of quotum’s stock the stock was apparently issued to an s_corporation candid -- - inc in which james was a shareholder according to james the stock was issued in candid’s name on his lawyer’s advice the structure that james chose for his investment in quotum provides the framework for our analysis although candid owned the stock in quotum which petitioners now seek to write off as worthless petitioners did not present any evidence regarding what position if any candid took concerning its ownership_interest in quotum’s stock petitioners did not introduce any of candid’s federal_income_tax returns into evidence nor did they prove how the alleged loss generated by the worthlessness of quotum’s stock affected if at all petitioners’ federal_income_tax returns for petitioners did not prove whether candid had distributable_net_income or loss for nor did they prove their basis if any in candid’s stock in short petitioners have failed to provide the necessary information to determine whether candid had a distributable net_loss for and if so who may claim the loss they have also failed to prove what their basis in candid’s stock was in petitioners have not argued that candid’s ownership of quotum’s stock should be disregarded the record is what it is in its present state the record is simply inadequate to support the testimony concerning the extent of james’ ownership_interest in candid is conflicting see supra note --- - petitioners’ claim that they are entitled to a capital_loss under either sec_165 or sec_165 are petitioners liable for the accuracy--related penalties under sec_6662 respondent determined that petitioners’ underpayment_of_tax was due to negligence or intentional disregard of rules or regulations and that therefore they are liable for the accuracy-related_penalty under sec_6662 petitioners dispute this determination claiming that they relied upon the advice of their accountant in reporting the moneys paid on schedules c to their returns and that the accountant’s advice was rendered after the accountant researched applicable tax law sec_6662 authorizes the imposition of a penalty equal to percent of an underpayment attributable to negligence or disregard of rules or regulations see sec_6662 and b for purposes of sec_6662 the term negligence includes any failure to make a reasonable attempt to comply with the provisions of the internal_revenue_code sec_6662 to exercise ordinary and reasonable care in the preparation of a tax_return sec_1_6662-3 income_tax regs and to keep adequate books_and_records or to substantiate items properly id the term disregard includes any careless reckless or intentional disregard of rules or regulations sec_6662 sec_1_6662-3 income_tax regs sec_1_6662-3 income_tax regs defines these actions as follows a disregard of rules or regulations is careless if the taxpayer does not exercise reasonable diligence to determine the correctness of a return position that is contrary to the rule_or_regulation a disregard is reckless if the taxpayer makes little or no effort to determine whether a rule_or_regulation exists under circumstances which demonstrate a substantial deviation from the standard of conduct that a reasonable person would observe a disregard is intentional if the taxpayer knows of the rule_or_regulation that is disregarded the penalty does not apply however if the taxpayer demonstrates that he had reasonable_cause for the underpayment and he acted in good_faith with respect to the underpayment as required by sec_6664 see sec_1_6662-3 income_tax regs the record in this case supports a conclusion that petitioners claimed they were in a trade_or_business of international transportation in order to obtain a dollar-for- dollar tax deduction for the funds invested in an attempt to start a new business to purchase russian airplanes in so doing petitioners ignored their own documentation which inadequate as it may be suggests that a foreign_corporation quotum was the entity formed to acquire the airplanes petitioners’ reporting position also ignored the promissory note given to james and the stock certificate reflecting that candid not petitioners owned an interest in quotum although petitioners’ accountant testified that he researched the tax law it appears that he did - - so without reviewing or considering the documentation that petitioners had regarding their respective investments that documentation indicated the following all of which is inconsistent with a conclusion that petitioners engaged in two different schedule c businesses during james’ investment was transferred directly to quotum in exchange for that investment james received both stock in quotum and a promissory note the stock was issued to james’ closely held s_corporation candid james also became president of quotum and actively participated in quotum’s effort to acquire russian airplanes quotum apparently never acquired any airplanes or engaged in any business at least part of the funds advanced by james was expended on business_expenses of quotum and to the extent so used was not stolen or reflective of a bad_debt and christopher gave dollar_figure to james after james had already transferred dollar_figure to quotum’s account in nordbanken christopher gave that amount to james to invest in quotum he did not use the money in his own trade_or_business the record does not disclose what james did with christopher’s money the itemization above reflects only some of the factual reasons why we conclude that if research was done as petitioners’ accountant testified it was inadequate and - -- unreliable either the accountant was not given the relevant facts and documents or he ignored them in any event in order for petitioners to prevail on a claim that they reasonably relied in good_faith on a competent return preparer they must demonstrate that they supplied all necessary information to the preparer they reasonably relied on the preparer’s advice and the incorrect returns resulted from the preparer’s mistakes see 94_tc_473 dealing with the addition_to_tax for negligence under sec_6653 petitioners have failed to satisfy their burden_of_proof on this issue conclusion we have considered carefully all remaining arguments made by petitioners for a result contrary to that expressed herein and to the extent not discussed above we find them to be irrelevant unnecessary to address or without merit we hold on this very unsatisfying record that petitioners have failed to carry their burden_of_proof on any of the alternative arguments presented in this case to reflect the foregoing decisions will be entered for respondent


t c no united_states tax_court union carbide foreign_sales_corporation et al petitioners v commissioner of internal revenue respondent docket nos filed date p leased an asset and the terms of the lease became onerous or burdensome under lease agreements p was entitled to either terminate the lease or purchase the leased asset by the payment of a certain sum p chose to acquire the leased asset and relying on 166_f2d_805 6th cir revg a memorandum opinion of this court dated date seeks to bifurcate and allocate the asset acquisition_cost into two portions p asserts one portion should represent the value of the leased asset without considering the value of the existing lease p further asserts that the remaining portion should be allowed as a business deduction for ' cases of the following petitioners are consolidated herewith uop catalysts adsorbents and process systems inc tax_matters_partner docket no union carbide corporation and subsidiaries docket no and union carbide corporation and subsidiaries docket no -- - terminating a burdensome lease r contends that sec_167 c i r c enacted in requires that the acquisition_cost must be allocated solely to the acquired tangible capital_asset p contends that the holding of cleveland allerton hotel inc permits the allocation held sec_167 i r c interpreted to prohibit allocation of any portion of the asset acquisition_cost to a deduction for p’s termination of a burdensome lease harold j heltzer philip f mcgovern jerry l robinson and howard mark weinman for petitioners steven r winningham joseph f long carmino j santaniello s katy lin and robin l peacock for respondent opinion gerber judge respondent moved for partial summary_judgment on the legal question of whether sec_167 applies to petitioner’s’ acquisition of ownership of a previously leased oceangoing vessel respondent contends that sec_167 would require petitioner to allocate to the depreciable asset all of its cost and further that petitioner was not entitled to allocate a portion of the cost to a deduction for unless otherwise indicated section references are to the internal_revenue_code in effect for the periods under consideration and rule references are to the tax_court rules_of_practice and procedure references to petitioner in this group of related and consolidated cases refers to union carbide corp petitioner in docket nos and relief from the terms of a burdensome lease petitioner argues that sec_162 is applicable to the portion of the cost that it contends was attributable to buying its way out of an onerous or burdensome lease our consideration of whether sec_167 c applies in these circumstances is a question of first impression background for purposes of this motion for partial summary_judgment the parties agree about the underlying facts and that this matter is ripe for consideration of the legal question although respondent generally questions the substance of this transaction for purposes of the legal guestion presented in his motion respondent accepts the form of and or petitioner’s explanation for the subject transaction if respondent is unsuccessful in his motion a trial will be necessary to address respondent’s position regarding the substance of the transaction s and related issues including the basis of the vessel in question the asset under consideration the chemical pioneer is a seagoing vessel that was manufactured to petitioner’s specifications for the transport of liquid chemicals when the with the exception of what appears to be a computational issue all other issues in these consolidated cases have been resolved by agreement of the parties in addition there are several procedural motions outstanding that we will need to address if the motion for partial summary_judgment is not dispositive of the substantive issue - vessel was completed during petitioner did not wish to show it as an asset on its balance_sheet so petitioner arranged a series of transactions that permitted it to lease rather than own the vessel for purposes of the legal question we consider it is only necessary to understand that petitioner leased the vessel and then several years later wanted to be relieved from the burdensome terms of the lease under the agreements petitioner had the choice of paying either to terminate the lease or to acquire the vessel petitioner chose to acquire the vessel under the terms of the agreements by acquiring the vessel however petitioner effectively terminated the burdensome lease we describe the following transactional steps employed for purposes of completeness the vessel was transferred to a_trust created by merrill lynch leasing inc merrill lynch and of which bankers trust co bankers was trustee bankers as trustee entered into a bareboat charter through date years with a partnership named union marine transport co umtc which consisted of two equal partners---petitioner’s subsidiary chemical marine fleet inc and a subsidiary of marine transport lines inc mtl an unrelated entity that petitioner had previously utilized for operation and management of its oceangoing transport of chemicals umtc concurrently this was described by the parties as a long-term_lease of a ship - - entered into a contract sublease with petitioner under which petitioner reserved percent of the vessel’s capacity and was responsible for percent of the payments due under the bareboat charter umtc also entered into an operating_agreement with marine transport management inc a subsidiary of mtl to manage and operate the vessel and umtc entered into a marketing agreement with another mtl subsidiary to market the portion of the vessel not used by petitioner including the percent not reserved by petitioner the terms of the bareboat charter permitted petitioner to terminate the lease and walk away from the arrangement by the payment of a scheduled amount petitioner however chose to acquire the vessel on date petitioner purchased for dollar_figure merrill lynch’s interest in the grantor_trust that held the vessel including the title to the vessel and rights to its use the dollar_figure payment was about percent less than the amount that petitioner would have had to pay to terminate the lease without acquiring ownership of the vessel ’ on date the bareboat charter and related contracts were canceled the umtc partnership was dissolved and petitioner acquired title to the vessel from the trust after date petitioner did not make any lease payments under the ’ for purposes of deciding the issue in this summary_judgment motion it should not matter whether it was more or less costly to acquire the vessel or to simply terminate the lease -- - bareboat charter any payment made by petitioner would have resulted in a wash under the various agreements the umtc partnership and the sublease arrangements remained in effect and the marketing and third-party leases continued to operate normally under the agreement until sometime in solely for purposes of his motion respondent also accepts the fact that the lease was burdensome and that at the time petitioner acquired it the value of the vessel was dollar_figure without considering the value of the lease under this scenario petitioner is seeking to allocate dollar_figure or percent of the dollar_figure purchase_price to the termination of the burdensome lease leaving dollar_figure attributable to its basis in the vessel petitioner questions respondent’s assumption in his motion that the lease remained in existence and was not terminated until date petitioner argues that the lease was effectively terminated in date after the vessel was purchased and the date termination was merely a formality petitioner contends however that respondent’s position that sec_167 applies would fail under either scenario respondent’s concessions cause sec_167 to be the focal point of this opinion and our consideration - discussion a summary_judgment summary_judgment may be granted if it is demonstrated that no genuine issue exists as to any material fact and that a decision may be entered as a matter of law see rule b 98_tc_518 affd 17_f3d_965 7th cir the moving party bears the burden of proving that there is no genuine issue of material fact and factual inferences will be read in a manner most favorable to the party opposing summary_judgment in that regard and solely for purposes of deciding the issue here we accept petitioner’s interpretation that the lease terminated upon acquisition of the vessel the parties’ contentions with respect to sec_167 are delineated in a way that would obviate the need to decide whether any of the leases continued to exist after the acquisition of the vessel that is so because petitioner contends that the statute applies to property only if acquired subject_to a lease that continues in the future and respondent contends that the statute would apply here because the property acquired was subject_to a lease when acquired construing the transactional facts here most favorably to the defending party we are to decide whether a lessee of an asset who purchases that asset for the purpose of terminating the lease is subject_to sec_167 accordingly we may render judgment on the issue as a matter of law see rule b the --- - pleadings exhibits transcript of argument and affidavits contain the facts and information used for the purpose of ruling on the motion herein b analysis of sec_167 sec_167 c was enacted as section b of the omnibus_budget_reconciliation_act_of_1993 publaw_103_66 107_stat_532 it was part of a larger package of provisions aimed at the treatment of intangibles that was enacted in sec_197 ’ under the regimen of sec_197 various intangibles are identified categorized and subjected to uniform tax treatment as part of this larger package of rules sec_167 was enacted to specifically exclude leasehold interests including subleases from the effect of sec_197 even though leases were removed from the effect of sec_197 by enacting sec_167 c congress intended uniform treatment for all situations where a tangible asset was acquired subject_to a lease in that regard sec_167 is designed to prevent taxpayers from allocating any of the cost of acquiring tangible_property to prior to the enactment of sec_197 depreciation or amortization of intangibles was governed by sec_1 a - income_tax regs and was a source of considerable controversy between taxpayers and the internal_revenue_service see staff of joint comm on taxation technical explanation of the tax simplification act of j comm print title v treatment of intangibles amortization of goodwill and certain other intangibles sec_501 of the bill and new sec_197 of the code pincite --- - leases or subleases to which the property is subject see h rept pincite n c b pincite the statute is concise to the point and expressed as follows sec_167 basis for depreciation ---- in general --the basis on which exhaustion wear_and_tear and obsolescence are to be allowed in respect of any property shall be the adjusted_basis provided in sec_1011 for the purpose of determining the gain on the sale_or_other_disposition of such property special rule for property subject_to lease ---- if any property is acquired subject_to a lease-- a no portion of the adjusted_basis shall be allocated to the leasehold interest and b the entire adjusted_basis shall be taken into account in determining the depreciation deduction if any with respect to the property subject_to the lease sec_167 and the parties do not dispute that if we decide that the vessel acquired by petitioner is property subject_to a lease as referenced in the statute then no portion of the acquisition_cost can be attributed to any lease in question where the parties part company is in their interpretation of the phrase tf any property is acquired subject_to a lease respondent argues that petitioner acquired the vessel subject_to the lease to the umtc partnership ie the lease under which petitioner was entitled to use the vessel petitioner on the other hand argues that the statute only applies to property that is subject_to a lease when acquired and will continue to be subject_to the same lease afterwards petitioner argues that its purpose in -- - acquiring the vessel was to terminate the lease and therefore it did not acquire property subject_to a lease we must decide which party’s interpretation or possibly whether both interpretations was intended under respondent’s position petitioner would be entitled to depreciate the acquisition_cost approximately dollar_figure million over the remaining life of the vessel petitioner however seeks to deduct percent of the acquisition_cost approximately dollar_figure million in the year of acquisition of the vessel as the cost of terminating a burdensome lease the remaining amount approximately dollar_figure million was to be attributable to the depreciable basis of the vessel ultimately this controversy concerns the timing of deductions in connection with petitioner’s acquisition of the vessel and its attempt to terminate the lease there is no question about whether the vessel was subject_to a lease at the time it was acquired by petitioner petitioner argues however that as a matter of proper grammatical syntax the statutory language has been phrased to require that acquired property must remain subject_to a lease to come within the allocation requirements of sec_167 petitioner suggests that congress would have used the phrase if any property subject_to a lease 1s acquired to achieve the outcome advanced by respondent petitioner contends that respondent appears to treat the phrase subject_to a lease as if it modified the word property petitioner contends that the placement of the phrase subject_to a lease shows that it modifies the word acguired which grammatically should mean that the property remains subject_to a lease in the hands of the acquiring party respondent agrees that the phrase subject_to a lease modifies the term acguired but contends that it does so as part of the past participial phrase ‘acquired subject toa lease’ which used in conjunction with the verb ‘is’ modifies and governs ‘property’ respondent contends that such usage constitutes a past participial phrase and that acquired subject_to a lease merely denotes the gaining of possession respondent also points out that the phrase has been placed in the past tense by the use of the word acquired and is without continuing or future tense finally respondent reference sec_1 u s c sec_1 which provides that words used in the present tense include the future as well as the present from this statement respondent reasons that conversely words stated in the past tense such as acquired do not include the future thus respondent concludes that congress intended to limit the subject phrase to the point of the acquisition of the asset although we appreciate the parties’ arguments concerning grammar congress’ intent should not be decided solely by reference to finite nuances to be found in the rules of grammar that is especially so here where neither party’s grammar argument is obviously more correct than the other’s we do not focus solely on such distinctions to decide the intent of congress in this case normally we begin our inquiry by looking to the plain language of the statute to interpret its meaning see 447_us_102 when interpreting the words used in a statute we give them their ordinary meaning see 332_us_524 considering the phrase if any property subject_to a lease is acquired we reach the conclusion that either party’s interpretation is possible depending on the intent of congress the question we must answer is whether the legislation was directed only to situations where a lease is to continue beyond the time of acquisition of the property subject_to that lease or whether it applies to an acquisition of property by a lessee where the lease merges into the lessee’s new property ownership_interest the legislative_history provides no direct assistance or decisive indicator to answer our particular inguiry the conference_report contains the following general statement interests under leases of tangible_property ----the term sec_197 intangible does not include any interest as a lessor or lessee under an existing lease of tangible_property whether real or personal the cost of acquiring an interest as a lessor under a lease of tangible_property where the interest as lessor is acquired in connection with the acquisition of the tangible_property is to be taken into account as part of the cost of the tangible_property for example if a taxpayer acquires a shopping center that is leased to tenants operating retail stores the portion if any of the purchase_price of the shopping center that is attributable to the favorable attributes of the leases is to be taken into account as a part of the basis of the shopping center and is to be taken into account in determining the depreciation deduction allowed with respect to the shopping center the cost of acquiring an interest as a lessee under an existing lease of tangible_property is to be taken into account under present law see sec_178 of the code and sec_1_162-11 rather than under the provisions of the bill fn refs omitted h conf rept pincite 1993_3_cb_393 petitioner focuses on the use of the phrase under an existing lease in the first paragraph of the above-quoted commentary the use of that terminology could refer either to a lease in existence at the time of the acquisition or to a lease that continues in existence petitioner links the use of that phrase to the legislative commentary and the single example that addresses circumstances where the lease would continue beyond the acquisition_date petitioner would have us accept that this sec_1_162-11 income_tax regs similar to sec_167 c requires the purchaser of a leasehold interest to amortize an annual aliquot part of the cost over the remaining term of the lease as pertinent to this discussion sec_178 addresses lease renewal options as affecting the remaining term of a lease factor shows that sec_167 applies only where the lease is to continue respondent correctly points out that the example and discussion of continuing leases does not expressly condition the application of sec_167 on the acquisition of a continuing ‘interest of a lessor under a lease of tangible_property ’ in the context of the commentary and the example we agree with respondent that it was not intended to limit the application to a particular type of transaction set forth in the example although the example discusses a lease that continues beyond the time of acquisition it is clear that the example is not intended to be all-inclusive more particularly the statutory language could easily apply to leases that terminate upon or immediately after acquisition and or leases that continue beyond acquisition of the leased asset accordingly the legislative_history does not provide definitive guidance or a direct answer to our inguiry of whether sec_167 applies only to a situation where a lease is to continue in futuro the commentary and the example do make it absolutely clear however that all costs were intended to be allocated to the depreciable tangible_property petitioner also points out that one of the purposes for enacting sec_167 was to deal with a specific controversy between lessor taxpayers and the internal revenue -- - service those situations involved the amortization of the premium value of an acquired lease on facts similar to the example in the legislative_history supra we agree with petitioner that one of the motivating factors for enacting sec_167 was to deal with that problem the statutory language however would ostensibly apply to anyone acquiring property and is not in any manner limited to acquisitions for a premium and or by a purchaser of an asset subject_to a lease that is to continue into the future the parties have gone to great lengths to reword and or hypothesize the meaning of statutory phrase in controversy the phrase we consider however 1s quite succinct---- if any property is acquired subject_to a lease the threshold for application of sec_167 applies to any property that is acquired when it is subject_to a lease if property was not subject_to a lease when it was acquired sec_167 would not apply so we must decide whether the property here was subject_to a lease when it was acguired the plain language of the statute is not limited in its application to acquisitions by lessors nor does it delineate a requirement that the lease must continue after the acquisition only that the property be acquired subject_to a lease in order to interpret the phrase subject_to a lease solely as a continuing requirement as suggested by petitioner we would -- - have to look outside the statutory language it appears that sec_167 would be triggered irrespective of whether the lease had a remaining term of day or years with that premise it is difficult to accept petitioner’s argument that its own circumstances should be exempted from the statutory requirements if we accept petitioner’s interpretation that the lease must continue a taxpayer would be able to avoid the intended effect of sec_167 merely by a simultaneous acquisition of tangible_property cancellation of the existing lease and the renegotiation of a new lease under petitioner’s interpretation sec_167 would be rendered impotent and meaningless whether we accept the fact that petitioner’s lease terminated upon months after or sometime more distant from the acquisition of the vessel the lease did not terminate until petitioner acquired the vessel accordingly petitioner acquired the vessel at a time when it was subject_to the lease ‘ respondent points out that in kloppenberg co v commissioner tcmemo_1986_325 where the taxpayer was similarly attempting to value a capital_asset without considering the value of the lease this court used the phrase subject_to a lease in the same manner in which respondent advocates that it be used here in disagreeing with the taxpayer’s approach in kloppenberg we stated no one disputes that after date the taxpayer owned the property in fee simple however the taxpayer’s argument that the lease should therefore be disregarded ignores the fact that x x the taxpayer owned a significant interest in the property prior to the challenged transaction it is not the value of the combined interest which continued c petitioner’s alternative position although we have decided that petitioner’s acquisition of the vessel is governed by sec_167 the same result would have been reached even if sec_167 had not been enacted petitioner argues that we should treat the acquisition as though it were two separate payments or portions petitioner contends that one portion would be attributable to the acquisition of a vessel worth substantially less than the dollar_figure million total_payment and the other should be attributable to the cancellation of a burdensome lease respondent points out that petitioner chose the approach to acquire the vessel instead of making the payment to terminate the burdensome lease we note that petitioner’s cost to acquire the vessel was approximately percent less than the cost of the option permitting termination of the lease petitioner therefore wishes us to treat the acquisition of the vessel as though it had in effect exercised both choices---- petitioner wishes to have its cake and eat it too h continued x the taxpayer owned after date which is in issue rather it is the interest which the taxpayer purchased from the owner lessor on that date ie a fee simple interest subject_to the outstanding lease id with emphasis as suggested by respondent petitioner obviously followed the less costly approach from a financial perspective but not necessarily from a tax perspective petitioner has provided no explanation for the percent larger cost to terminate the lease than to acquire the continued -- - the main thrust of petitioner’s argument is that it was effectively doing two different things even though it had solely exercised the option of acquiring the vessel for the contract_price on brief petitioner went to great lengths to convince us that sec_167 deals solely with depreciation or amortization and that sec_162 concerning ordinary and necessary business deductions governs the portion of its transaction that effected the termination of the lease respondent does not question petitioner’s premise that sec_162 deals with the pure situation where there is an expenditure to cancel or terminate a burdensome contract or lease the approach that petitioner uses to make its point is to argue that the value of the vessel without considering the lease is dollar_figure million and so the remaining dollar_figure million of the dollar_figure million acguisition price was paid to cancel a lease’ petitioner’s approach has met with continued vessel the difference was built into the contract terms so that it was not due to some change in conditions such as extraordinary wear of the vessel leased asset we note that the parties for purposes of this summary_judgment motion agree that the vessel’s value without considering the value of the subject lease was dollar_figure million petitioner would attribute the difference between the dollar_figure million acquisition_cost and the dollar_figure million to cancellation of the lease respondent on the other hand would attribute the difference to value of the use of the acquired vessel for the remainder of its useful_life respondent’s approach is in line with the approach if not the intent of sec_167 and existing case law as discussed infra the fair_market_value of the vessel when petitioner acguired it was more than dollar_figure million continued success in only one circuit and has not met with success in this court the court_of_appeals for the second circuit and the supreme court petitioner attempts to bolster its argument by referencing several cases where transactions were split or bifurcated to permit differing results with respect to each portion of the transaction with one exception ’ the courts have not permitted a current deduction to terminate a burdensome lease where the lessee purchased the leased asset there are cases permitting a current deduction for the cost of terminating a burdensome lease or contract obligation but those cases do not involve the continued because of the value of the stream of income attributable to the lease in the factual setting of this case the fair_market_value of the vessel as opposed to the value without considering the existing lease included the stream of rental income accordingly a willing seller would not have ignored the value attributable to the use of the vessel especially where the lessee was obligated to pay for that use irrespective of whether the lessee used the vessel when petitioner acquired the vessel it acguired the physical_asset and the right to its use petitioner in attempting to attribute the majority of the acquisition_cost to an expense for canceling the lease ignores its ability to use or lease the vessel accordingly it is difficult to reconcile petitioner’s approach to value ‘ to some extent the case law that predated the enactment of sec_167 1s instructive in interpreting the statute the very approach suggested by petitioner has been thoroughly considered by this and other courts 's the exception is to be found in 166_f2d_805 6th cir revg a memorandum opinion of this court dated date which is discussed in detail later in this opinion - - acquisition of a capital_asset when sec_167 was enacted with the exception of some precedent in the sixth circuit the courts did not permit the approach sought by petitioner here--allocating part of the cost of acquiring a leased asset to a deductible expense attributable to the termination of a burdensome lease generally the courts have held’ that in the acquisition of a leased asset the portion of the cost attributable to an existing lease is to be associated with or attributable to the value of the asset the value of the asset without considering the lease has not been considered the true measure of the asset’s value to value the asset without considering the lease would be to ignore a stream of income rent to which the owner of the asset is entitled a seller of an asset would not separate the lease from the leased asset and ignore what may be the asset’s principal source of value at some point in the life of a leased asset the income rent to be derived may exceed the residual_value of the asset that is why the vessel here about halfway through the term of a 20-year lease may have a value without considering the lease of about dollar_figure million whereas the income ‘ the opinions in which this question was considered date back more than years and preceded the enactment of sec_167 by more than years --- - stream from the remaining life of the lease may have been valued at about dollar_figure million ’ respondent contends that case precedent in existence prior to the enactment of sec_167 is consistent with the restriction contained in sec_167 e that the buyer may not allocate to the lease any portion of the acquisition_cost of the leased property as explained above petitioner contends that its transaction is a two-part transaction and should be bifurcated into the cost of acquiring a capital_asset and the cost of canceling or terminating a burdensome lease although the acquisition of the vessel may have effectively terminated the lease the transaction which caused the lease termination was capital in nature accordingly a significant prerequisite to petitioner’s success is its ability to bifurcate the cost expended to acquire the capital_asset and allocate the cost into two portions---one attributable to the capital_asset and the other to the cost of terminating the burdensome lease petitioner argues that the value of the vessel at the time of the acquisition was substantially less than it was required to the acquisition of a leased asset by the lessee is somewhat unigue when compared to the acquisition of the asset by a third party that is so because at the time of acquisition of a leased asset by the lessee the leasehold interest merges into the fee ownership whereas a third-party purchaser of a leased asset does not experience a merger of interests petitioner’s approach would result in highly beneficial treatment to lessees that would not otherwise be available under sec_167 to lessors and others who might acquire leased assets -- - pay and the difference is attributable to the lease cancellation petitioner’s characterization is no different from the arguments that have been made in several cases considered by this and other courts prior to the enactment of sec_167 except for the holding in one circuit courts have not permitted a lessee’s allocation of a portion of the acquisition_cost of a leased capital_asset to the cancellation of a burdensome lease in order to permit a business deduction under sec_162 the supreme court the court_of_appeals for the second circuit and this court have all reasoned that the value attributable to the lease’s income stream represents value that a third-party buyer would be required to pay the seller for the leased asset as pointed out above no seller would part with a leased asset without receiving value for the income attributable to the lease using that rationale the supreme court approved the court_of_appeals for the second circuit’s approach of allowing the acquisition_cost including the portion attributable to the value of the lease to be made part of the acquired asset’s depreciable basis petitioner’s argument was addressed about years ago in two seminal cases 166_f2d_805 6th cir revg a memorandum opinion of this court dated date and 21_tc_817 affd in part revd in part 221_f2d_322 2d cir affd 350_us_456 cleveland allerton hotel inc involved a hotel that was built on land subject_to a 100-year lease with a dollar_figure annual rental about years into the lease the hotel owner acquired the underlying land for dollar_figure at the time of the acquisition the unimproved and or unencumbered value of the land was dollar_figure and the adjusted_basis for the building was dollar_figure the taxpayer building owner added to the adjusted_basis of the building for depreciation purposes the excess paid over the dollar_figure value of the land the question considered by this court was whether respondent erred in disallowing depreciation by the taxpayer in excess of the preacquisition adjusted_basis dollar_figure this court decided that the taxpayer’s purchase of the land for dollar_figure was the value any purchaser would have paid for land that had the benefit of an income-producing lease accordingly it was concluded that the entire acquisition_cost represented a nondepreciable capital_expenditure attributable to the cost of the land on appeal the court_of_appeals for the sixth circuit reversed concluding that the taxpayer was entitled to currently deduct as a business_expense the excess of dollar_figure over the dollar_figure value of the unencumbered land as a cost of extinguishing the lease -- - in millinery ctr bldg corp v commissioner supra the facts were essentially the same as in cleveland allerton hotel inc v commissioner supra and the taxpayer relying on the court of appeals’ holding in cleveland allerton hotel inc sought to deduct the excess of the acquisition_cost of the underlying leased land over the unimproved value of the land this court choosing not to follow the holding of the court_of_appeals for the sixth circuit held that the excess was not currently deductible as an ordinary and necessary business_expense in addition this court held that the taxpayer was not entitled to add the excess of the amount_paid over the unimproved value of the land to the depreciable basis of the building on appeal the court_of_appeals for the second circuit affirmed this court’s holding that the excess was not currently deductible as a business_expense the court_of_appeals however reversed our holding that the taxpayer was not entitled to allocate a portion of the acquisition_cost to the depreciable basis of the building accordingly the court_of_appeals agreed with this court and disagreed with the court_of_appeals for the sixth circuit with respect to whether any portion of the cost allocable to the lease was currently deductible because of this conflict between the courts of appeals the supreme court granted the taxpayer’s certiorari petition - - the supreme court affirmed the holding of the court_of_appeals for the second circuit ie that the taxpayer was entitled to an allocation of the acquisition_cost between the building and land and entitled to depreciate the basis over the remaining useful_life of the building ' the supreme court noted that as lessee of the land the taxpayer’s ownership or use of its building was subject_to significant control by the lessor and to conditions of the lease for example the taxpayer’s right to use its building was burdened by the payment of rent and the obligation to relinguish use of the building and or to demolish the building at the end of the lease_term this point suggests that in purchasing the land the taxpayer may to some extent have been perfecting unfettered ownership in the building in addition the supreme court pointed out that the millinery ctr bldg corp v commissioner supra taxpayer did not prove that its rental payments were excessive for what it was leasing and therefore the supreme court left for another day the question of the deductibility of payments for relief from the terms of a lease in deciding that the approach of the court of the allocation permitted was between a depreciable building and a nondepreciable land portion of the merged interest the government did not seek supreme court review of the depreciation allowance of that portion of the acquisition_cost that exceeded the value of the building’s remaining economic life no portion was permitted to be deducted as current business_expense attributable to the effective cancellation of the land lease - - appeals for the second circuit was correct however it would appear that the approach of the court_of_appeals for the sixth circuit was rejected accordingly the vitality of the holding in cleveland allerton hotel inc v commissioner supra holding is questionable ’ in spite of these circumstances petitioner strongly urges that it is entitled to rely on the cleveland allerton hotel inc holding further complicating petitioner’s situation any appeal of our decision here would be to the court_of_appeals for the second circuit---the millinery ctr circuit that of course militates against petitioner’s chances for success on appeal because petitioner would have to petitioner has provided only one case with comparable facts and squarely on point that followed cleveland allerton hotel inc v commissioner supra see 126_fsupp_786 n d ohio in that regard we note that the troc inc case preceded the supreme court’s opinion in 350_us_456 and that it was within the sixth circuit_court of appeals’ venue petitioner also relies on priv ltr rul date and field_service_advice date both of which were issued subsequent to the transaction in guestion and accordingly could not have been relied upon the administrative discussions give petitioner some solace in their discussions of cleveland allerton and the absence of any discussion of or reliance on sec_167 irrespective of the positions or discussions contained in those administrative documents they are statutorily of no precedential value see sec_6110 respondent argues that the cited ruling and advice are distinguishable accordingly whether the discussion or positions in rulings or internal advice memoranda are favorable or unfavorable to taxpayers in the present situation we give them no weight - sway the thinking of the appellate court that expressly disagreed with the cleveland allerton hotel inc holding accordingly at the time of the enactment of sec_167 c the weight of case authority did not permit the relief sought by petitioner more significantly in affirming the second circuit_court of appeals the supreme court’s holding in millinery ctr bldg corp v commissioner supra resulted in the same outcome as the one prescribed by sec_167 ie no allocation of the acquisition_cost to the lease was permitted in circumstances where a leased asset is acquired further both the case precedent and the statute require that all of the cost be allocated to the depreciable capital_asset respondent attempts to resolve these entangled circumstances by reference to our holding in 54_tc_742 affd 445_f2d_985 10th cir there we expressed the view that we would conform to the holding of a federal court_of_appeals that is squarely on point irrespective of whether we agree with that court of appeals’ holding we have specifically disagreed with the holding of the court_of_appeals for the sixth circuit’s cleveland allerton holding see millinery ctr bldg corp v commissioner 1t c affd in part revd in part 221_f2d_322 2d cir affd 350_us_456 the appeal of this case as noted above will be to the court_of_appeals for the second circuit which agreed with our holding and disagreed with the court_of_appeals for the sixth circuit see millinery ctr bldg corp v commissioner f 2d pincite where land with improvements was acquired the courts have permitted the excess of the purchase_price over the value of the land to be allocated to the building a depreciable asset in the present case no such nondepreciable asset such as land is involved and under sec_167 all of the acquisition_cost is to be allocated to the acquired leased property - - therefore the existing case law and statutory provision are generally in harmony it may also be fair to say that congress was aware of the supreme court’s holding in millinery ctr bldg corp v commissioner supra when it enacted sec_167 c for leases as part of a larger statutory package intended to result in uniform treatment for intangibles we note that allocation of the acquisition_cost of a leased asset under sec_167 operates irrespective of whether it would have been more or less beneficial to the taxpayer to allocate otherwise in petitioner’s situation it obviously would be more beneficial if percent of the acquisition payment for the vessel was currently deductible as a business_expense incurred to terminate a burdensome lease we can think of no reason why petitioner as a lessee should be treated any differently from a nonlessee taxpayer who acquires a leased asset in that regard petitioner has not provided any persuasive evidence showing that congress intended to exclude the acquisition of a leased capital_asset by the lessee nor has it shown that congress intended that the lessees should be allowed to allocate a portion of the acquisition_cost of an asset toa lease and that lessors should not be so entitled in summary petitioner has not shown that there is any reason to read sec_167 to exclude transactions where a lessee purchases the leased asset or to read the statute as - - applicable only to existing leases that are to continue in futuro in addition the existing case precedent is in harmony with sec_167 by not permitting allocation of a portion of the purchase_price of a leased asset to the value or cost of the lease accordingly we hold that sec_167 applies to petitioner’s acquisition of the vessel and respondent’s motion for partial summary_judgment will be granted an appropriate order will be issued