internal_revenue_service national_office technical_advice_memorandum date third party communication none date of communication not applicable number release date index uil no case-mis no tam-134100-12 associate area_counsel small_business self-employed cc sb taxpayer's name taxpayer's address taxpayer's identification no year s involved date of conference --------------------------------------------------------------- -------- ----------------------------------------------------- ------------------------------------- --------------------------------- --------------------------- legend trust a_trust b date a b c d company x company y -------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------- ------- ------- ------------------- -------------------- ------------------------- --------------------------- -------------------- ----------------- ------------------------------------------- tam-134100-12 issue did trust a and trust b materially participate in the relevant activities of company x within the meaning of sec_469 for purposes of applying sec_56 for the tax years at issue conclusion based on the facts submitted trust a and trust b did not materially participate in the relevant activities of company x during the tax years at issue within the meaning of sec_469 for purposes of sec_56 because the trustee and special trustee in their capacity as trustees of trust a and trust b were not involved in the operations of company x’s relevant activities on a regular continuous and substantial basis during the tax years at issue facts trust a and trust b collectively the trusts are complex trusts that were each created on date trust a and trust b each own an interest in company x an s_corporation a owns the remaining interests in company x company x wholly owns company y a qualified_subchapter_s_subsidiary trust a and trust b each reported positive taxable_income from their interests in company x on their respective and tax returns accordingly the trusts would not have disallowed passive losses if they were deemed to not materially participate in the relevant activities of company x the trust agreements creating each of trust a and trust b are identical in their governing provisions a a’s spouse a’s children and a’s grandchildren are the beneficiaries of trust a and trust b b is the sole trustee of trust a and trust b and has served in this capacity pursuant to article xi of the trust agreements since date c is the settlor of trust a and d is the settlor of trust b article xi of the trust agreements appoints a as a special trustee of trust a and trust b and states that t he special trustee shall control the following activities relating to company x and company y common_stock owned by any trust created hereunder all decisions regarding the sale or retention of such stock and all voting of such stock the trust agreements do not grant any further fiduciary powers over the trusts’ assets or with respect to the operations or management of the trusts to a as the special trustee a also serves as president of company y and as such is directly involved in the day-to-day operations of company y’s trade_or_business activities a is unable to differentiate his time spent as president of company y as special trustee of the trusts and as a shareholder of company x b as trustee of trust a and trust b is not tam-134100-12 involved in the operations of the relevant activities of either company x or company y on a regular continuous and substantial basis examination asserts that the trusts did not materially participate in the relevant activities of company x thus for purposes of sec_56 which cross-references the definition of material_participation in sec_469 to determine whether research_and_development expenses must be amortized by taxpayers over a ten-year period for purposes of the alternative_minimum_tax examination determined that the trusts’ share of the research_and_development expenditures incurred by company x must be amortized by the trusts over years examination asserts that b’s participation in the relevant activities of company x and company y that counts towards meeting the material_participation requirements of sec_56 and sec_469 is only that which was performed in the relevant activities in b’s fiduciary capacity as trustee of trust a and trust b a’s participation in the relevant activities of company x and company y also count towards these requirements but only to the extent that a participated in those activities in a’s fiduciary capacity as special trustee of trust a and trust b examination asserts that a’s time spent serving as president of company y does not count towards meeting this material_participation requirement because a is not the trustee of the trusts nor is a an employee of the trustee specifically because the trust agreements limit the powers of the special trustee to certain delineated acts the special trustee does not possess broad or unlimited discretionary authority to bind the trusts to any course of action without the express consent of the trustee the taxpayers argue that because a is a special trustee of trust a and trust b a’s involvement in company y’s relevant activities should be considered for purposes of determining whether the trusts materially participate within the meaning of sec_469 for purposes of sec_56 in the relevant activities of company x and company y therefore the taxpayers argue that all of the personal services performed by a in those activities should count towards meeting the material_participation requirements of sec_56 and sec_469 on behalf of the trusts the taxpayers argue that because a’s roles of special trustee individual shareholder and president of company y are all interrelated it is impossible to differentiate a’s time into the different capacities for which a serves and a is in fact fulfilling a’s obligations for these various capacities simultaneously taxpayers argue that a’s total time spent involved in the operations of the relevant activities of company x and company y should count towards meeting the material_participation requirements of sec_56 and sec_469 on behalf of the trusts law and analysis sec_56 provides in part that in determining the amount of the alternative_minimum_taxable_income of any taxpayer other than a corporation the following treatment shall apply in lieu of the treatment applicable for purposes of computing the regular_tax tam-134100-12 a the amount allowable as a deduction under sec_173 or sec_174 in computing the regular_tax for amounts paid_or_incurred after date shall be capitalized and - i in the case of circulation_expenditures described in sec_173 shall be amortized ratably over the 3-year period beginning with the taxable_year in which the expenditures were made or ii in the case of research_and_experimental_expenditures described in sec_174 shall be amortized ratably over the 10-year period beginning with the taxable_year in which the expenditures were made d if the taxpayer materially participates within the meaning of sec_469 in an activity sec_56 shall not apply to any amount allowable as deductions under sec_174 for expenditures paid_or_incurred in connection with such activity sec_469 provides that if aggregate losses from passive activities exceed aggregate income from passive activities for the taxable_year the excess losses may not be used to offset income from nonpassive activities and accordingly are not allowed for the taxable_year sec_469 provides that any loss that is disallowed under sec_469 commonly referred to as a suspended_loss will be treated as a deduction allocable to such activity in the next taxable_year sec_469 defines passive_activity_loss as the amount if any by which the aggregate losses from all passive activities for such taxable_year exceed the aggregate income from all passive activities for such taxable_year suspended passive losses may accumulate and will continue to carry forward into subsequent tax years indefinitely until the taxpayer has sufficient net_passive_income to offset the suspended losses or until the taxpayer disposes of the taxpayer’s entire_interest in the passive_activity sec_469 defines a passive_activity as any activity which involves the conduct of any trade_or_business in which the taxpayer does not materially participate sec_469 specifically enumerates trusts as one type of taxpayer to which sec_469 applies sec_469 defines material_participation as an activity which the taxpayer participates in on a regular continuous and substantial basis for individuals the qualitative test of sec_469 has largely been replaced by the more quantitative regulatory tests of temp sec_1_469-5t - of the income_tax regulations the treasury_department has not yet issued regulations addressing the material_participation requirement for trusts_and_estates see sec_1 5t g until regulations are promulgated sec_469 remains the sole standard for determining whether a_trust or estate satisfies the material_participation requirement of sec_469 other than the regular continuous and substantial language of tam-134100-12 sec_469 there is an absence of explicit statutory or regulatory guidance regarding how a_trust established material_participation in a trade_or_business activity nevertheless the legislative_history for sec_469 provides important insight into how congress intended for the material_participation standard to apply to trusts special rules apply in the case of taxable entities that are subject_to the passive loss rule an estate_or_trust is treated as materially participating in an activity if an executor or fiduciary in his capacity as such is so participating s rep no pincite sec_7701 defines fiduciary as a guardian trustee executor administrator receiver conservator or any person acting in any fiduciary capacity for any person the regulations further state that fiduciary refers to persons who occupy positions of peculiar confidence toward others such as trustees executors and administrators sec_301_7701-6 the only court opinion addressing how a_trust establishes material_participation for purposes of sec_469 is 256_fsupp2d_536 n d tx in mattie k carter the court held that in determining material_participation for trusts the activities of the trust’s fiduciaries employees and agents should be considered to determine whether the trust’s participation is regular continuous and substantial the court rejected the government’s position that the determination should be made solely with reference to the activities of the trustee finding this approach arbitrary and creating unnecessary statutory ambiguity determining the proper focus in sec_469 for the relevant activities of trust a and trust b is a question of federal tax law and must include an examination of the treatment of trusts under subchapter_j the taxation of trusts under subchapter_j is a hybrid regime involving an entity-level tax as well as the pass-through of income to the beneficiaries while a complex_trust is sometimes required to pay tax on its own income under sec_641 it may also generally deduct under sec_661 income that is passed through to its beneficiaries under sec_662 although the beneficiaries of a_trust do not generally participate in the activities of the trust the designated trustee acts on behalf of and in the interests of the beneficiaries the focus on a trustee’s activities for purposes of sec_469 is consistent with the general policy rationale underlying the passive loss regime as a general matter the owner of a business may not look to the activities of the owner’s employee’s to satisfy the material_participation requirement see s rep no pincite the activities of employees are not attributed to the taxpayer indeed because an owner’s trade_or_business will generally involve employees or agents a contrary approach would result in an owner invariably being treated as materially participating in the trade_or_business activity a_trust should be treated no differently a trustee performs its duties on behalf of the beneficial owners consistent with the treatment of business owners therefore it is appropriate in the trust context to look only to the activities of the trustee to determine whether the trust materially participated in the activity an interpretation that renders tam-134100-12 part of a statute inoperative or superfluous should be avoided 472_us_237 notwithstanding the decision in mattie k carter the service believes that the standard annunciated in the legislative_history is the proper standard to apply to trusts for purposes of sec_469 thus the sole means for trust a and trust b to establish material_participation in the relevant activities of company x and company y is if the fiduciaries in their capacities as fiduciaries are involved in the operations of the relevant activities of company x and company y on a regular continuous and substantial basis a fiduciary must be vested with some degree of discretionary power to act on behalf of the trust united_states v anderson f2 d 9th cir although the trusts represent that a was involved in the day-to-day operations and management decisions of company x and company y a’s powers as special trustee were restricted by article xi of the trust agreements as special trustee a lacked the power to commit trust a and trust b to any course of action or control trust property beyond selling or voting the stock of company x or company y the work performed by a was as an employee of company y and not in a’s role as a fiduciary of trust a or trust b and therefore does not count for purposes of determining whether trust a and trust b materially participated in the trade_or_business activities of company x and company y under sec_469 a’s time spent serving as special trustee voting the stock of company x or company y or considering sales of stock in either company would count for purposes of determining the trusts’ material_participation however in this case a’s time spent performing those specific functions does not rise to the level of being regular continuous and substantial within the meaning of sec_469 trust a and trust b represent that b acting as trustee did not participate in the day-to-day operations of the relevant activities of company x or company y accordingly we conclude that trust a and trust b did not materially participate in the relevant activities of company x or company y within the meaning of sec_469 for purposes of sec_56 for the tax years at issue caveat a copy of this technical_advice_memorandum is to be given to the taxpayers sec_6110 of the code provides that it may not be used or cited as precedent no opinion is expressed herein as to any other issues raised in the technical_advice request or that may be raised based on the facts of this case


t c memo united_states tax_court lowell l and marilyn a robertson petitioners v commissioner of internal revenue respondent’ docket no filed date 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 tcmemo_1994_424 - - commissioner filed at tcmemo_1994_424 hereinafter robertson i holding petitioners liable for additions to tax under sec_6653 and and 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 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 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 sec_6653 - - and and and for increased interest under sec_6621 c following the release of robertson i the court and counsel for the parties in other cases that were filed by the other unitholders of the roscrea trust and by petitioners for the years and 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 sec_6653 and sec_6661 a determination made at the unit- holder level see merino v commissioner tcmemo_1997_ webb v commissioner tcmemo_1990_556 remanded without published opinion 17_f3d_398 9th cir the other unitholders advised the court that they wished to present evidence on the issue of their liability for the additions to tax under sec_6653 and sec_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 q4e- 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 sec_6653 and sec_6661 - - petitioner is a unitholder of the roscrea trust that was formed by 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 date 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 date 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 date 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 date 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 -- - 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 months in return egquilease 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 egquilease 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 dollar_figure the trust paid systems dollar_figure in cash of which dollar_figure was characterized as a downpayment and dollar_figure was characterized as a prepayment of interest due on the trust note in the trust issued a promissory note - j- to systems in the principal_amount of dollar_figure trust note that bore interest at the rate of 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 quarters in arrears in the amount of dollar_figure per quarter and pay- ment in the amount of dollar_figure for each of the remaining quarters as mentioned above each payment due from the trust under the trust note was exactly offset by the aggregate guarterly 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 guarter 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 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 dollar_figure dollar_figure per unit per quarter for the first four guarters and dollar_figure dollar_figure 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 years and 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 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 1ie 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 - lo - the investment memorandum also states except for the trustee's right to collect the additional rent 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 tcmemo_1992_350 mele v commissioner tcmemo_1988_409 dobbs v commissioner tcmemo_1987_361 cf rubin v commissioner tcmemo_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 ie whether they offered a reason- able opportunity for profit exclusive of tax benefits and petitioner's subjective business_purpose for entering the transactions ie whether he had a profit objective or purchased an interest in the trust solely to acquire tax benefits see generally 933_f2d_143 2d cir affg tcmemo_1990_205 909_f2d_1360 9th cir affg in part revg in part and remanding tcmemo_1987_628 89_tc_1229 sturm v commissioner tcmemo_1987_625 moore v commissioner tcmemo_1987_626 843_f2d_351 9th cir affg 85_tc_968 81_tc_184 affd in part revd in part and remanded 752_f2d_89 4th cir 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 91_tc_838 in considering the last factor we took note of the limited nature of the 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 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 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 -- 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 dollar_figure dollar_figure dollar_figure residual_value big_number big_number big_number total big_number big_number big_number we adopted the view of respondent's expert mr s paul blumenthal that dollar_figure was the maximum amount that would be recouped by the unitholders accordingly we found that they could not recoup their cash payment of dollar_figure and thus could not realize an economic profit this analysis is similar to that applied in other court cases see 752_f2d_89 4th cir estate of strober v commissioner tcmemo_1992_350 mele v commissioner tcmemo_1988_409 dobbs v commissioner tcmemo_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 dollar_figure and the aggregate maximum economic benefit dollar_figure are both substantially less than the economic benefit set forth in the projections that accompanied the -- - investment memorandum reproduced as appendix b hereto summarized as follows projections projections projections contingent rent dollar_figure dollar_figure dollar_figure residual_value big_number big_number big_number total big_number big_number big_number second the minimum residual_value of the equipment determined by petitioners' expert dollar_figure is less than the residual_value determined by respondent's expert dollar_figure 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 ina 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 - in robertson i and that we should hold that petitioners are not liable for the additions to tax under sec_6653 a and petitioners' arguments require an analysis of the appraisal of the subject computer equipment furnished by mr john r wilkins president communigraphics inc dated date 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 ibm d16 central proces dollar_figure ibm processor cont big_number ibm coolant dist u ibm ao02 console big_number big_number exhibit b du pont de nemours deutschland gmbh quantity unit model description ibm list price ibm lol central proces big_number big_number exhibit c du pont de nemours deutschland gmbh quantity unit model description ibm list price ibm ao02 disk drive big_number ibm a2f disk drive big_number ibm bo2 disk drive big_number ibm b2f disk drive big_number ibm tape control big_number ibm tape drive big_number exhibit d first computer corp quantity unit model description cdc list price cdc controller --- w channel sw cdc a2 disk drive --- cdc b2 disk drive -- big_number grand total big_number we note that the roscrea trust allegedly agreed to purchase the equipment for dollar_figure 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 -- - tii valuations burroughs wellcome company du pont de nemours deutschland gmbh first computer corporation the ibm and 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 months march exh a dollar_figure november exh b - big_number november exh c - big_number june exh d - big_number the user leases are for months at a rental of dollar_figure per month at a debt interest rate for exhibit a for months at a rental of dollar_figure per month at a assumed debt rate and a currency conversion rate of for exhibit b months at a rental of dollar_figure per month at a assumed debt rate and a currency conversion of for exhibit c and for months at dollar_figure per month at a debt rate for exhibit d the present_value of the user lease is dollar_figure 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 pincite and calculated the appraised value as follows present_value user lease dollar_figure present_value residual march exh a - dollar_figure november exh b - big_number november exh c - big_number june exh d - big_number sum of present values dollar_figure 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 dollar_figure respectfully submitted john r wilkins president communigraphics inc it is readily apparent that the appraisal is similar to another appraisal prepared by mr wilkins that was in issue in mele v commissioner tcmemo_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 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 - - 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 fach of the values set forth in paragraph 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 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 as follows present_value residual date exh a - dollar_figure date exh b - big_number date exh c - big_number date exh d - _big_number total big_number --- - to that amount mr wilkins adds the present_value of the payments due under the initial user leases dollar_figure to arrive at the aggregate present_value of the equipment dollar_figure an amount slightly in excess of the alleged acquisition_cost of the equipment dollar_figure 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 dollar_figure plus the aggregate present_value of the residual values of the equipment upon the expiration of the initial user leases dollar_figure 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 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 -- - 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 lease sec_1s 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 and that's what i was trying to do in becoming an investor in roscrea trust before expiration of the master leases in 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 - - 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 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 dollar_figure dollar_figure exh b big_number a’ dollar_figure exh c big_number dollar_figure big_number exh d big_number dollar_figure big_number big_number big_number ‘this amount is dollar_figure more than the amount in the appraisal dollar_figure 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 and dollar_figure percent referred to in the appraisal as debt interest rate or assumed debt rate rather than the single rate of percent the second inconsistency is that - mr wilkins used months rather than months and months rather than 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 date reprinted herein as appendix a and a second set dated date reprinted herein as appendix b we refer to either set or both sets as the projections the projections dated date were reviewed by petitioner and are described in robertson i the projections dated date 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 - - 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 the trust's share of contingent rents and 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 in the aggregate amount of dollar_figure 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 or percent of original cost of the equipment less a 10-percent sales commission ie dollar_figure dollar_figure or dollar_figure respectively the projections dated date show that the trust would realize in a cumulative after-tax benefit of dollar_figure dollar_figure and dollar_figure 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 - - projections on behalf of the seller could not explain why the anticipated sale proceeds of the equipment in 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 pincite 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 - used in the projections and the value computed by the appraisal according to mr wilkins' appraisal the present_value of the computer equipment in is dollar_figure on the other hand the projections assumed that if the equipment were sold in at the end of the 96-month master leases the proceeds from the sale would be dollar_figure dollar_figure or dollar_figure clearly if the proceeds from the sale of the equipment in are dollar_figure dollar_figure or dollar_figure as contemplated in the projections then the equipment could not be worth dollar_figure in as mr wilkins opined in his appraisal if we discount the three sale proceeds used in the projections pincite percent the present values of the sale proceeds in are dollar_figure dollar_figure and dollar_figure 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 in the projections - - reprinted herewith as appendix b we have added a column entitled 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 the trust will be classified as a_trust for federal_income_tax purposes the master leases should not preclude the unitholders from being considered the owners of the equip- ment 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 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 - - 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 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 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 months is longer than most -- - 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 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 --- - revenue rulings to the trust's indebtedness on the trust note to seller in contrast to the facts in franklin the unitholders will be personally obligated to pay the trust note the transaction will generate cash_flow if additional rent is paid to the trust and therefore to the unitholders 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 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 percent of its cost is one of the key - - 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 - - leases and have a residual_value of not less than 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 and central - -- 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 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 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 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 is equal to the price paid_by the - - 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 date is dollar_figure 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 date 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 -- - 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 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 years and fails to define the term economic life sec_6653 and robertson i held petitioners liable for the additions to tax under sec_6653 and 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 a 820_f2d_1464 9th cir sec_6653 imposes an addition_to_tax equal to 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 85_tc_934 quoting marcello v commissioner 380_f2d_499 5th cir affg in part and remanding in part per curiam t c memo sec_6653 imposes an additional_amount equal to percent of the interest payable under sec_6601 x with respect to the portion of the underpayment described in paragraph which is attributable to x negligence this addition applies to the period beginning on the last date prescribed by law for payment -- -- of such underpayment and ending on the date of the assessment of the tax sec_6653 b sec_6661 robertson i also held petitioners liable for the addition_to_tax under sec_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 a sec_6661 provides that if there is a substantial_understatement_of_income_tax there shall be added to the tax an amount equal to 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 a an understatement is substantial if it exceeds the greater of percent of the tax required to be shown on the return or dollar_figure see sec_6661 a as determined in robertson i the understatement_of_tax in this case dollar_figure 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 -- - 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 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 c 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 d income_tax regs therefore in the case of an understatement attributable to a tax_shelter a taxpayer must prove that there was substantial_authority for the tax treatment of an item and the taxpayer reasonably believed that the tax treatment of an item was more_likely_than_not the proper treatment see sec_6661 c mele v commissioner tcmemo_1988_409 - al --- petitioners argue that the court should vacate that portion of robertson i relating to the additions to tax under sec_6653 and sec_6661 and hold that petitioners are not liable for those additions to tax as to the additions under sec_6653 and petitioners assert that the court should hold that petitioners are not subject_to liability under those provisions because 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 they conducted an independent evaluations sic of the investment that corroborated the information provided in the memorandum the projections and the appraisal 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 gualifying for the expected tax consequences of the transaction and 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 sec_6661 peti- tioners assert that the court should hold that petitioners - -- 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 sec_6661 b 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 sec_6653 and second petitioners maintain that they meet the standards for waiver of the addition_to_tax under sec_6661 which provides that the secretary may waive all or any part of the sec_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 sec_6653 and sec_6661 petitioners argue that the court should vacate those portions of our opinion relating to additions to tax under sec_6653 and sec_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 eguipment -- - 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 - 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 guestions 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 - - 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 tcmemo_1988_409 second according to the testimony of petitioner and five other unitholders at least 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 -- - 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 at - 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 -- - 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 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 --- - 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 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 just focusing on the pricing for the moment who did you speak with in connection with that just with the cost of the equipment the cost of the equipment with biggs and what was your determination about---view about the cost of the equipment that was going to be involved in the roscrea trust it was reasonable you read the whole investment memo i read the investment memo except for the part that was a very technical tax piece of the memo i did not read that did you read the appraisal that came along with the investment memo yes did you question the appraisal did i question it no you took it at face value i took it at the value after i applied my judgment to it yes -- - 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 a smaller central processor the ibm 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 -- - 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 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 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 which according to his testimony was introduced in would mean that the end of the useful_life was in the expiration of the master leases this suggests that the ibm would have little or no residual_value upon expiration of the master leases similarly mr atkins testified regarding the economic life of the ibm 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 a i think the will have a life cycle of about years in the market place that does not mean that all of them sold will be there years later but there will be enough in the market place there they'll still be on lease - - q and this was your view in i take it a right mr atkins' opinion regarding the economic life of the ibm is as follows q in did you have an opinion of the economic life of the ibm a the 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 and the ibm 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 would range from to 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 -- - a atkins and biggs advised me that the useful_life could be and would likely be in the range of to years so i believe in my mind i was using 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 tf 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 -- -- 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 - -- 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 sec_6661 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 sec_6653 and sec_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 -- - of the transaction accordingly by comparing the cash pay- ment made by the roscrea trust dollar_figure with the maximum amount that the unitholders could expect to recoup dollar_figure an analysis similar to our analysis in robertson i was made by the court in gilman v commissioner tcmemo_1989_684 affd 933_f2d_143 2d cir 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 tcmemo_1992_350 where the court makes the same analysis and gquotes extensively from gilman v commissioner supra for the reasons stated above we sustain respondent's determination of the additions to tax under sec_6653 a and for negligence or intentional disregard of rules or regulations and the additions to tax under sec_6661 for substantial_understatement_of_income_tax 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 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 of the federal rules of evidence because it would not assist the trier of fact we agree rule 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 the burden of mr raynault's report and testimony is that the documents supplied to -- - 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 sec_6653 a and is based entirely upon the factual record made --- - 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 105_tc_16 affd 98_f3d_194 5th cir 92_tc_101 rule computation as amended by an order of the court robertson i directed that the court's decision be entered under rule in due course thereafter respondent filed respondent's computation for entry of decision under rule and petitioners filed petitioners' objection to entry of respondent's decision under rule both parties also filed memoranda setting forth their positions -- - petitioners object to respondent's computation of the deficiency in and additions to petitioners' tax on two grounds first respondent failed to give petitioners any credit in for taxes paid with respect to the income from the roscrea trust reported on their returns for the years through petitioners refer to income from the trust that was reported on their returns for the years through as phantom income second respondent failed to recognize in computing petitioners' taxes the economic loss of dollar_figure 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 e phantom income reported for the years through and petitioners' cash investment in computing their liability for taxes interest additions and penalties with respect to the year in issue in this case and the years in issue in other docketed cases and 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 -- - 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 through is before the court in this proceeding however and sec_6214 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 of later years' overpayments if any is necessary because otherwise the amount of the deficiency for 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 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' tax attributable to the disallowance of such deductions is not affected by the issue whether petitioners had overstated their income ina later year by including rental income from the equipment in accordance with our annual -- - system of reporting income and expenses the tax attribut- able to each year stands on its own see 321_us_281 10_bta_73 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 sec_6653 and the addition_to_tax for substantial_understatement of liability under sec_6661 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 sec_6653 the amount of the additions is a percentage of the underpayment as defined by sec_6653 in the case of the addition_to_tax for substantial_understatement of liability under sec_6661 the addition i sec_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 -- - years against phantom income reported in later years from the trust transaction is consistent with our holding in robertson i in kazi v commissioner tcmemo_1991_37 affd without published opinion sub nom massey v commissioner 950_f2d_723 3d cir 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 dollar_figure 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 - -- 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 dollar_figure in the form of depreciation_deductions see gilman v commissioner tcmemo_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 dollar_figure mele v commissioner tcmemo_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 dollar_figure accordingly we sustain the rule 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 computation appendix a roscrea trust ibm ibm peripherals control data disk drives cost dollar_figure 10-dec-82 d e f g rental income dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure additional income a big_number big_number big_number big_number big_number big_number big_number big_number big_number sale proceeds big_number big_number big_number total income big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number depreciation b dollar_figure big_number big_number big_number big_number big_number big_number interest big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number total expenses big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number taxable_income big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number cash-flow tax_benefit liability c big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number rental cash-flow big_number big_number big_number big_number big_number big_number big_number big_number big_number sale proceeds big_number big_number big_number gross benefit big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number less capital invested big_number annual_benefit big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number reinvest big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number cumulative benefit d big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number a this figure estimates the releasing revenues beginning in month b calculated using accelerated_cost_recovery_system guidelines for foreign and domestic property c assumes a tax_rate d at zero residual_value the cumulative benefit amounts to big_number e assumes a sale price of less a selling commission f assumes a sale price of less a selling commission g assumes a sale price of less a selling commission appendix b roscrea trust ibm ibm peripherals control data disk drives cost dollar_figure 16-dec-82 d e f g rental income dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure dollar_figure additional income a big_number big_number big_number big_number big_number big_number big_number big_number big_number sale proceeds big_number big_number big_number total income big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number depreciation b dollar_figure big_number big_number big_number big_number big_number big_number interest big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number total expenses big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number taxable_income big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number cash-flow tax_benefit liability c big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number rental cash-flow big_number big_number big_number big_number big_number big_number big_number big_number big_number sale proceeds big_number big_number big_number gross benefit big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number less capital big_number annual_benefit big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number reinvest big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number cumulative benefit d big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number big_number a b c d e f assumes a sale price of less a selling commission assumes a sale price of less a selling commission g assumes a sale price of less a selling commission this figure estimates the trust's portion of the releasing revenues beginning in month calculated using accelerated_cost_recovery_system guidelines for foreign and domestic property assumes a tax_rate at zero residual_value the cumulative benefit amounts to dollar_figure