Opinion ID: 1131099
Heading Depth: 1
Heading Rank: 3

Heading: business purpose

Text: The business purpose inquiry examines the taxpayer's intent in entering into a transaction and looks for indications of legitimate motives other than tax avoidance. Bail Bonds By Marvin Nelson, Inc. v. C.I.R., supra, 820 F.2d at 1549; Rice's Toyota World, Inc. v. C.I.R., supra, 752 F.2d at 92. Federal courts scrutinizing business purpose have considered the investor's testimony regarding motive, the extent to which the investor had sufficient experience with the particular type of transaction to assess the tax-independent value of the transaction, the extent to which the investor directly investigated or sought expert advice as to the tax-independent value of the investment, the extent to which investment literature stresses tax-independent value, and the extent to which an inflated purchase price financed by nonrecourse debt suggests an intent to abandon the transaction after the tax benefits have been realized. Rice's Toyota World, Inc. v. C.I.R., supra, 752 F.2d at 92-93; Casebeer v. C.I.R., 909 F.2d 1360, 1364 (9th Cir.1990). Applying the business-purpose part of the test to the facts of the Morgan/Bakersfield transaction, we find that taxpayers in this case had no business purpose other than tax avoidance. First, although all taxpayers who testified before the Tax Court stated that they were motivated to invest in the Morgan/Bakersfield transaction, at least in part, by a belief that they could make a profit from the investment in the long run, their testimony is not dispositive. See Shriver v. C.I.R., supra, 899 F.2d at 726 (approving tax court opinion giving little weight to the taxpayer's testimony on motive). Second, none of the taxpayers who testified described any experience that would assist in evaluating the worth of a commercial property transaction such as this one. Third, nothing in the record suggests that any of the taxpayers investigated the transaction's potential value, other than its value as a tax shelter. Some of the taxpayers sought further information and advice after reading the Bakersfield promotional materials and before investing, but we find no indication in the record that those inquiries focused on the tax-independent value of the Bakersfield investment. Fourth, the Bakersfield promotional materials stress the tax benefits that the transaction would yield. The most important of those materials, the Bakersfield investment memorandum, states that only persons who expect to have 1982, 1983, and 1984 taxable income of at least $6,000, $24,000, and $27,000, respectively, which will be subject to combined federal and state income tax at a rate of 49 percent for each unit purchased, would be allowed to invest. The memorandum later states that the benefits of losses during the early years of operation will accrue only to investors receiving continued income taxable at high rates from other sources. The memorandum repeatedly warns of the risk of tax nondeductibility, but barely mentions other types of risks inherent in the transaction. The financial projections appended to the memorandum are arranged to emphasize the tax benefits of the transaction. On the whole, discussions of the tax consequences of the investment dominate the entire document. Finally, the structure of the transaction itself leads almost inevitably to the conclusion that taxpayers intended to abandon the transaction after its tax benefits were exhausted. Because Bakersfield financed the purchase primarily with nonrecourse debt, no assets of the partnership or its members were placed at risk. At the same time, taxpayers were not immediately building any real incentive to hold the properties in the form of equity. That is so because of the negative amortization schedule on the nonrecourse note used to pay for the properties, which prevented taxpayers from acquiring any significant equity in the properties until after 1996, and because of the inflated price that taxpayers paid for the property. [8] The transaction's tax benefits would be exhausted after a few years, and taxpayers would be able to walk away from their investment at that point without losing equity or otherwise incurring financial disadvantage. We infer from those facts that the Bakersfield partnership intended to exploit the investment for its tax advantages and to abandon it thereafter. In sum, we find that taxpayers intended to utilize their investment in the Bakersfield sale and leaseback transaction only for the purpose of tax avoidance.