Opinion ID: 489931
Heading Depth: 1
Heading Rank: 2

Heading: Proceedings of the Tax Court

Text: 11 In 1979, the case was tried in the tax court before Judge William H. Quealy. After the case was tried and briefed, but before the findings of fact and law were filed, Judge Quealy retired. The case was reassigned to Special Trial Judge Fred R. Tansill, who granted Bail Bonds' motion for a new trial. 12 Before the first trial, the parties had jointly moved for an order incorporating into the record the testimony of Alfred Harris, a former Margolis employee, given before the tax court in a previous unrelated case. The tax court granted the motion, treating it as a stipulation. At the second trial, the tax court denied Bail Bonds' request to withdraw the stipulation. 13 The tax court in the second trial held that the reinsurance agreement with Farila was a sham designed to disguise a scheme of creating deductions by shifting money back and forth from one party to another through various intermediaries, all of which acted under the effective control or direction of Margolis. 14 In concluding that the Anglo Dutch loans were also shams, the tax court relied heavily on the sham nature of the Farila agreement. The court stated that [i]f ... the [Farila] Agreement lacks economic substance, the loan will also be tainted. More specifically, the court found that the funds from Anglo Dutch were not valid loans creating obligations to pay deductible interest. The funds instead were ultimately returned without consideration to Anglo Dutch or Nelson. Thus, the court determined that the loan proceeds merely circulated through various intermediaries as part of the scheme to create expense deductions for [Bail Bonds] and to funnel cash into the hands of [Nelson]. The court concluded that the Anglo Dutch loans did not constitute genuine indebtedness, and sustained the Commissioner's disallowance of the interest deductions. 15 On appeal, Bail Bonds contends that the tax court's decision contained errors of law in three respects: (1) the judge in the second trial improperly relied on the transcript of the first trial; (2) in the second trial, the tax court improperly enforced the stipulation regarding the testimony of Alfred Harris; and (3) the tax court erroneously upheld the disallowance of Bail Bonds' interest deductions for the Anglo Dutch loans.