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Corporations Dispute Adjustment of Partnership Items

SEP. 25, 2001

Transcapital Leasing Associates 1990-II, L.P., et al. v. United States

DATED SEP. 25, 2001

DOCUMENT ATTRIBUTES

Case Name
TRANSCAPITAL LEASING ASSOCIATES 1990-II, L.P. INTERNATIONAL BANCSHARES CORPORATION, A TEXAS CORPORATION, AND ITS SUBSIDIARIES, INCLUDING IBC SUBSIDIARY CORPORATION, A DELAWARE CORPORATION, INTERNATIONAL BANK OF COMMERCE, A TEXAS BANKING CORPORATION, AND IBC FINANCIAL SERVICES, INC. (FORMERLY KNOWN AS BANCOR DEVELOPMENT COMPANY OF LAREDO), A TEXAS CORPORATION, A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Petitioners, v. THE UNITED STATES OF AMERICA, Respondent
Court
United States District Court for the Western District of Texas
Docket
No. SA01CA0881EP
Authors
Cousins, William R., III
Welty, M. Todd
Parkin, Matthew S.
Lester, William H., Jr.
Institutional Authors
Meadows, Owens, Collier, Reed, Cousins & Blau LLP
Cox & Smith Inc.
Code Sections
Section 6226
Subject Area/Tax Topics
Consolidated returns
Partnership taxation
Index Terms
partnerships, adjustments, court review
Jurisdictions
United States
Language
English
Tax Analysts Document Number
Doc 2001-27330 (31 original pages)
Tax Analysts Electronic Citation
2001 TNT 218-45

Transcapital Leasing Associates 1990-II, L.P., et al. v. United States

=============== SUMMARY ===============

International Bancshares Corp. and its subsidiaries have challenged the IRS's adjustment of partnership items arising from a former limited partnership the corporations had an interest in, TransCapital Leasing Associates 1990-II L.P., which was dissolved on April 10, 1995.

The corporations are seeking a redetermination of final partnership administrative adjustments to the partnership's returns for the taxable years ended August 31, 1991; December 31, 1991; December 31, 1992; December 31, 1993; and May 30, 1994. The corporations maintain that the IRS erroneously made adjustments to the partnership's rental activities and portfolio income interest for those taxable years arising from its investment in computer leasing transactions.

=============== FULL TEXT ===============

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF TEXAS

PETITION FOR READJUSTMENT OF

PARTNERSHIP ITEMS UNDER CODE SECTION 6226

Petitioners, International Bancshares Corporation, IBC Subsidiary Corporation, International Bank of Commerce and IBC Financial Services, Inc., by and through undersigned counsel, file this Petition for Readjustment of Partnership Items against Respondent, The United States of America, and for this cause of action state as follows:

I. Petitioners

(a) Petitioner International Bancshares Corporation, EIN 74-

2157138, is a Texas corporation having its principal place

of business at 1200 San Bernardo, Laredo, Texas 78040.

(b) IBC Subsidiary Corporation, EIN 74-2581228, a Delaware

corporation, is a wholly owned subsidiary of International

Bancshares Corporation.

banking association, is a wholly owned subsidiary of IBC

Subsidiary Corporation (International Bancshares

Corporation, IBC Subsidiary Corporation, and International

Bank of Commerce collectively referred to as "IBC").

(d) Petitioner, IBC Financial Services, Inc., formerly known as

Bancor Development Company of Laredo, ("Bancor"), EIN 74-

1939693, is a Texas corporation and a 90% subsidiary of IBC,

having its principal place of business at 130 East Travis,

San Antonio, Texas 78205.

(e) For federal income tax purposes, International Bancshares

Corporation, IBC Subsidiary Corporation, International Bank

of Commerce, and Bancor file a consolidated tax return.

(f) Bancor is a notice partner, pursuant to Title 26 U.S.C.

sections 6226(b) and 6231(a)(8) of the Internal Revenue Code

of 1986, as amended (the "Code"), of the TransCapital

Leasing Associates 1990-II, L.P., a former Delaware limited

partnership, (the "Partnership"). The Partnership was

dissolved on April 10, 1995.

(g) TransCapital Management Associates Limited Partnership IV, a

former Delaware limited partnership, was the Tax Matters

Partner (the "Tax Matters Partner") of the Partnership.

TransCapital Management Associates Limited Partnership IV

was dissolved on April 10, 1995. The Tax Matters Partner

failed to file a petition for readjustment of partnership

items within 90 days of April 30, 2001, the day which the

Commissioner of Internal Revenue (the "Commissioner") issued

his Notice of Final Partnership Administrative Adjustment

(the "FPAA").

(h) The Commissioner issued the FPAA from his office located at

300 East 8th Street, Suite 602, STOP 8000 AUS, Austin, Texas

78701. The FPAA was dated April 30, 2001. A copy of the FPAA

is attached hereto as Exhibit "A."

(i) Bancor is a 99% limited partner in the Partnership. IBC owns

90% of Bancor. Consequently, both the proposed and

alternative adjustments in the FPAA would result in

deficiencies for the Petitioners.

(j) Pursuant to sections 6226(b) and 6226(d) of the Code,

Petitioners have standing to bring this action before this

Court.

II. RESPONDENT

Respondent is The United States of America and may be served by hand delivering a copy of this Petition to Robert Pittman, United States Attorney for the Western District of Texas, 601 NW Loop 410, Suite 600, San Antonio, Texas 78216; and mailing two copies of this Petition by certified mail, return receipt requested, to the Honorable John Ashcroft, Attorney General of the United States, Tenth and Pennsylvania Avenues, N.W., Washington D.C. 20530, and to Steve Burgess, Small Business-Self Employed Business Division, Area Director, Internal Revenue Service, 4050 Alpha Road, MS 1000 MSRO, Dallas, Texas 75244.

III. STATEMENT OF CASE

(a) This is a civil action arising under Code section 6226(b)

for the re-determination of final partnership administrative

adjustments to the Partnership's Form 1065 tax returns for

the taxable years ended August 31, 1991, December 31, 1991,

December 31, 1992, December 31, 1993, and May 30, 1994

as set forth by the Commissioner in the FPAA.

(b) For the short taxable year ended August 31, 1991, the

Commissioner erroneously and illegally determined a negative

adjustment for net income from the rental activities in the

amount of $11,202,640. In addition, for the short taxable

year ended August 31, 1991, the Commissioner erroneously and

illegally determined a negative adjustment for portfolio

income interest in the amount of $114,548.

Commissioner erroneously and illegally determined a positive

adjustment for net income from the rental activities in the

amount of $1,108,299. In addition, for the short taxable

year ended December 31, 1991, the Commissioner erroneously

and illegally determined a negative adjustment for portfolio

income interest in the amount of $469,758.

(d) For the taxable year ended December 31, 1992, the

Commissioner erroneously and illegally determined a positive

adjustment for net income from the rental activities in the

amount of $3,324,896. In addition for the taxable year

ended December 31, 1992, the Commissioner erroneously and

illegally determined a negative adjustment for portfolio

income interest in the amount of $1,357,124.

(e) For the taxable year ended December 31, 1993, the

Commissioner erroneously and illegally determined a positive

adjustment for net income from the rental activities in the

amount of $3,324,896. In addition, for the taxable year

ended December 31, 1993, the Commissioner erroneously and

illegally determined a negative adjustment for portfolio

income interest in the amount of $1,121,901.

(f) For the short taxable year ended May 31, 1994, the

Commissioner erroneously and illegally determined a positive

adjustment for net income from the rental activities in the

amount of $7,392,864. In addition, for the short taxable

year ended May 31, 1994, the Commissioner erroneously and

illegally determined a negative adjustment for portfolio

income interest in the amount of $344,633.

IV. JURISDICTION AND VENUE

(a) Jurisdiction is conferred upon this Court by Title 26,

U.S.C. section 6226(b) and Title 28, U.S.C. section 1346(e).

(b) Venue is proper pursuant to Title 28, U.S.C. section

1402(c).

filing this Petition in the United States District Court for

the Southern District of Texas, Laredo Division, and the

Court of Federal Claims. Pursuant to section 6226(b)(3), the

Petition filed in this Court takes priority over the

petitions to be filed in the United States District Court

for the Southern District of Texas, Laredo Division, and the

Court of Federal Claims.

(d) For jurisdiction purposes, Petitioners have complied with

Section 6226(e) of the Code by depositing $4,082,835

($214,933 for the tax year 1991, $662,352 for the tax year

1992, $763,338 for the tax year 1993, and $2,442,212 for the

tax year 1994) with the Commissioner, representing the

amount by the which the Petitioners' federal income tax

liability would be increased if the treatment of the

partnership items on the Petitioners' tax returns for the

tax years 1991, 1992, 1993, and 1994 were made consistent

with the treatment of partnership items on the Partnership's

tax return for the tax years 1991, 1992, 1993, and 1994, as

adjusted by the final partnership administrative adjustments

determined by the Commissioner in the FPAA. A copy of the

letter and the check sent to the IRS representing this

deposit is attached hereto as Exhibit "B."

V. BACKGROUND OF LEASEHOLD TRANSACTIONS

(a) Bancor is a personal property leasing and investment

subsidiary of International Bank of Commerce. International

Bank of Commerce is the lead bank of International

Bancshares Corporation, which is a financial holding company

with four banking subsidiaries providing commercial and

retail banking services in South and Southeast Texas. Most

of International Bank of Commerce's lending activities

involve commercial (domestic and foreign), consumer and real

estate mortgage financing. In 1988, IBC sought to diversify

its lending activities and supplement its investment

activities by pursuing various leasing and leasehold

position transactions.

(b) IBC, through its subsidiary Bancor, invests in leasing

transactions as part of its diversified investment program.

In 1988, IBC began a program of investment in various lease

transactions with the acquisition of computer equipment and

related leases. In 1991, IBC, through its subsidiary Bancor,

entered into the transactions described below, which

transactions are the subject of the FPAA. Subsequently,

Bancor continued its program of investment in lease

transactions which included: the acquisition of various

partnership interests in 1992 and 1993; the acquisition of

beneficial ownership interests in various aircraft in 1993,

1997, and 1998; and, the acquisition of an ownership

interest in a truck leasing transaction in 1995. In 1999,

IBC formed a wholly owned subsidiary, IBC Aircraft Services,

Inc., a Texas corporation, to acquire a 20% equity in

interest in Aircraft Finance Trust, a special purpose

Delaware business trust established to purchase and own a

portfolio of aircraft assets and related leases.

opportunity to acquire a beneficial ownership interest in a

Boeing 737-200 Advanced Aircraft (the "Aircraft Interest")

on lease to Southwest Airlines for a cash investment of

$1,950,000. The acquisition of the Aircraft Interest was

coupled with the acquisition of the interest in the

Partnership. In other words, Bancor could not pursue the

acquisition of the Aircraft Interest without acquiring the

Interest in the Partnership. The interest in the

Partnership, which engaged in computer leasing transactions,

is the subject of this litigation.

(d) Bancor acquired the Aircraft Interest in order to make a

pre-tax profit.

(e) Bancor acquired the Aircraft Interest in an arm's length

transactions with unrelated persons.

(f) Bancor conducted extensive due diligence concerning the

Aircraft Interest and the anticipated economic return before

acquiring the Aircraft Interest.

(g) The aircraft transaction had economic substance, was not

pre-arranged and predetermined, had legitimate business

purposes, was not a sham and had significant profit motive.

(h) On or about July 31, 1991 and prior to Bancor acquiring the

Aircraft Interest, International Bank of Commerce requested

and received a tax opinion from the law firm of Grossman and

Flask, P.C., located in Washington, D.C., regarding the

federal income tax consequences to the Petitioners resulting

from the ownership of the Aircraft Interest. IBC and Bancor,

on reliance of the tax opinion, decided to acquire the

Aircraft Interest, knowing that Bancor must also acquire an

interest in the Partnership.

(i) On or about July 31, 1991 and prior to Bancor acquiring the

Aircraft Interest, International Bank of Commerce also

requested and received a tax opinion from the accounting

firm of KPMG Peat Marwick, located in Vienna, Virginia,

regarding the federal income tax consequences to the

Petitioners resulting from the ownership of the Aircraft

Interest. IBC and Bancor, on reliance of the tax opinion,

decided to acquire the Aircraft Interest knowing that Bancor

must also acquire an interest in the Partnership.

VI. COMPUTER LEASEHOLD TRANSACTIONS

(a) PURPOSES OF PARTNERSHIP'S LEASEHOLD TRANSACTIONS.

(1) The Partnership entered into computer leasehold

transactions in order to make a pre-tax profit.

(2) The Partnership acquired all of its interests in the

computer leasing equipment in arms' length transactions

with unrelated persons.

(3) The Partnership and its partners conducted extensive due

diligence concerning the equipment and the anticipated

economic return under the leases before entering into

the leasehold transactions that are the subject of the

FPAA.

(4) The Partnership leasehold activities had economic

substance, were not pre-arranged and predetermined, had

legitimate business purpose, were not a sham and had

significant profit motive.

(b) UNDERLYING TRANSACTIONS WITH ARCO OIL & GAS COMPANY AND THE

TIMKEN COMPANY.

(1) On or about December 27, 1990, the Neptune Group, Inc.,

a Delaware Corporation ("Neptune"), purchased certain

computer equipment manufactured by Cray Research, Inc.,

a Delaware corporation ("Cray"), from Cray (the "Cray

Equipment").

(2) At the time Neptune purchased the Cray Equipment, the

Cray Equipment was on lease to Arco Oil & Gas Company, a

division of Atlantic Richfield Company ("ARCO").

(3) Neptune financed a portion of the Cray Equipment

purchased by incurring debt (the "Cray Debt") secured by

the Cray Equipment and the lease to ARCO (The "ARCO

Lease"). Neptune also agreed to pay Cray certain fees

out of the residual value of the Cray Equipment (the

"Cray Fees").

(4) On or about March 29, 1990, Neptune purchased certain

computer equipment manufactured by International

Business Machines Corporation (the "IBM Equipment", and

together with the Cray Equipment, collectively, the

"Equipment").

(5) Neptune leased the IBM Equipment to the Timken Company,

an Ohio corporation ("Timken"), pursuant to a lease

agreement (the "Timken Lease" and together with the Arco

Lease, collectively the "User Lease"). Neptune financed

a portion of its purchase price for the IBM Equipment by

incurring debt secured by the IBM Equipment and the

Timken Lease (the "IBM Debt", and together with the Cray

Debt, collectively, the "Senior Debt").

(1) The Partnership, a Delaware limited partnership, was

formed on November 14, 1990. TransCapital Management

Associates Limited Partnership IV, a Delaware limited

partnership, and TransCapital Leasing Associated 1990-I,

L.P. ("TCLA"), a Delaware limited partnership, were the

1% General Partner and the 99% Limited Partner,

respectively.

(2) On or about August 1, 1991, the Partnership purchased

the Equipment from Neptune in a "wrap" transaction,

encumbered by the User Lease, Senior Debt, and Cray Fees

(collectively the "Senior Encumbrances").

(3) As part of the Partnership's purchase price for the

Equipment, the Partnership delivered to Neptune two

nonrecourse installment promissory notes (collectively

the "Partnership Note") secured by a subordinate lien in

favor of Neptune on the Equipment and Neptune Lease (the

"Neptune Lien") and agreed to pay Neptune (i) a deferred

lease acquisition fee (the "Neptune LAF"), payable out

of the residual value of the Equipment, and (11) a 15%

remarketing fee with respect to the Equipment payable

out of the remarketing proceeds (the "Neptune

Remarketing Fee," and together with the Neptune LAF,

collectively, the "Neptune Fee"), in return for Neptune

remarketing the Equipment through December 31, 1997.

(4) The purchase price paid by the Partnership to Neptune

for the Equipment was $9,165,606, comprised of equity in

the amount of $285,891 and the Partnership Note, in the

aggregate of $8,879,715. The aggregate amount of

Neptune's LAF the Partnership agreed to pay is

$2,122,333.

(5) Immediately after the Partnership purchased the

Equipment from Neptune, the Partnership leased the

Equipment back to Neptune (the "Neptune Lease").

(6) Under the Neptune Lease, Neptune was entitled to receive

100% of the revenues from the User Lease and any

subsequent renewals or release revenues through January

31, 1995 and was obligated to pay the Senior Debt.

(7) In connection with the Partnership's acquisition of the

Equipment, the Partnership obtained appraisals (the

"Appraisals") for the Equipment from a nationally

renowned qualified independent appraisal firm (the

"Appraiser"). The Appraiser opined that (i) the economic

useful life of the Equipment would continue for 10

years; (ii) the current fair market value of the

Equipment exceeded the purchase price (including

Neptune's LAF) paid by the Partnership to Neptune; and

(iii) the net rent due from the lessees under the User

Lease and Neptune Lease represents the fair market

rental value of the Equipment for terms of such leases.

The Appraisals projected that the residual value of the

Equipment during the period within which the Partnership

would share in sublease release revenues (after payment

of Neptune's Fee) would return to the Partnership the

full amount of its equity investment plus a substantial

return thereon.

(d) THE PARTNERSHIP'S SECOND WRAP TRANSACTION.

(1) On or about August 1, 1991 and subsequent to completing

the sale/leaseback arrangement with Neptune, the

Partnership entered into a second wrap transaction with

Mithril Corporation, a Texas corporation ("Mithril").

(2) The Partnership sold the Equipment to Mithril encumbered

by the (i) Senior Encumbrances, (ii) Neptune Lease,

(iii) Neptune Lien, and (iv) Neptune Fee.

(3) As part of its purchase price for the Equipment, Mithril

delivered to the Partnership two nonrecourse,

installment "wrap around" promissory notes (collectively

the "Mithril Note"), secured by a subordinate lien in

favor of the Partnership on the Equipment and the

Partnership Lease (the "Partnership Lien"). The

installments due under the Mithril Note and the fixed

rent due under the Partnership Lease are equal in timing

and amount.

(4) The sales price received by the Partnership from Mithril

for the Equipment was $11,740,606, comprised of equity

in the amount $285,891 and the Mithril Note, in the

aggregate amount of $11,454,715.

(5) In the same Appraisals for the first wrap transaction

with Neptune, the Appraiser opined that the fair market

value of the Equipment exceeded the sales price received

by the Partnership from Mithril for the Equipment.

(6) Immediately after the Partnership sold the Equipment to

Mithril, the Partnership leased the Equipment back from

Mithril for a lease through July 31, 1996 (the

"Partnership Lease").

(7) Under the Partnership Lease, the Partnership was

entitled to receive (i) 100% of the Neptune Lease rental

and was required to apply the Neptune Lease rentals to

the Partnership Note, (ii) 100% of any renewal or

release of revenue with respect to the Cray Equipment

after the expiration of the Neptune Lease until such

time as the Neptune LAF was paid in full, and (iii)

61.75% of the renewal or release revenues thereafter

with respect to the Cray Equipment and immediately after

the expiration of the Neptune Lease with respect to the

IBM Equipment, out of which the Partnership would be

required to pay the Neptune remarketing fee.

(8) In the same Appraisals for the first wrap transaction

with Neptune, the Appraiser opined that the net rent due

from Mithril under the Partnership Lease represented the

fair market rental value of the Equipment for terms of

such leases.

(9) On or about August 15, 1991, the Partnership sold its

rights to the Neptune Lease rentals to PSC Leasing

Corporation, a New York Corporation, in consideration

for the assumption of the Partnership Note and $25,000

in cash. As of August 15, 1991, the balance of the

Partnership Note was $8,790,378 (the balance of the Cray

Debt was $7,237,609 and the balance of the IBM Debt was

$1,552,769).

(10) At the time of the sale by the Partnership of the

Neptune Lease rentals, TCLA was the 99% limited partner

in the Partnership. In addition, at the time of the

sale, Equitable Leasing Autuchthon Association, a Nevada

limited partnership, and TransCapital Management

Associates Limited Partnership VII were 99% limited

partner and the 1% general partner, respectively of

TCLA. Ultimately, Equitable Leasing Autuchthon

Association was allocated 99% of the gain from the sale

as the 99% limited partner of TCLA and TransCapital

Management Associates Limited Partnership VII was

allocated 1% of the gain from the sale as the 1% general

partner of TCLA.

(e) BANCOR'S ACQUISITION OF THE 99% LIMITED PARTNER INTEREST IN

THE PARTNERSHIP FROM TCLA.

(1) Bancor acquired an interest in the Partnership for a

cash investment of $559,947. Prior to Bancor's

acquisition of an interest in the Partnership,

Petitioners' due diligence projected that its cash

investment of $559,947 would produce a cash on cash

return in the amount of $1,280,021.

(2) On or about August 30, 1991 and prior to Bancor

acquiring the 99% limited partner interest in the

Partnership from TCLA, IBC requested and received a tax

opinion from the law firm Grossman and Flask, P.C.,

located in Washington, D.C., regarding the federal

income tax consequences to the Petitioners resulting

from the leasing transactions of the Partnership. IBC

and Bancor, on reliance of the tax opinion, decided to

acquire the limited partner interest in the Partnership

from TCLA.

(3) On or about August 31, 1991 and prior to Bancor

acquiring the 99% limited partner interest in the

Partnership from TCLA, International Bank of Commerce

also requested and received a tax opinion from the

accounting firm KPMG Peat Marwick, located [in] Vienna,

Virginia, regarding the federal income tax consequences

to Petitioners resulting from the leasing transactions

of the Partnership. IBC and Bancor, on reliance of the

tax opinion, decided to acquire the limited partner

interest in the Partnership from TCLA.

(4) On or about August 31, 1991, TCLA assigned and

transferred 99% limited partner interest to Bancor in

exchange for 15 shares of voting common stock of Bancor

(the "Stock"). As part of the transfer, Bancor agreed to

assume all of the obligations of TCLA with respect to

the limited partnership interest, including funding the

capital contribution requirement.

(5) Concurrently with TCLA's assignment of the limited

partnership interest to Bancor, and as part of the same

transaction, IBC contributed $534,947 to Bancor in

exchange for 135 shares of the Stock.

(6) Both before and after such contributions and Stock

issuance, TCLA and IBC owned, respectively, 10% and 90%

of the total issued and outstanding Stock of Bancor

(with the respective Stock ownership of Bancor by TCLA

and IBC PRIOR to the contributions, being 50 and 450

shares, respectively).

(7) In May 1994, the leases were terminated pursuant to a

fair market value purchase option.

VII. THE 1991 TAX RETURNS

(a) On or about June 15, 1992 the Partnership timely filed a

United States Partnership Tax Return, Form 1065 for the

short taxable year ended August 31, 1991. For the August 31,

1991 tax year, the Partnership reported income of

$11,317,188 and deductions of $0. The income and deductions

flowed through to the respective partners, who at the time

were TransCapital Management Associates Limited Partnership

IV and TCLA.

(b) On or about June 15, 1992, the Partnership timely filed a

United States Partnership Tax Return, Form 1065 for the

short taxable year ended December 31, 1991. For the December

31, 1991 short tax year, the Partnership reported income of

$469,758 and deductions of $1,108,299. The income and

deductions flowed through to the respective partners, who at

the time were TransCapital Management Associates Limited

Partnership IV and Bancor.

consolidated United States Corporate Income Tax Return, Form

1120 for the taxable period ending December 31, 1991. For

the 1991 tax year, Petitioners reported consolidated taxable

income of $27,661,528 and paid total tax assessed of

$9,346,493. Petitioners reported income and deductions

allocated from the Partnership in the amount of $465,060 and

$1,097,216 respectively for Bancor's 99% interest in the

Partnership.

(d) The deductions claimed by the Petitioners for the 1991 tax

year in connection with the Partnership's leasehold

activities did otherwise meet the requirements for

deductibility under the Code.

VIII. THE 1992 TAX RETURNS

(a) On or about March 31, 1993, the Partnership timely filed a

United States Partnership Tax Return, Form 1065 for the

taxable year ended December 31, 1992. For the 1992 tax year,

the Partnership reported income of $1,357,124 and deductions

of $3,324,896. The income and deductions flowed through to

the respective partners, who at the time were TransCapital

Management Associates Limited Partnership IV and Bancor.

(b) On or about September 14, 1993, the Petitioners timely filed

a consolidated United States Corporate Income tax return,

Form 1120 for the taxable period ending December 31, 1992.

For the 1992 tax year, Petitioners reported consolidated

taxable income of $45,084,793 and paid total tax assessed of

$15,311,064. On or about December 19, 1994, Petitioners

filed an amended tax return for the 1992 tax year. Pursuant

to the amended return, Petitioners were entitled to a refund

in the amount of $193,411 of federal income tax paid.

Petitioners reported income and deductions allocated from

the Partnership in the amount of $1,343,553 and $3,291,647

respectively for Bancor's 99% interest in the Partnership.

tax year in connection with the Partnership's leasehold

activities did otherwise meet the requirements for

deductibility under the Code.

IX. THE 1993 TAX RETURNS

(a) On or about April 14, 1994, the Partnership timely filed a

United States Partnership Tax Return, Form 1065 for the

taxable year ended December 31, 1993. For the 1993 tax year,

the Partnership reported income of $1,121,901 and deductions

of $3,324,896. The income and deductions flowed through to

the respective partners, who at the time were TransCapital

Management Associates Limited Partnership IV and Bancor.

(b) On or about September 14, 1994, the Petitioners timely filed

a consolidated United States Corporate Income tax return,

Form 1120 for the taxable period ending December 31, 1993.

For the 1993 tax year, Petitioners reported consolidated

taxable income of $26,538,981 and paid total tax assessed of

$9,242,716. Petitioners reported income and deductions

allocated from the Partnership in the amount of $1,110,682

and $3,291,647 respectively for Bancor's 99% interest in the

Partnership.

year in connection with the Partnership's leasehold

activities did otherwise meet the requirements for

deductibility under the Code.

X. THE 1994 TAX RETURNS

(a) On or about March 6, 1995, the Partnership timely filed a

United States Partnership Tax Return, Form 1065 for the

short taxable year ended May 30, 1994. For the 1994 tax

year, the Partnership reported income of $344,633 and

deductions of $7,392,864. The income and deductions flowed

through to the respective partners, who at the time were

TransCapital Management Associates Limited Partnership IV

and Bancor.

(b) On or about September 13, 1995, the Petitioners timely filed

a consolidated United States Corporate Income tax return,

Form 1120 for the taxable period ending December 31, 1994.

For the 1994 tax year, Petitioners reported consolidated

taxable income of $45,687,949 and paid total tax assessed of

$15,936,157. Petitioners reported income and deductions

allocated from the Partnership in the amount of $341,186 and

$7,318,935 respectively for Bancor's 99% interest in the

Partnership.

year in connection with the Partnership's leasehold

activities did otherwise meet the requirements for

deductibility under the Code.

XI. RELATION OF PARTIES IN THE LEASEHOLD TRANSACTIONS

(a) International Bancshares Corporation, IBC Subsidiary

Corporation, International Bank of Commerce, and Bancor are

not considered under the Code as related parties of

Neptune, Mithril, PSC Leasing, Cray Research, IBM, ARCO or

Timken.

(b) The Partnership and TCLA are not considered under the Code

as related parties of Neptune, Mithril, PSC Leasing, Cray

Research, IBM, ARCO or Timken.

XII. COMMISSIONER'S ERRORS IN FPAA

(a) The Commissioner erred in adjusting Partnership items in the

FPAA in determining that the amounts of net income (loss)

form other rental activities and interest income are not

allowable to the Partnership because they emanate from

transactions that lack economic substance, were prearranged

and predetermined, and were without a legitimate business

purpose.

(b) The Commissioner erred in determining that the amount of net

income of $11,202,640 from other rental activities and

$114,548 of interest income reported by the Partnership for

the short taxable year ended August 31, 1991 are not

allowable because they emanate from transactions that lack

economic substance, were prearranged and predetermined, and

were without legitimate business purpose.

loss of $1,108,299 from other rental activities and $469,758

of interest income reported by the Partnership for the short

taxable year ended December 31, 1991 are not allowable

because they emanate from transactions that lack economic

substance, were prearranged and predetermine, and were

without legitimate business purpose.

(d) The Commissioner erred in determining that the amount of net

loss of $3,324,896 from other rental activities and

$1,357,124 of interest income reported by the Partnership

for the taxable year ended December 31, 1992 are not

allowable because they emanate from transactions that lack

economic substance, were prearranged and predetermine, and

were without legitimate business purpose.

(e) The Commissioner erred in determining that the amount of net

loss of $3,324,896 from other rental activities and

$1,121,901 of interest income reported by the Partnership

for the taxable year ended December 31, 1993 are not

allowable because they emanate from transactions that lack

economic substance, were prearranged and predetermine, and

were without legitimate business purpose.

(f) The Commissioner erred in determining that the amount of net

loss of $7,392,864 from other rental activities and $344,633

of interest income reported by the Partnership for the short

taxable year ended May 31, 1994 are not allowable because

they emanate from transactions that lack economic substance,

were prearranged and predetermine, and were without

legitimate business purpose.

(g) The Commissioner erred in alternatively determining that the

August 15, 1991 transaction in which the Partnership sold

its right to receive rental income from Neptune to PSC

Leasing was not in substance a sale. The Commissioner erred

in determining that the income the Partnership reported from

this transaction during its year ended August 31, 1991 is to

be spread over periods to which the rental income relates

rather than recognized in full in the tax year ended August

31, 1991.

(h) The Commissioner erred in alternatively determining that the

$11,518,795 of rental income reported by the Partnership in

its year ended August 31, 1991 tax return must be reported

by Bancor, and ultimately IBC, because the transactions that

produced the rental income were an interrelated series of

transactions designed to shift income to a tax neutral

entity while allowing Bancor, and ultimately IBC, the

related deductions.

XIII. PARTNERSHIP CORRECT TREATMENT OF LEASEHOLD TRANSACTIONS

(a) Partnership correctly computed and reported its total income

for the short taxable year ended August 31, 1991, and the

leasehold transactions for such year did not lack economic

substance, were not prearranged and predetermined, and had a

legitimate business purpose.

(b) Partnership correctly computed and reported its total income

for the short taxable year ended December 31, 1991, and the

leasehold transactions for such year did not lack economic

substance, were not prearranged and predetermined, and had a

legitimate business purpose.

for the taxable year ended December 31, 1992, and the

leasehold transactions for such year did not lack economic

substance, were not prearranged and predetermined, and had a

legitimate business purpose.

(d) Partnership correctly computed and reported its total income

for the taxable year ended December 31, 1993, and the

leasehold transactions for such year did not lack economic

substance, were not prearranged and predetermined, and had

a legitimate business purpose.

(e) Partnership correctly computed and reported its total income

for the short taxable year ended May 30, 1994, and the

leasehold transactions for such year did not lack economic

substance, were not prearranged and predetermined, and had a

legitimate business purpose.

(f) The Partnership's transaction on August 15, 1991 in which

the Partnership sold to PSC Leasing its right to receive

rental income from Neptune was in substance a sale. The

Partnership properly reported the income from this

transaction on its tax return Form 1065 for the Partnership

short tax year ended August 31, 1991.

XIV. PRAYER

Petitioners respectfully pray for judgment against Respondent and respectfully ask the Court to order the Respondent to reverse the adjustments in the FPAA, in the amount of: ($11,202,640) for income from other rental activities and ($114,548) of interest income for the tax year ended August 31, 1991; $1,108,299 for income from other rental activities and ($469,758) of interest income for the tax year ended December 31, 1991; $3,324,896 for income from other rental activities and ($1,357,124) of interest income for the tax year ended December 31, 1992; $3,324,896 for income from other rental activities and ($1,121,901) of interest income for the tax year ended December 31, 1993; and $7,392,864 for income from other rental activities and ($344,633) of interest income for the taxable year ended May 31, 1994. Petitioners also pray that the Court order Respondent to return the deposit in the amount of $4,082,835, which was deposited by Petitioners pursuant to section 6226(e) of the Code, with interest thereon to the Petitioners, and for such other relief as to which Petitioners may be entitled or such amounts as in law and in fact, are ultimately determined and for such other and further relief to which Petitioners may be entitled.

Respectfully submitted,

[signed]

By: William R. Cousins, III

State Bar No. 04901500

[signed]

By: M. Todd Welty

State Bar No. 00788642

MEADOWS, OWENS, COLLIER, REED

COUSINS & BLAU, L.L.P.

901 Main Street

Suite 3700

Dallas, Texas 75202

(214) 744-3700 Telephone

(214) 747-3732 Facsimile

[signed]

By: Matthew S. Parkin

State Bar No. 24002729

[signed]

By: William H. Lester, Jr.

State Bar No. 12239300

COX & SMITH INCORPORATED

112 East Pecan Street

Suite 1800

San Antonio, Texas 78205-1521

(210) 544-5500 Telephone

(210) 226-8395 Facsimile

ATTORNEYS FOR PETITIONERS

CERTIFICATE OF SERVICE

On this the 25th day of September 2001, a copy of the foregoing Petition was delivered to counsel listed below via the means indicated.

VIA CERTIFIED MAIL RETURN RECEIPT REQUESTED

Honorable John Ashcroft Attorney General of the United States Department of Justice 10th & Constitution Avenue, N.W. Washington, D.C. 20530

Steve Burgess Small Business-Self Employed Business Division Area Director Internal Revenue Service 4050 Alpha Road MS 1000 MSRO Dallas, Texas 75244

TransCapital Management Associates Limited Partnership IV Tax Matters Partner TransCapital Leasing Associates 1990-II Limited Partnership 11130 Sunrise Valley Dr., Suite 206 Reston, VA 20191

VIA: HAND DELIVERY

Robert Pittman, Esq. United States Attorney Western District of Texas 601 NW Loop 410 Suite 600 San Antonio, Texas 78216

[signed]

M. Todd Welty

DOCUMENT ATTRIBUTES

Case Name
TRANSCAPITAL LEASING ASSOCIATES 1990-II, L.P. INTERNATIONAL BANCSHARES CORPORATION, A TEXAS CORPORATION, AND ITS SUBSIDIARIES, INCLUDING IBC SUBSIDIARY CORPORATION, A DELAWARE CORPORATION, INTERNATIONAL BANK OF COMMERCE, A TEXAS BANKING CORPORATION, AND IBC FINANCIAL SERVICES, INC. (FORMERLY KNOWN AS BANCOR DEVELOPMENT COMPANY OF LAREDO), A TEXAS CORPORATION, A PARTNER OTHER THAN THE TAX MATTERS PARTNER, Petitioners, v. THE UNITED STATES OF AMERICA, Respondent
Court
United States District Court for the Western District of Texas
Docket
No. SA01CA0881EP
Authors
Cousins, William R., III
Welty, M. Todd
Parkin, Matthew S.
Lester, William H., Jr.
Institutional Authors
Meadows, Owens, Collier, Reed, Cousins & Blau LLP
Cox & Smith Inc.
Code Sections
Section 6226
Subject Area/Tax Topics
Consolidated returns
Partnership taxation
Index Terms
partnerships, adjustments, court review
Jurisdictions
United States
Language
English
Tax Analysts Document Number
Doc 2001-27330 (31 original pages)
Tax Analysts Electronic Citation
2001 TNT 218-45

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