Corporations Dispute Adjustment of Partnership Items
Transcapital Leasing Associates 1990-II, L.P., et al. v. United States
- Case NameTRANSCAPITAL 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
- CourtUnited States District Court for the Western District of Texas
- DocketNo. SA01CA0881EP
- AuthorsCousins, William R., IIIWelty, M. ToddParkin, Matthew S.Lester, William H., Jr.
- Institutional AuthorsMeadows, Owens, Collier, Reed, Cousins & Blau LLPCox & Smith Inc.
- Code Sections
- Subject Area/Tax Topics
- Index Termspartnerships, adjustments, court review
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2001-27330 (31 original pages)
- Tax Analysts Electronic Citation2001 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.
(c) International Bank of Commerce, EIN 74-1541057, a Texas
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.
(c) For the short taxable year ended December 31, 1991, the
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).
(c) Petitioners intend to file backup petitions subsequent to
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.
(c) On or about May 1, 1991, IBC was presented with an
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").
(c) THE PARTNERSHIP'S ACQUISITION OF THE EQUIPMENT.
(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.
(c) On or about August 27, 1992, the Petitioners timely filed a
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.
(c) The deductions claimed by the Petitioners for the 1992
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.
(c) The deductions claimed by the Petitioners for the 1993 tax
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.
(c) The deductions claimed by the Petitioners for the 1994 tax
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.
(c) The Commissioner erred in determining that the amount of net
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.
(c) Partnership correctly computed and reported its total income
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
- Case NameTRANSCAPITAL 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
- CourtUnited States District Court for the Western District of Texas
- DocketNo. SA01CA0881EP
- AuthorsCousins, William R., IIIWelty, M. ToddParkin, Matthew S.Lester, William H., Jr.
- Institutional AuthorsMeadows, Owens, Collier, Reed, Cousins & Blau LLPCox & Smith Inc.
- Code Sections
- Subject Area/Tax Topics
- Index Termspartnerships, adjustments, court review
- Jurisdictions
- LanguageEnglish
- Tax Analysts Document NumberDoc 2001-27330 (31 original pages)
- Tax Analysts Electronic Citation2001 TNT 218-45