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Corporations Dispute Adjustment of Partnership Items

SEP. 26, 2001

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

DATED SEP. 26, 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 Southern District of Texas
  • Docket
    No. 01-146
  • Authors
    Cousins, William R., III
    Welty, M. Todd
    Parkin, Matthew S.
    Lester, William H., Jr.
    Notzen, Marcel C.
  • Institutional Authors
    Meadows, Owens, Collier, Reed, Cousins & Blau, LLP
    Cox & Smith Inc.
    Alvarez & Notzen, LLP
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    partnerships, adjustments, court review
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2001-27868 (26 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 228-22

Transcapital Leasing Associates 1990-II, L.P. 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 in which the corporations had an interest, 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, 1991-1993; 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.

The corporations note that they filed a petition in this matter, raising the same issues in district court, and that they also intend to file a backup petition in the Court of Federal Claims. The corporations maintain that the petition filed in the district court takes priority over the instant petition as well as the backup petition filed in the Court of Federal Claims. The corporations further assert that the instant petition will take priority over the petition filed in the Court of Federal Claims.

 

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

 

IN THE UNITED STATES DISTRICT COURT

 

FOR THE SOUTHERN 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 Greg Serres, United States Attorney for the Southern District of Texas, P.O. Box 1179, Laredo, Texas 78042; 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 tax able 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 filed a petition in this matter in the United States District Court for the Western District of Texas, San Antonio Division, on September 25, 2001. In addition, Petitioners intend to file a backup petition in the Court of Federal Claims on September 27, 2001. Pursuant to section 6226(b)(3) of the Code, the Petition filed in the United States District Court for the Western District of Texas, San Antonio Division, takes priority over the petition filed in this Court and the backup Petition filed in the Court of Federal Claims. In addition, the petition filed in this Court will take priority over the petition to be filed in the Court of Federal Claims on September 27, 2001.

(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 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 [sic] 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 prearranged 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 least 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 1990-1, 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 (ii) 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 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 partner interest in the tax opinion, decided to acquire the limited 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

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

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 met 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 [sic] 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 predetermine, [sic] 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, [sic] 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, [sic] 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, [sic] 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, [sic] 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,

 

 

By: William R. Cousins, III

 

State Bar No. 04901500

 

 

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

 

 

By: Matthew S. Parkin

 

State Bar No. 24002729

 

 

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

 

 

By: Marcel C. Notzen, III

 

State Bar No. 15119001

 

 

ALVAREZ & NOTZEN, LLP

 

415 Shiloh

 

Laredo, Texas 78045

 

(956) 717-8880 Telephone

 

(956) 717-8877 Facsimile

 

 

ATTORNEYS FOR PETITIONERS

 

 

CERTIFICATE Of SERVICE

On this the 26th 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.

 

Washingcon, D.C. 20530

 

 

Steve Burgess

 

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

 

 

Greg Serres

 

United States Attorney

 

Southern District of Texas

 

P.O. Box 1179

 

Laredo, Texas 78042

 

 

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 Southern District of Texas
  • Docket
    No. 01-146
  • Authors
    Cousins, William R., III
    Welty, M. Todd
    Parkin, Matthew S.
    Lester, William H., Jr.
    Notzen, Marcel C.
  • Institutional Authors
    Meadows, Owens, Collier, Reed, Cousins & Blau, LLP
    Cox & Smith Inc.
    Alvarez & Notzen, LLP
  • Code Sections
  • Subject Area/Tax Topics
  • Index Terms
    partnerships, adjustments, court review
  • Jurisdictions
  • Language
    English
  • Tax Analysts Document Number
    Doc 2001-27868 (26 original pages)
  • Tax Analysts Electronic Citation
    2001 TNT 228-22
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