Home   Federal Cases   State Cases   News   Search   Cart   Log In 
 
Search 591,343 Cases and Articles on TJV!
 
Federal Case Categories







Broz v Commissioner of Internal Revenue

Case No. 21629-06 (U.S. Tax Ct., Sep. 1, 2011)

Ps were shareholders in a wholly owned S corporation (S) engaged in providing wireless cellular service. S acquired wireless cellular licenses from the FCC and built networks to service the license areas. S never operated any on-air networks. Instead, P formed related holding companies to hold title to the licenses and equipment. Many issues raised questions of first impression because transactions were structured in this ever-changing technology industry. Our holdings on these issues include:

1. Held: Ps were not sufficiently at risk for sec. 465, I.R.C., purposes when stock of a related corporation was pledged.

2. Held, further, the mere grant of a license by the FCC is not sufficient for an activity to qualify as an active trade or business under sec. 197, I.R.C.

Respondent determined over $16 million of deficiencies1 in petitioners’ Federal income tax for 1996, 1998, 1999, 2000 and 2001 (years at issue). Respondent also determined that petitioners were liable for accuracy-related penalties of $563,042 for 1998, $386,489 for 1999, and $591,213 for 2000.

After concessions, we are asked to decide several issues, many of which present questions of first impression as they relate to the ever-evolving cellular phone industry. We must first decide a procedural issue, whether respondent is bound by equitable estoppel to a settlement offer made and subsequently withdrawn by respondent’s Appeals Office before the deficiency notice was issued. We find that respondent is not bound by the settlement offer. Second, we must decide whether petitioners properly allocated $2.5 million of the $7.2 million purchase price to depreciable equipment when the allocation in the purchase agreement remained unchanged despite a 2-year delay in closing the transaction. We find that petitioners’ allocation was improper. Third, we must determine whether petitioners had sufficient debt basis under section 1366 in stock of Alpine PCS, Inc. (Alpine), an S corporation, to claim flowthrough losses. We find that petitioners had insufficient debt basis, and therefore cannot claim the flowthrough losses. Fourth, we must determine whether petitioners were at risk under section 465 and can therefore claim flowthrough losses from Alpine and related holding companies. We must decide whether petitioners’ pledge of stock in a related S corporation is excluded from the at-risk amount because it was “property used in the business.” This issue presents a question of first impression. We find that petitioners were not sufficiently at risk and therefore cannot claim the flowthrough losses because the stock they pledged was related to the business. Fifth, we must decide whether Alpine and Alpine PCS-Operating, LLC (Alpine Operating), an equipment holding company, were engaged in an active trade or business permitting them to deduct business expenses. We find that neither entity was engaged in an active trade or business and therefore may not deduct the expenses. Finally, we must decide whether the related license holding companies are entitled to amortization deductions for cellular licenses from the FCC upon the grant of the license or upon commencement of an active trade or business. This issue presents a question of first impression. We hold that they are not entitled to any amortization deductions upon the license grant because they were not engaged in an active trade or business during the years at issue.
 

 

Judge(s): Diane Kroupa
Jurisdiction: U.S. Tax Court
Related Categories: Business Organizations , Communications , Shareholder , Technology
 
Circuit Court Judge(s)
Diane Kroupa

 
Petitioner Lawyer(s) Petitioner Law Firm(s)
Stephen Feldman
Eric Weiss

 
Respondent Lawyer(s) Respondent Law Firm(s)
Steven Cappellino Internal Revenue Service
Elizabeth Edberg Internal Revenue Service
Meso T. Hammoud Internal Revenue Service

 

CUSTOM EMAIL ALERTS!

With your FREE registration, you can select an unlimited number of Alert categories for daily, weekly or monthly deliveries of the Federal and State Cases most relevant
to you!

Click Here to sign up.

 



Click the maroon box above for a formatted PDF of the decision.
cellular equipment. when motorola constructed and installed the going concern and has performed the activities for which it was 1992). affirmative misconduct is more than mere negligence. id. respondent is bound to an oral settlement offer made and "notes payable" on the general ledgers. rfb, alpine and the (code) in effect for the years in issue, and all rule references - 11 - commissioner. rohn v. commissioner, supra; see also urbano v. licenses. petitioners formed various entities (the alpine determine the extent of that requirement. we begin with the statute is interpreted, the entire statute must be considered. corporation (pebbles), a wholly owned subsidiary of cis, through moreover, even if the rfb stock is unrelated to the cellular beginning in 1999, the advances from rfb were reclassified respondent issued petitioners the deficiency notice for the therefore may not deduct the expenses. finally, we must decide and alpine pcs-operating, llc (alpine operating), an equipment service to rfb's analog network areas. rfb then allocated income taxpayer must also prove the traditional three elements of it requires an affirmative act by the government to either petitioner participated in approximately 400 lotteries for at the time of acquisition. weis v. commissioner, 94 t.c. 473, at-risk purposes because the stock represents an ownership section 197 is "in connection with the conduct of a trade or in section 212, the first day of the month in which * * * respondent determined that alpine was not entitled to respondent determined a $100,003 deficiency for 1996, a fcc licenses in rsa lotteries and to construct and operate promissory notes were executed between petitioner and rfb, mackinac's original purchase of the michigan 2 equipment for $1.6 offer. petitioners have not established what rights, if any, they on behalf of the taxpayer and that the taxpayer was the actual phone business, petitioners were not economically or actually at 1996, $613,673 in 2000 and $342,455 in 2001. rfb made federal cook). petitioners, rfb and the alpine license holding entities fresno c, llc. property to determine their respective costs. the cost of the notes on his individual returns. to alpine, alpine operating and the alpine license holding the grant of the license or upon commencement of an active trade percent of the population in any license areas within five years u.s. 26, 36 (1998); huffman v. commissioner, 978 f.2d 1139, 1145 petitioners construct and operate networks to service the new license areas. debt. the activities for which the trade or business was formed are intangibles include "any license, permit or other right granted by 468 (1975); hitchins v. commissioner, 103 t.c. 711, 718 & n.8 never personally guaranteed or were otherwise personally liable on specific trade or business requirement because the phrase "trade depreciation, startup and certain other business expenses included in the at-risk amount. sec. 465(b)(2)(b). the taxpayer and alpine bid on licenses for areas in michigan where rfb was petitioners further argue that the $2.5 million allocation to any additions or improvements to explain why the allocation amount for the years at issue. respondent also determined that afford to pay the entire outstanding liability rather than on the expenses for an "active trade or business", sec. 195. the wife was involved in marketing. affecting corporate assets. according to petitioners, stock is journal entries and other documents. the loan ran from rfb to the expenses. we find therefore that they are ineligible to amortize bona fide indebtedness between petitioners and alpine. 10 in a material sense after the transaction. putnam v. approved by officer dolce's supervisor. he withdrew the offer, party lender in a back-to-back loan arrangement. underwood v. commissioner, supra; culnen v. commissioner, supra. the term rfb made $241,500 of cash distributions to petitioner in on account of advancing cellular technology. in fact, some of the basis when he or she incurs a "cost" on a loan or is left poorer made. moreover, petitioners signed the promissory notes on behalf of rfb and his brother, james broz, served as cfo. petitioner only $1.6 million when rfb purchased it in 1996. see estate of a corporation and the pledge of stock of the related corporation (...continued) under examination. they discussed the need for a written closing agreement with mr. in petitioners' federal income tax for 1996, 1998, license and equipment were transferred to pebbles cellular technology. several issues raise questions of first impression. 9 million for the equipment in 1994. rfb arranged to purchase the issue presents a question of first impression. we find that iii. the cobank loans entities. related to the business. fifth, we must decide whether alpine amortize and deduct the beginning expenses as startup expenses. to reflect the foregoing, rfb also used some of alpine's digital licenses to provide digital providing analog cellular service during the years at issue. rfb irs are enforceable only if they comply with the procedures. general rule. they argue that the plain meaning of the statute the alpine license holding entities were alpine-california expansion. the lenders required, however, that rfb form a new company, for approximately seven or eight years in the 1980s. is not necessarily determinative, however, if it fails to reflect claim they advanced the cobank loan proceeds to the alpine - 35 - deductions for the beginning expenses. we begin with the general informed petitioners that he needed his manager's approval before remaining one percent. was unreasonable. petitioners knew that the settlement offer was alpine to claim flowthrough losses during the years at issue. already providing analog service. the fcc financed the purchase service. s acquired wireless cellular licenses from and then from the taxpayer to the s corporation (back-to-back petitioners from being at risk for any pledge of property used in p formed related holding companies to hold title to the cir. 1991) (quoting diamond v. commissioner, 930 f.2d 372 (4th officer dolce's oral settlement offer is therefore not legally apply equitable estoppel. we address the parties' arguments in moreover, even though officer dolce failed to notify petitioners active trade or business. the alpine license holding entities a bargained-for amount. see sleiman v. commissioner, 187 f.3d have not established that they lent, rather than advanced, the of first impression because transactions were business entities rfb would form to hold title only to the dorchester indus. inc. v. commissioner, 108 t.c. 320, 330 (1997) rfb refinanced the cobank loan several times. petitioner counsel, mr. cook, within two weeks that the offer was withdrawn. entities are entitled to deductions for the beginning expenses in the legislative history of section 197 that congress intended commissioner, 122 t.c. 384, 393 (2004). negotiations with the u.s. 500 (1974). they argue that both sections 174 and 197 conduct of a trade or business or in an activity described misconduct on respondent's part. they argue that officer dolce's docket no. 21629-06. filed september 1, 2011. depreciable and nondepreciable property is purchased for a lump the conduct of a trade or business. sec. 197(c)(1). such taxpayers acquiring intangible assets with a deduction similar to otherwise indicated. or business has begun. they argue that the statute lacks a the parties disagree whether the rfb stock petitioners sufficient debt basis to claim flowthrough losses during the years in a trade or business. see sec. 167(a). there is no indication petitioners' equitable estoppel argument fails for several we earlier issued an opinion, broz v. commissioner, 137 t.c. entities during the years at issue. rfb used cobank loan the trade or business requirement in sec. 197. the regulations permitting them to deduct business expenses. we find that well established. see dormer v. commissioner, t.c. memo. 2004- - 10 - petitioner organized rfb cellular, inc. (rfb), an s agreement petitioners had reviewed, but officer dolce did not costs they incurred and the vendor financing they received. they actual economic outlay for debt basis to arise. kerzner v. is a related party and if repayment of the funds is uncertain. the court of appeals for the sixth circuit, to which this decision will be entered demographics similar to those of rfb's existing network areas, a shareholder who makes a loan to an s corporation generally statements for the years at issue that it would not demand see, e.g., lexecon inc. v. milberg bershad hynes & lerach, 523 v. business and startup expenses an active trade or business under sec. 197, i.r.c. the statute requires that there be a trade or business for networks were operated by rfb rather than alpine. rfb used respect to the promissory notes. petitioner nevertheless that petitioners were liable for accuracy-related penalties of evidence that the alpine entities were indebted to petitioner whether petitioners were at risk under section 4653 interest on the purported loans. rfb indicated in financial the fcc is not sufficient for an activity to qualify as amortizable over a fixed 15-year period. sec. 197(a). alpine entities and the alpine license holding entities. we must first decide a procedural issue of whether 4 allocation amount remained unchanged between the 1994 and 1996 sec. 465, i.r.c., purposes when stock of a related enforceable. equipment, petitioner began operating the network and used the payments rfb made on petitioners' behalf. executed between petitioner and alpine, and between petitioner exceeded the scope of his settlement authority. his authority equipment. approximately $909,000 of the purchase price was business. richmond television corp. v. united states, 345 f.2d personal assets is insufficient to create basis until and unless sec. 465(a); follender v. commissioner, 89 t.c. 943 (1987). the and can disagree. as those in the 1994 agreement. both purchase agreements taxpayer. see heckler v. community health servs., 467 u.s. 51, 59 funds. accordingly, we find that the alpine entities were not was added to the outstanding loan balances. no payments were ever with a business that is being conducted. we find, therefore, that because it was not engaged in an active trade or business during financed by indebtedness" because rfb borrowed the funds from determined that rfb was not an "incorporated pocketbook" for payable to the fcc for the balance of the purchase prices. alpine a. the organization of rfb we now turn to alpine operating. alpine operating was formed 167; rohn v. commissioner, t.c. memo. 1994-244. the procedures b. the michigan 2 acquisition 144. the phrase "trade or business" appears five times in section congress enacted section 197 to resolve some of the entities. additionally, petitioners were not economically at to change depreciation principles established in section 167 to for closing agreements and compromises are set forth in section petitioner alpine. petitioner wholly owned alpine operating, a disregarded petitioners were not sufficiently at risk and therefore cannot a. business expenses license grant regardless of whether any business had begun. rfb acquired both depreciable and nondepreciable property claimed interest and automobile depreciation deductions for 1999 b. direct loan from rfb have not provided sufficient evidence of the equipment's value. or business. this issue presents a question of first impression. inc. v. united states, 374 f.3d 424, 427 (6th cir. 2004). the expenses incurred before actual business operations commence and ever personally liable on the purported loans to the alpine estoppel. see united states v. guy, 978 f.2d 934, 937 (6th cir. the cobank loan. see id. petitioners signed the promissory notes act to his or her detriment. hofstetter v. commissioner, 98 t.c. proceeds to expand its existing business through alpine and the that no property shall be taken into account as security for only to property acquired after jan. 25, 2000. nevertheless, the before the enactment of section 197. sec. 1.167(a)-3, income tax cobank. petitioners' pledge of rfb stock therefore cannot be failure to personally notify them for 40 days that the offer was in petitioners' basis in their alpine entities. a pledge of interest in the business that can be sold or transferred without deductions for the licenses were disallowed because they were not supra at 859. the promissory notes, therefore, do not establish - 31 - pledged his rfb stock as additional security but he never petitioners were not at risk with respect to their investments in or years. form 906, closing agreement on final determination operated the new networks. evolving cellular phone industry with rapidly changing i. rfb cellular, inc. (rfb) the negotiations. pebbles did not change or improve the section 197 contains an active trade or business requirement depreciable assets is proper. they first argue it is proper regs. form 866, agreement as to final determination of tax tax returns. no promissory notes were issued for the tax investments. alpine investments assumed the promissory notes alpine on petitioners' behalf. we have found that direct payments cir. 1992). cir. 1999); estate of leavitt v. commissioner, 875 f.2d 420, 422 petitioners sought to expand rfb's existing cellular held a 99-percent interest in alpine and his brother held the existing cellular business and are therefore entitled to the - 20 - we are asked to resolve the tax consequences of the ever of tax cases is governed by general principles of contract law. finalized. recharacterized as loans only through yearend reclassifying (9th cir. 1992), affg. in part and revg. in part t.c. memo. 1991- therefore claim flowthrough losses from alpine and related intentionally or recklessly mislead the taxpayer. mich. express, expenses. compromises) and the regulations thereunder. see secs. 7121 and withdrawn constituted "affirmatively reckless conduct." we section 197 imposes a trade or business requirement, we must also other alpine entities made yearend adjusting entries entities. alpine allocated some of the funds to other alpine an allocation in a purchase agreement we now turn to basis in alpine. we must determine whether alpine entities, and petitioners served as a mere conduit for the passive trade or business is required for deductibility of we find that officer dolce's actions do not rise to the level of contributed the michigan 4 license and received in exchange 100 settlement offer is enforceable, notwithstanding the lack of a i. the settlement offer closing the transaction. we find that petitioners' allocation commissioner, t.c. memo. 2009-76. when the taxpayer claims debt to them regarding the settlement offer. officer dolce made a - 38 - from the licenses back to alpine. the rfb stock is related to the stock in a related s corporation is excluded from the at-risk related entities. cobank specifically acknowledged that rfb - 29 - petitioners have not established the elements necessary for us to 13 shareholder in an s corporation is entitled to deduct losses the s petitioners accepted the settlement offer. officer dolce moreover, petitioners have not shown that they incurred a or business" does not appear in subsection (a), which provides the and rfb. alpine investments executed promissory notes with the petitioners substituted themselves for alpine investments, taxpayer's liability. the parties never put the sum certain affirmative misconduct. were formed for the sole purpose of serving alpine's business and 3 license. alpine continued to make payments on the fcc debt even us to enforce the settlement offer. equitable estoppel is a we are asked to decide several issues, moreover, the payments petitioners made to alpine from the research and development costs under section 174 ("in connection estoppel. these three traditional elements include (1) a moreover, petitioners have not established that the michigan 4 f, llc, alpine michigan f, llc, alpine hyannis f, llc and alpine entities because of the unique way the transactions were begins business for purposes of deducting beginning expenses and definition in the at-risk rules involving whether the reported no income and did not claim any depreciation deductions alpine and the license holding entities ceased all business business. sec. 162(a). the taxpayer is not entitled to deduct uncertainty, however, over what constituted an amortizable petitioners that the offer was withdrawn. he also explained to percent of rfb's issued and outstanding stock. petitioner did rfb received between $4 and $4.2 million in vendor financing then transferred the licenses to various single-member limited for amortization of the fcc license under section 197. petitioners alternatively argue that they are entitled to 7121 (relating to closing agreements), section 7122 (relating to inc. (alpine), an s corporation, to claim flowthrough losses. we conceded attributable to the bankruptcy proceeding. in person for 40 days, officer dolce notified petitioners' properly allocated $2.5 million of the $7.2 million purchase however, to consider the entire phrase. the entire phrase in 1996 purchase agreements.9 weaver v. commissioner, t.c. memo. 2004-108. in contrast, only a rules for deducting business expenses. regarding the settlement offer. trade or business and is not entitled to deduct any beginning - 30 - memo. 2001-280; culnen v. commissioner, t.c. memo. 2000-139, revd. that the alpine license holding entities were not engaged in an becoming involved with the cellular phone industry. he was 901, 907 (4th cir. 1965). the taxpayer is not engaged in any property used in a trade or business, sec. 167, and startup - 4 - the loan to the s corporation with money borrowed from a third- furthermore, the flush language of sec. 465(b)(2) provides the licenses to alpine or the alpine license holding entities.13 michigan 2 equipment became obsolete between 1994 and 1996 and had entities) to further this expansion. alpine. we find that petitioners had insufficient debt basis in 1102 (8th cir. 1999), affg. t.c. memo. 1997-474. brother owned the remaining one percent. each alpine license cappellino, for respondent. we now focus on whether petitioners were at risk with respect - 6 - 1 depended on alpine for revenue. we therefore find, by extension, the law for administrative, or pre-petition, settlement offers is - 2 - did not report income during any of the other years at issue. regs., 44 fed. reg. 32244 (june 5, 1979). business to claim amortization deductions. if we determine that ___ (2011), in which we found for respondent as to the class life incorporated pocketbook. 15 years and that the schedule m-1 adjustment should be section 197 requires that the taxpayer be engaged in a trade or petitioner formed alpine investments, llc (alpine 312. alpine's licenses to provide digital service in geographic areas reclassifying the advances as loans from a shareholder. alpine government's representations and suffered a detriment because of lender to the s corporation. ruckriegel v. commissioner, t.c. holding companies. we must decide whether petitioners' pledge of adjustments to the transaction. nevertheless, the purchase price 197. an intangible is not amortizable under the general rule of alpine bid on licenses for geographic areas with structured. we must decide for the first time whether stock in a cost with respect to the loan or were otherwise left poorer in a entities acquired licenses and related equipment to expand rfb's officer thomas dolce (officer dolce) was assigned to petitioners' parties again undertook a series of negotiations and made some vehicles. business, sec. 162, depreciation expenses for tangible personal taxpayer must be carrying on or engaged in a trade or business at business" if it is to be included in the taxpayer's at-risk that finally determines one or more separate items affecting the million be allocated to the equipment. incorporate the stipulation of facts and the accompanying petitioners contend that they suffered actual economic related entity as an "incorporated pocketbook." see yates v. the fcc and built networks to service the license no alpine license holding entities met the fcc's build out period of ten years from the date of the grant. rfb and petitioners contend that section 197 lacks a specific trade we now must decide whether alpine and alpine operating were - 9 - initial downpayment. settlement offer because he determined petitioners could not those years. respondent also determined that alpine operating years at issue. rfb operated the only on-air networks. rfb used fact. id. petitioners have not established that rfb habitually do not require respondent to be bound by the sum certain - 36 - a disregarded entity they wholly owned, beginning in 1999. loans to rfb from its inception through 2001. petitioner was ceo office expenses, telephone and utilities, rent, insurance, and lawsuit petitioner's former employer, cis, filed against robert broz (petitioner) began his career as a banker before the only income alpine reported was income that rfb had allocated $2.5 million of the $7.2 million purchase price to the dues and subscriptions. circumstances. commissioner v. groetzinger, 480 u.s. 23, 36 7122; secs. 301.7121-1, 301.7122-1, proced. & admin. regs. these determined that the alpine license holding entities amortization merits of the case. officer dolce decided to withdraw the assets". subsequently withdrawn by respondent's appeals office before the property cannot be amortized if the trade or business or activity 12 increase his bases in the alpine entities. additionally, cobank commissioner, supra at 859. furthermore, rfb indicated in its have the same meaning. petitioners' interpretation fails, loss with respect to the pledge of stock when the banks obtained ignore petitioners' participation in the advances from rfb to revd. 794 f.2d 1157 (6th cir. 1986). whether the taxpayer is trade or business requirement. for example, taxpayers are allowed alpine deducted interest on debt owed to the fcc. alpine also our holdings on these issues include: focused on developing cellular networks in major statistical the parties needed to draft a closing agreement to finalize the trade or business during the years at issue. robert and kimberly broz, petitioners v. v. commissioner, 810 f.2d 209, 218 (d.c. cir. 1987), affg. 76 t.c. supra at 558; bergman v. united states, 174 f.3d 928, 930 n.6 (8th entitled to any deductions for beginning expenses. a. basis to s corporation shareholder many of which present questions of first impression as they settlement offer is enforceable because it was not memorialized reasons. first and foremost, we find that petitioners failed to notice was issued. we find that respondent is not bound by the are moot, irrelevant, or without merit. purpose behind section 197. section 197 was enacted to provide the other deductions were for expenses such as salaries, - 26 - petitioners. cf. yates v. commissioner, t.c. memo. 2001-280; amortization should begin. their dispute is based on their we have considered all arguments made in reaching our acquired a second license, the michigan 2 license, which serviced filed for bankruptcy protection in 2003. petitioners' bankruptcy investments), a single-member limited liability company, to serve transfer of funds was in substance a loan from the related entity approved the offer. they argue alternatively that respondent no changes to petitioners' tax liabilities for the years at issue also contend that their pledge of rfb stock as collateral for the 456 f.3d 645 (6th cir. 2006). petitioners have not shown that petitioners contend that the $2.5 million allocation to to encourage development of cellular networks in rural areas. the the s corporation and, because of the limited liability accorded alpine for revenue. we have already determined that petitioners nationwide. additionally, petitioners have failed to prove the on behalf of all the entities, making it unlikely that any of the taken into account to determine whether petitioners were at risk. officer dolce orally informed petitioners that he had business during the years at issue. we therefore find, by loans), the taxpayer must prove that the related entity was acting after the licenses were transferred to the alpine license holding failed to establish that alpine was engaged in an active trade or upon the license grant because they were not engaged in an active petitioners failed to establish here that alpine was engaged in an was settled after the years at issue, however, and is therefore affd. without published opinion 208, f.3d 205 (3d cir. 2000). directly indebted to petitioners. imposed by section 197 is similar to the less stringent we therefore will apply the step transaction doctrine and the alpine entities also guaranteed the loan. permits them to begin amortizing the licenses in the month of the submitted on one of two special forms the commissioner we have already determined that alpine was not engaged in an time the payments were made. petitioners also argue that they moreover, regulations have been promulgated that reinforce - 33 - liability company, to hold the digital equipment and lease it to alpine. respondent contends that the payments did not create moreover, to interpret section 197 as allowing amortization payable." some of the advances to alpine were allocated to other depreciable property is used to determine the amount of the determine whether they were engaged in a trade or business during areas of michigan, not close to each other. the eastern upper michigan peninsula. most of rfb's revenue came - 32 - president of cellular information systems (cis), a cellular only if they attach a statement to the return for the taxable year memo. 2006-78. if the taxpayer is a mere conduit and if the considerable period of time spent money in preparing to enter that to alpine pcs."8 price to depreciable equipment when the allocation in the practice of having his wholly owned corporation pay money to third the only income any of the alpine license holding entities bennett paper corp. & subs. v. commissioner, 78 t.c. 458, 463-465 concedes that petitioners are entitled to recapture for 1998 purchase agreement remained unchanged despite a 2-year delay in - 22 - intangible property used in a trade or business or held for the cir. 1991)), revg. 91 t.c. 733 (1988). allocated to costs incurred by pebbles between 1994 and 1996. turn. deductions for the licenses. adjusted basis in his or her stock and the shareholder's adjusted purchase agreements. petitioners have not shown that they made to acquire the michigan 2 license and related equipment in 1994 liability, is a type of closing agreement that is to be a final make services available to at least 25 percent of the population when it paid $7.2 million to acquire the cellular phone equipment not at risk for the borrowed amounts. see oren v. commissioner, under rule 155. determination of a taxpayer's liability for a past taxable year performed. johnsen v. commissioner, 83 t.c. 103, 114 (1984), - 39 - we find that petitioners' pledge of rfb stock did not put and license from pebbles, the seller. when a combination of $3,548,365 of losses alpine claimed in earlier years. case is appealable, requires a litigant to establish affirmative equipment during these two intervening years. pebbles sold the iii. basis limitations on flowthrough losses we now turn to the economic outlay requirement. petitioners he has made a firm decision to enter into business and over a - 28 - for a california office, furniture, fixtures, computers and advances made to petitioners. petitioners contend that petitioner was the obligor of last resort 1352, 1361 (11th cir. 1999), affg. t.c. memo. 1997-530. rsas across the country. he won and purchased an rsa license for is not at risk, however, for any pledge of property used in the license and equipment by issuing promissory notes and assuming we turn to the language of section 197. it is a central corporation sustained. a shareholder of an s corporation can representations if those representations induced the taxpayer to l. 103-66, sec. 13261, 107 stat. 532. estimated the value of the michigan 4 equipment using only the shareholder bears the burden of establishing his or her basis. liability companies (collectively, the license holding companies) 209 (1981); kronish v. commissioner, 90 t.c. 684, 695 (1988). - 25 - 2. held, further, the mere grant of a license by ii. the alpine entities ii. valuation of the michigan 2 acquisition actively carrying on a trade or business depends on the facts and undistributed after-tax profits for advances to the alpine alpine successfully bid on 12 licenses during the years at sign it. the parties did not enter into any written agreement alone capacity and not in conjunction with other entities. see build out requirement to make service available to at least 25 northern michigan (the michigan 4 license) in 1991. (1987). a taxpayer is not engaged in a trade or business even if petitioner formed alpine operating, a single-member limited affg. t.c. memo. 2000-355; parrish v. commissioner, 168 f.3d 1098, begins upon the grant of the license from the fcc or when 1990s. most large cellular service providers, like cis, were cobank was the main commercial lender to rfb and the alpine exhibits by this reference. petitioners resided in gaylord, business." (emphasis added.) the inclusion of the word "conduct" intangible is defined as an intangible that is held "in connection upon acquisition. we must decide for the first time whether limited and reasonably determinable. id. there was some allocated to alpine from rfb's use of alpine's licenses. alpine begin amortizing the fcc licenses upon grant even though no trade settlement offer. second, we must decide whether petitioners petitioner for usurpation of a corporate opportunity. the 482-483 (1990); randolph bldg. corp. v. commissioner, 67 t.c. 804, - 8 - offer was withdrawn. the parties waited to meet until december commercial lenders funded the bidding and constructed and for the years at issue. equipment is comparable to the michigan 2 equipment. - 27 - petitioners have not provided any evidence beyond their own self- proposed a "sum certain settlement" (settlement offer) during a engaged in an active trade or business at the relevant time. and the allocations in the 1996 purchase agreement were the same - 13 - certain expenses. alpine and alpine operating deducted interest, petitioners argue that the trade or business requirement intangibles were amortized and depreciated under section 167 corporation (s) engaged in providing wireless cellular with the conduct of a trade or business." see sec. 197(c)(1)(b). improper and instead sustain respondent's determination that $1.5 the business. we must also focus on when a cellular phone entity - 37 - geographical distance between officer dolce and petitioners rather 11 from motorola to cover startup expenses. approximately two- of most of the licenses alpine won at auction. the fcc required, doctrine and ignore the taxpayer's participation. id. stephen m. feldman and eric t. weiss, for petitioners. and deduct the beginning expenses. whether the related license holding companies are entitled to fails to present corroborative evidence. beam v. commissioner, prescribes. id.; sec. 301.7122-1(d)(1), (3), proced. & admin. regs. taxpayers could claim depreciation deductions for settlement offer when he learned the offer had yet to be of all the entities, making it unlikely that any of the entities personally liable for repayment. sec. 465(b)(2)(a). pledges of was not entitled to deduct interest and depreciation because it case and negotiated with petitioners' attorney, sean cook (mr. requirements for any of its licenses. consequently, the fcc kroupa, judge: respondent determined over $16 million of a. enforceability of the settlement offer 1. held: ps were not sufficiently at risk for income tax payments on petitioners' behalf in 1995 and 1996. expenses, contract labor, fringe benefits, and miscellaneous so as to remove any realistic possibility of loss, the taxpayer is the depreciation deductions were for leasehold improvements indicates to us that the intangibles must be used in connection equitable estoppel to a settlement offer made and subsequently issue. alpine made downpayments on the licenses and issued notes depreciable assets is proper because it represents the cost they entertainment expenses, salaries, rent, legal fees, relocation research and development cost need not be engaged in a trade or formed to hold the licenses and lease them to alpine.4 repayment of any of the advances. no security was provided with telephone conference in october 2005. the settlement offer made see, e.g., oren v. commissioner, 357 f.3d 854 (8th cir. 2004), returned the third license to the fcc and forfeited its $900,000 all section references are to the internal revenue code disallowed. respondent concedes a sec. 1231 adjustment and all remaining funds for working capital. engaged in an active trade or business for purposes of deducting entities. alpine maintained the books and records of alpine, the commissioner, 28 f.3d 1024 (10th cir. 1994); miller v. directly deduct his or her share of entity-level losses in - 24 - these tax payments were reflected as shareholder loans on rfb's (1993), 1993-3 c.b. 167, 353. an "amortizable intangible" is now the alpine license holding entities and alpine operating and were a trade or business must be made by viewing the entity in a stand- the business. dolce and reviewed a draft closing agreement mr. cook prepared. - 7 - petitioners his reasons for withdrawing the offer. the bankruptcy proceeding in reliance on the oral settlement a $4,954,056 deficiency for 2000, and $3,395,214 for 2001. areas (msa) and were less interested in rsa networks. the fcc sufficient debt basis under section 1366 in stock of alpine pcs, would advance the proceeds directly or indirectly to the alpine a governmental unit or an agency or instrumentality thereof" that reflected the advances as long-term liabilities on the returns therefore not entitled to claim flowthrough losses. transfer of loan proceeds from rfb to alpine. respondent further however, as a condition for financing, that the license holder of cellular networks in rural statistical areas (rsas) in the (a) the first day of the month in which the property is for the equipment during the years at issue. alpine operating b. startup expenses - 5 - contracts for wireless services are sold. we address these - 19 - rfb and pebbles entered into a purchase agreement in 1996 we begin with an overview of the at-risk rules. the at-risk defined as an intangible acquired by and held in connection with (1984). settlement in writing, let alone on one of the prescribed forms. amount. see sec. 465(b)(2)(a) and (b); krause v. commissioner, 92 made any interest payments. alpine amortized and deducted disallowed amount exceeds the shareholder's economic investment in settlement offer. substantive issues in turn. had insufficient debt basis in alpine to claim flowthrough losses business requirement. several code sections impose an active would seek payment from petitioners. see oren v. commissioner, uncertainty surrounding the regulation. h. rept. 103-111, at 777 misrepresentation by the taxpayer; and (3) detriment to the because officer dolce recklessly withdrew the offer after officer dolce informed mr. cook two weeks later that the should be bound by equitable estoppel to the settlement offer shareholder guaranteed. see estate of leavitt v. commissioner, misconduct on the government's part as a threshold to proving or business requirement. thus, petitioners argue that they may material sense.11 culnen v. commissioner, t.c. memo. 2000-139, revd. and remanded petitioners also have not shown that rfb made the payments to $4,671,608 deficiency for 1998, a $3,385,533 deficiency for 1999, entities as part of a back-to-back loan arrangement.10 petitioners also rely on the michigan 4 acquisition as best licenses. the alpine license holding entities each claimed financial statements that it would not demand repayment on any license acquired as part of the michigan 2 acquisition should be alpine claimed depreciation deductions5 obtained the necessary approval but later learned that the offer taxpayers are entitled to amortize and deduct startup expenses commissioner of internal revenue, respondent amortization deductions related to the licenses and deducted c. economic outlay deficiency notice was issued. petitioners argue that the oral - 21 - activities by the end of 2002. because it is the amount the parties agreed to in the 1994 and highly unlikely that petitioners would experience a loss. of the grant. the fcc canceled two of the three licenses alpine acquired; or shareholder's pledge of stock of a related corporation is taxpayers are allowed a depreciation deduction for property used claim the flowthrough losses because the stock they pledged was next, we must determine whether petitioners properly alpine with the loan proceeds from cobank gave them basis in alpine entities, which recorded the allocations as advances or principal or interest were ever made by any of the parties with a taxpayer makes an economic outlay for purposes of debt 2001. petitioners failed to provide any evidence beyond interest paid on amounts borrowed from a related entity to with a trade or business"). moreover, the taxpayer claiming a 2 traditional elements of equitable estoppel. petitioners have relate to the ever-evolving cellular phone industry. we must on the allocations made in the michigan 2 purchase agreement even licenses and equipment. many issues raised questions petitioner wholly owned alpine investments, a disregarded entity. (1994 purchase agreement). mackinac cellular had paid $1.6 made a formal election under section 195(b). rsa lotteries attracted an average of 500 participants tenet of statutory construction that, when any provision of a borrowed amounts if such property is directly or indirectly procedures are exclusive and must be satisfied for a compromise as an intermediary for transferring money to the alpine entities. to be decommissioned after rfb's acquisition. nevertheless, the rfb's assets in the bankruptcy proceedings. the bankruptcy case reported interest income and income expense from the promissory 2005 to discuss the withdrawal because they were in different basis through payments made by an entity related to the taxpayer basis in any indebtedness of the s corporation to the shareholder. the michigan 4 license that petitioner contributed to rfb similar to the requirement imposed by section 162.14 business to new license areas. rfb's lenders agreed to fund the than to any affirmative misconduct on the part of officer dolce. financed by indebtedness which is secured by the property. the "incorporated pocketbook" refers to the taxpayer's habitual findings of fact expenses. production of income if the property had a useful life that was entity to isolate the liabilities to the thinly capitalized new irrelevant for purposes of determining economic outlay at the taxpayers may deduct ordinary and necessary expenses paid or deducted interest on debt owed to rfb, even though alpine never petitioners' reliance, if any, on the oral settlement offer meet the threshold in the sixth circuit of showing any affirmative subsection (a) unless it is an "amortizable section 197 to deduct business expenses incurred in carrying on a trade or a. alpine neither entity was engaged in an active trade or business and parties on his behalf. see ruckriegel v. commissioner, supra. contain the phrase "in connection with" and both should therefore depreciation deduction. the relevant inquiry is the respective that reliance. estoppel precludes the irs from denying its own b. the alpine license holding entities see maloof v. commissioner, supra. petitioners service by adding digital equipment onto rfb's existing cellular petitioners claim that alpine had two on-air networks in september is held in connection with the conduct of a trade or business. even though alpine had not requirement imposed by section 174. see snow v. commissioner, 416 we now address whether equity principles nonetheless require therefore cannot be attributed to alpine and alpine operating. 357 f.3d at 859; levien v. commissioner, 103 t.c. 120, 126 (1994), agree that the licenses are amortizable but disagree on when in a written closing agreement. respondent also argues that and remanded 28 fed. appx. 116 (3d cir. 2002). petitioner never depreciation. see omnibus budget reconciliation act of 1993, pub. (b) in the case of property held in connection with the licenses to alpine. (beginning expenses). respondent argues that none of the alpine passthrough losses. michigan, at the time they filed the petition. estate of bean v. commissioner, 268 f.3d 553, 557 (8th cir. 2001), areas. s never operated any on-air networks. instead, respect to the promissory notes. no cash payments of either during the years at issue. petitioners contend that the alpine that the licenses are amortizable upon commencement of a trade or fair market values of the depreciable and nondepreciable property alpine recorded the same advances as "notes reported was income allocated to them from rfb's use of the no alpine entities operated any on-air networks during the asserts that petitioners did not make any economic outlay that expenses for alleged startup costs7 corporation to the shareholder and the shareholder must make an have already determined that the structured transaction made it pledged constitutes property used in the business. petitioners the years at issue. we begin with alpine. incurred during the taxable year in carrying on a trade or (4th cir. 1989), affg. 90 t.c. 206 (1988). the taxpayer may fund written closing agreement, because officer dolce's supervisor because they were not involved in an active trade or business business. id. without regard to the taxpayer's trade or business ignores the see sec. 197(c)(1)(b), (d)(1)(d). the cost of the intangible is price to equipment for depreciation purposes. petitioners relied accordance with the flowthrough rules of subchapter s. see sec. judicial doctrine that requires finding the taxpayer relied on the we reject petitioners' narrow interpretation of property used petitioners did not file the appropriate statement with their rfb also sold cellular phones to people to generate airtime. petitioners organized alpine to obtain fcc licenses and to contend that rfb stock is not property used in the business for co. v. commissioner, 116 t.c. 289, 294 n.10 (2001). satisfy the requirement. holding entity assumed the fcc debt in exchange for receiving the cartwright v. commissioner, t.c. memo. 1996-286. moreover, $563,042 for 1998, $386,489 for 1999, and $591,213 for 2000. but increased petitioners' tax liability for 2002, which was not alpine entities and rfb to document the purported loans. deduction. smith v. commissioner, 937 f.2d 1089, 1097 n.9 (6th ps were shareholders in a wholly owned s specifically, we must decide whether a cellular phone business alpine's michigan licenses and allocated any income earned from intangible asset and the proper method and period for personally guaranteed the cobank loan. the loan was secured by prohibited the distribution of loan proceeds to an individual. serviced the northern portion of the lower michigan peninsula by entities. petitioners' argument is irrelevant because we have moreover, we find it implausible that the equipment had a organized. id. at 907. amortization purposes. mere grant of an fcc license does not entities would seek payment from petitioners. see oren v. service the fcc debt. against the government with utmost caution and restraint. boulez cobank loan constituted an economic outlay justifying an increase t.c. memo. 1990-304 (citing tokarski v. commissioner, 87 t.c. 74, and other deductions.6 iv. irs appeals proceeding supra at 423; maloof v. commissioner, t.c. memo. 2005-75, affd. - 17 - interest, depreciation, startup expense, and other deductions acquires debt basis if the shareholder makes an economic outlay million in 1994 indicates that the equipment was worth, at most, united states tax court and 2000. the shareholder pays all or part of the obligation that the 5 settlement. mr. cook provided officer dolce with a draft closing - 14 - therefore inherently separate and distinct from the activities of yet there was no allocation for these costs. not accept the taxpayer's self-serving testimony when the taxpayer began offering rsa licenses by lottery to any interested person was improper. third, we must determine whether petitioners had rfb entered into a purchase agreement with mackinac cellular was not engaged in an active trade or business. respondent evidence of the value of the michigan 2 equipment. petitioners 7 1366(a). the losses cannot exceed the sum of the shareholder's we find compelling that alpine did not meet the fcc's decision, and, to the extent not mentioned, we conclude that they elliott v. commissioner, 40 t.c. 304, 313 (1963). meso t. hammoud, elizabeth rebecca edberg, and steven g. license. business at the time of the expenditure to qualify for the opinion 11 substituted himself as "lender" in the place of rfb. there is no affd. without published opinion 77 f.3d 497 (11th cir. 1996). we some of the facts have been stipulated and are so found. we they incurred any cost with regard to their pledge of rfb stock. these include whether in an s corporation there is a separate extended to litigation risk, not collectibility. he made the extension, that alpine operating was not engaged in an active first, we state the general rules governing when a on the cobank loan. petitioners were not actually at risk because years at issue in 2006. respondent determined that petitioners offers over the course of the negotiations. officer dolce orally digital networks to service the new license areas. petitioner general rules for amortizing intangibles. payments on the taxpayer's behalf where the taxpayer used the corporation, in 1991, the year he acquired the license. he or settlement to be binding on both a taxpayer and the petitioners, shareholders of alpine, an s corporation, had v. the deficiency notice rules ensure that a taxpayer deducts losses only to the extent he different interpretations of section 197. respondent contends iv. at-risk limitation on flowthrough losses ruckriegel v. commissioner, supra. the payments were we now turn to amortization of the fcc licenses. the parties allow taxpayers to amortize intangible assets without regard to them at risk in alpine and the other alpine entities to allow them rfb initially recorded the advances in its books as "other not final until they entered into a written closing agreement. whether an entity is an incorporated pocketbook is a question of forfeited the downpayment. - 18 - commissioner, 535 f.2d 309, 312 n.2 (5th cir. 1976), affg. 63 t.c. trade or business until the business has begun to function as a rohn v. commissioner, supra. a settlement offer must be for the loan. the indebtedness must run directly from the s to which it relates has yet to commence. see frontier chevrolet loan distributions, at the time the payments were made. see covering specific matters, is a second type of closing agreement - 15 - entity for federal income tax purposes. alpine operating to the s corporation, the court will apply the step transaction active trade or business and are not entitled to amortization 807 (1977). petitioners bear the burden of proving that amount because it was "property used in the business." this the depreciation deduction under section 167 for tangible assets. we now must determine the nature of the section 197 trade or taxpayer has not made an economic outlay, however, if the lender petitioners testified that the equipment was rapidly depreciating the determination of whether an entity is actively engaged in sum, the lump sum must be apportioned between the two types of are to the tax court rules of practice and procedure, unless would entitle them to increase their basis in the s corporation. withdrawn by respondent's appeals office before the deficiency should allow petitioners to be treated as at risk. we disagree. affg. t.c. memo. 2002-172; underwood v. commissioner, supra at the time of the expenditure to be eligible for the deduction. see thirds of the financing went to construct and install the risk. we have held that where the transaction has been structured cannot claim the flowthrough losses. fourth, we must determine - 3 - failed to establish that officer dolce made any misrepresentations structured in this ever-changing technology industry. deficiencies1 returns and are only now electing to amortize and deduct the cobank loan proceeds were characterized as advances, rather than petitioners organized alpine, an s corporation, to bid on whether there was a trade or business. we begin with petitioners' argument that the oral settlement related s corporation is property used in the business to preclude from a related entity to the taxpayer's s corporation constituted against this background, we now address whether petitioner - 23 - - 16 - b. equitable enforcement of the settlement offer proceedings ran concurrently with their irs appeals case. value of $2.5 million at the time rfb acquired it from pebbles. (1996 purchase agreement) after the lawsuit was resolved. the not contribute any other money or property, nor did he make any adverse action. petitioners claim they conceded certain rights in 6 finally, respondent did not induce petitioners to take any towers. rfb owned the equipment that serviced the michigan - 34 - t.c. 1003, 1016-1017 (1989), affd. sub nom. hildebrand v. rather than to rfb. interest on the unsecured notes accrued and they never personally guaranteed the cobank loan, nor were they from roaming charges for the use of two networks in michigan. holding company, were engaged in an active trade or business and between petitioner and alpine, to reflect accrued but unpaid penalties set forth in the deficiency notice. respondent also 1999, 2000 and 2001 (years at issue). respondent also determined respondent's allocation is incorrect. see rule 142(a); see intangible." see sec. 197(a). an amortizable section 197 risk with respect to their involvement with the alpine entities. regulations further support our determination that intangible such expenses included consulting expenses, travel and petitioners timely filed a petition. formed by petitioner to expand rfb's existing cellular networks. (continued...) michigan 2 assets to rfb. the assets of the alpine license holding entities. several of held a 99-percent interest in each license holding entity and his c. alpine operating and alpine investments, llc alpine entities. cf. sec. 1.465-25(b)(1)(1), proposed income tax rfb recorded the advances on its general ledger as "advances rfb's analog licenses already covered. rfb provided digital find that petitioners had insufficient debt basis, and therefore claim, however. instead, the record reflects that the on-air serving testimony to substantiate the replacement cost. we need - 12 - 8 or routinely paid petitioners' expenses so as to make rfb an accordingly, we conclude that equitable estoppel principles petitioner decided to invest personally in the development cobank loan proceeds to alpine. see yates v. commissioner, t.c. to s corporations, the amount does not have to be repaid. the conditional settlement offer to petitioners that needed to be we hold that they are not entitled to any amortization deductions petitioners concede that the amortization period for the were left "poorer in a material sense" by rfb's use of amount at risk includes cash contributions and certain amounts in the geographic license area within five years of the grant the michigan 2 acquisition by rfb was stalled for two years. 137 t.c. no. 5 offer is an enforceable agreement. the compromise and settlement remained unchanged over the 2-year period. we accordingly find allocated $2.5 million of the $7.2 million michigan 2 purchase canceled two of the three licenses alpine retained. alpine which had yet to be finalized, upon realizing that a sum certain though there was a 2-year delay in acquiring the equipment and in which the trade or business begins. see sec. 195(b)(1), (c). we find instead that the delay was due to the considerable for depreciation purposes. after concessions,2 28 fed. appx. 116 (3d cir. 2002). petitioners had relied on it. respondent denies that the oral (1994); raynor v. commissioner, 50 t.c. 762, 771 (1968). the sec. 1.197-2(f)(1)(i), income tax regs. the regulations apply would have to pay to replace the wireless cellular equipment. petitioner's own self-serving testimony to substantiate this in the business. pledged property must be "unrelated to the licenses. rfb allocated income and expenses related to the first decide a procedural issue, whether respondent is bound by business. petitioners argue that the licenses are amortizable basis. instead, petitioners served as a mere conduit to the at issue. petitioners argue that the payments petitioner made to that petitioners' allocation of $2.5 million to equipment was borrowed with respect to the activity for which the taxpayer is through yearend adjusting entries as loans from alpine instead, we must examine the alpine entities individually to sec. 1366(d)(1)(a) and (b). this restriction applies because the the alpine entities were commissioner, t.c. memo. 2006-125.12 77 (1986)), affd. without published opinion 956 f.2d 1166 (9th misrepresentation by government; (2) reasonable reliance on that (build out requirement). the fcc licenses were issued for a amortization deductions for cellular licenses from the fcc upon clarify that amortization under sec. 197 begins on the later of-- officer dolce and mr. cook exchanged several settlement corporation was pledged. commissioner, 352 u.s. 82 (1956); estate of bean v. commissioner, retained, and alpine returned the third license to the fcc and or she is economically or actually at risk for the investment. settlement was beyond his authority. officer dolce notified excluded from the at-risk amount because it was property used in the activity begins. for the sole purpose of serving alpine's business and depended on rfb stock qualifies as "property * * * directly or indirectly 14 the settlement could be finalized. he also advised mr. cook that (1982), affd. 699 f.2d 450 (8th cir. 1983). rfb's business vi. amortization of the fcc licenses acquired basis in alpine in the amount of the loan. petitioners 695, 700 (1992). the doctrine of equitable estoppel is applied the appeals case involved all five years at issue. appeals active trade or business during the years at issue, and it is not petitioner's tax advisers advised petitioner that he needed to personal property as security for borrowed amounts are also it was stalled for various reasons but primarily because of a


All Content © 2007-2012 The Judicial View, L.L.C. All Right Reserved.
About The Judicial View ®  | Privacy Policy   |  Terms of Use   |  Contact Us  |  Advertise