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a procedural issue, whether respondent is bound by equitable estoppel to a settlement offer made and subsequently withdrawn by respondent’s Appeals Office before the deficiency notice was issued.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)|
|Petitioner Lawyer(s)||Petitioner Law Firm(s)|
|Respondent Lawyer(s)||Respondent Law Firm(s)|
|Steven Cappellino||Internal Revenue Service|
|Elizabeth Edberg||Internal Revenue Service|
|Meso T. Hammoud||Internal Revenue Service|