U.S. Tax Court did not err in finding that plaintiff was liable for $431,174,592 and $5.534,611 in tax deficiencies arising out of plaintiff’s attempt to implement “like-kind” exchanges under section 1031 of Tax Code. Record showed that plaintiff sold two of its fossil fuel power plants that would otherwise have resulted in $823 million and $683 million in taxable gains, and that plaintiff entered into six “sale-and-leaseback” transactions concerning other power plants owned by tax-exempt entities in which plaintiff leased said entities for period longer than plaint’s useful life and then immediately leased back said plants to tax-exempt entities for shorter term. Ct. rejected plaintiff’s claim that it had acquired genuine ownership interest in each of said plants so as to qualify for treatment under section 1031 that would allow it to defer tax on $1.2 billion gain it realized in sale of its power plants, where Commissioner could properly conclude that instant sale-lease transactions were abusive tax shelters, since: (1) subleases allocated all costs and risks associated with plants to subleasees; and (2) under reasonably likely standard, Tax Ct. could conclude that subleasees would repurchase plants at end of sublease period. Also, Tax Ct. could impose penalties based on its findings that plaintiff’s underpayments of tax were attributable to its negligence or disregard of rules, where plaintiff, as sophisticated taxpayer, did not rely in good faith on opinions of its tax professionals.
Federal 7th Circuit Court
Civil Court
Taxation