A. Organizing and Participating in the Sale of a Plan
In this case, the "plan or arrangement" constituting the tax shelter is the territorial distributorship program. Individual plaintiffs concede that they participated in the organization and sale of the program. Under the evidence each was intimately involved with the sale of distributorships and partnership units. They acted as representatives of the companies and were compensated by fees and commissions.
ATR argues that it did not organize or assist in the organization of or participate in the sale of a plan within the meaning of the statute. Its position is that it "did not participate other than by being sold." However, what was sold were distributorships, not the ATR corporation, and the undisputed evidence shows that ATR was actively involved in organizing and selling the distributorship program. ATR granted USMPI the right to market ATR distributorships, hired marketing consultants, and requested a legal opinion regarding registration of the sale of distributorships under the Securities Act of 1933. The distributorships were sold in the name of ATR, and representatives of ATR signed the distributorship agreements. As noted, ATR set up and controlled a legal defense fund for participants in the program. Given these facts, ATR was a "person who organizes" and "participates in the sale of a plan" under § 6700(a)(1).
B. Gross Valuation Overstatement
Under the statutory definition to be applied here, a gross valuation overstatement consists of a statement of the value of the territorial distributorships that "exceeds 200 percent of the amount determined to be the correct valuation," and that "value . . . must be directly related to any deduction" . . . "allowable" to the distributor. Both § 6700 requirements are met. See United States v. Turner, 601 F. Supp. 757, 766-67 (E.D. Wis. 1985).
1. Statement of Value
Plaintiffs' claim that they did not make a "statement as to the value" of the distributorships within § 6700(b)(1) is without merit. The ATR document package, supplied to each investor, states: "The total purchase price of each Territorial Distributorship consists of a Contingent Principal Sum . . . ." This amount was placed in the appropriate blank in the territorial distributorship agreement after the distributor chose a territory. A person who puts a purchase price on an asset may be considered to have made a representation as to its value. See United States v. United Energy Corp., 1987 U.S. Tax Cas. (CCH) para. 9216, at 87,367 (N.D. Cal. 1987).
Plaintiffs cannot readily argue that the statement of the distributorship's price was not a statement of value. In legislating § 6700, Congress was concerned with the "widespread marketing and use of tax shelters undermin[ing] confidence in the fairness of the tax system and in the effectiveness of existing enforcement provisions." S. Rep. No. 494, 97th Cong., 2d Sess. 267, reprinted in 2 1982 U.S. Code Cong. & Admin.News 1014. Word games were anticipated. According to the legislative history, the seller of a tax shelter is to be held liable for a gross valuation overstatement "whether or not the accuracy of the statement of valuation is disclaimed." Id. at 1015. Drafted broadly, § 6700 speaks of "any statement as to the value of property or services." Within the terms and context of this tax provision, plaintiffs made a "statement of value" by executing the distributorship agreements. Defendant's exhibits 18c (Thomas Pitts); 19b (Albert Pitts); 19j (James Pitts). ATR set the formula by which the price was established and accepted each distributorship agreement at the price as fixed.
2. The Correct Valuation of the Distributorships
The statute makes a distinction between the "correct valuation" and the value stated by or on behalf of the seller. The "correct valuation" is the fair market value - the amount payable in a bona fide commercial transaction between a willing buyer and a willing seller, neither being compelled to buy or sell and both having knowledge of relevant facts. Music Masters, 621 F. Supp. at 1055. As discussed in the legislative history:
The penalty for gross valuation overstatement will have no effect on bona fide commercial or investment transactions in which, for example, a willing and knowledgeable buyer purchased from a willing and knowledgeable seller for cash because such a purchase price will define the value of the investment.
S.Rep. No. 494, 97th Cong., 2d Sess. 267, reprinted in 2 1982 U.S. Code Cong. and Admin. News 1015.
Ascertaining a "correct valuation" for ATR's territorial distributorships may be difficult to do, but even at the top of the realistic range, the stated value is many times greater than the "correct valuation."
3. Direct Relation of the Value Stated to a Deduction
Plaintiffs argue that since the notes for the "Incurred Annual Contingent Amounts" are with recourse, they must be paid from distributorship profits or by the investors themselves, giving economic substance to the transaction. Also, the allowable deduction is computed from the amount of debt, not the fair market value of the distributorships. Therefore, according to plaintiffs, the deduction is related to the debt incurred and does not involve a "statement of value."
This contention misses the relevant point. The amount of debt incurred is itself a statement of value, being the purchase price upon which the deductions are based. The amount of the debt, recourse or not, exceeds by more than 200 percent the correct value of the distributorships.
Also, the recourse debt appears to lack bona fides. Albert Pitts and Anthony Tedeschi, a territorial distributor, testified that they expected such payments to be made, but the nature of the transactions and the material used to market the distributorships strongly suggest otherwise.
The following conclusions are made:
1. Plaintiffs organized and participated in the sale of a plan and furnished gross valuation overstatements that were directly related to the amount of an allowable deduction.
2. In so doing, plaintiffs violated 26 U.S.C. § 6700.
3. The government has proved each element of the violations by a preponderance.
4. Plaintiffs are liable for the penalties assessed, which they agreed were properly computed.
It is so ordered.
AND NOW, this 3rd day of April 1989 judgments are hereby entered in favor of defendant United States of America and against plaintiffs American Technology Resources, Albert S. Pitts, James A. Pitts and Thomas M. Pitts as follows, for the reasons set forth in Memorandum of Decision Under Fed.R.Civ.P. 52(a);
1. The provisions of 26 U.S.C. § 6700 are applicable to each plaintiff for selling abusive tax shelters as to the tax years 1982 and 1983;
2. Plaintiffs are liable to defendant United States of America (Internal Revenue Service) under 26 U.S.C. § 6700 for the following penalties:
Costs on plaintiffs
American Technology Resources 1982 $ 78,400
Albert S. Pitts 6,000
James. A. Pitts 4,000
Thomas M. Pitts 8,000