Posted on: Tuesday, February 15, 2005
Tax judge rules against Teruya
By Jerry Moskal
Gannett News Service
WASHINGTON — What Teruya Brothers Ltd., claimed was a tax-free property swap failed to pass muster with a U.S. Tax Court judge.
As a result of a precedent-setting opinion issued by Judge Michael B. Thornton, the Honolulu-based company faces up to $4.12 million in additional 1996 taxes. The Internal Revenue Service ruled the transaction resulted in a $12 million taxable gain.
The 20-page opinion said the firm's sale of an apartment building and a condominium to Times Super Market did not qualify as a tax-free exchange since Teruya owned the supermarket chain.
"I can't comment," Jonathan H. Steiner, a Honolulu tax attorney for the company, said Friday. "The opinion just came out (Wednesday). I haven't had a chance to review it and all the appropriate remedies. I'm not the right person to comment anyway."
Wayne Teruya, the firm's vice president, said that only Raymond Teruya, company president, is allowed to speak for the firm. Raymond Teruya did not return two telephone calls seeking comment.
"We don't comment on decisions, court documents," IRS spokesman Anthony Burke said. "Whatever our statement is in the court record, that's our public comment. Litigation, decisions, that kind of thing, the record speaks for itself."
According to the opinion that was released Wednesday, Teruya exchanged the Ocean View condominium for the Kupuohi II property and Royal Towers Apartment Building for the supermarket's Kupuohi I and Kashumanu properties.
At the time of the transaction, Teruya owned 62.5 percent of the Times Super Market, which was Hawai'i's third-largest supermarket chain with 13 stores.
Subsequently, Times, which had 950 employees, was sold in 2001 to Quinn Supers Inc., of Stockton, Calif. Quinn, an affiliate of PAQ Inc., which has six Food4Less stores in Northern California and 650 employees.
The opinion said Teruya used "multiparty structures" to avoid the tax consequences of a direct exchange with a related firm.
" ... (The) petitioner has failed to establish that avoidance of federal income taxes was not one of the principal purposes of the Ocean Vista and Royal Towers transactions," Thornton wrote.
The opinion said that if Teruya had made a direct sale of Ocean Vista it would have been subject to a 34 percent corporate tax rate for 1996, the year the company reported $2.06 million in taxable income. The opinion said Times reported a $1.04 million net operating loss for the same year. "Petitioner offers no explanation for Teruya's use of the qualified intermediary in the Ocean Vista and Royal Towers transactions," Thornton wrote.
As a result, the opinion said, Teruya is not allowed to defer the taxable capital gains that resulted from the exchange.
Thornton ordered the exact amount Teruya will have to pay in additional taxes to be computed before he signs a final decision, after which the company will have 90 days to file an appeal of the ruling.
