World Airways, Inc., and World Air Center, Inc. v. Commissioner of Internal Revenue , 564 F.2d 886 ( 1977 )

J. BLAINE ANDERSON, Circuit Judge:

This is an appeal from a decision of the Tax Court, reported at 62 T.C. 786 (September 18, 1974), and involves two issues.

The first issue involves the question of when World Airways can deduct certain engine and airframe overhaul expenses. The Tax Court held that the only proper year to deduct these expenses was in the same year the overhaul and consequent expenses were actually incurred. See 62 T.C. 789-805.

The second issue is whether or not World Airways is entitled to a 7% investment credit for the purchase of an Aero Commander Jet Aircraft which it leased to the government (the FAA). The Tax Court held that World Airways was not entitled to the 7% credit. See 62 T.C. 805-813.

For the reasons stated by the Tax Court in its exhaustive and well-reasoned opinion, we affirm. On the overhaul expense issue, we all agree and no further comment is necessary. On the investment credit issue, however, Judge Lumbard would reverse and he dissents from our affirmance, infra. On this issue we add a few very brief comments. The dissent adequately sets forth the essential facts.

The real problem with this issue is that nowhere in the case law or applicable regulations is there a definition of the terms “casual or short term” as those terms are used in Treas. Reg. § 1.48-l(k). The dissent suggests that the lease of the aircraft in this case fits within the overall policy of the investment credit provisions as established by Congress and therefore the lease should be defined as a “casual or short term” lease. We cannot agree.

The purpose of the investment credit is to modernize and expand the nation’s productive capabilities and increase employment.¹ The dissent urges that this particular lease fits the purpose and policy of the investment credit provisions because the lease between the FAA and World Airways “contemplates use of the airplane remaining with the taxpayer for the greater part of the airplane’s twelve-year life,” and (in note 4) that “ . . . the intent of petitioner was compounded of both a desire to lease the plane to the government part time, and a desire to enjoy the benefits of using the plane in its own business the rest of the time.”

The dissent apparently feels that if World Airways uses the aircraft for its own use during the times the government is not putting the aircraft to use, then this use expands its production and employment and entitles World Airways to the investment credit.

We feel that if World Airways had in fact used the aircraft to expand its productive capabilities and increase its’ employment, then possibly we would be persuaded to join Judge Lumbard in defining the lease as “casual or short term” and to allow World Airways the investment credit. Such is not the case, however, from our reading of the record, transcript and exhibits in this case.

First, Exhibit 9-E, a resolution of the Board of Directors of World Airways, suggests that the only reason for their purchasing of the aircraft in the first place was to fill the lease with the FAA. Secondly, testimony by a World Airways executive suggests that once the leases with the FAA were completed, World did not use the aircraft to increase its own production or employment, but instead tried to get rid of the aircraft by sale or long-term lease. (Vol. II of the record, pp. 82-83). And, finally, we can find no evidence in the record to show that World Airways ever did in fact put the aircraft to its own use during the times the aircraft was not being used by the government.

In short, it appears to us that World purchased the aircraft solely for lease to the government. When it could no longer be leased to the government, they had no further use for it. Surely, this did not increase World’s production or employment and is not what Congress envisioned when it created the investment credit provisions of the Internal Revenue Code.

Section 1.48-l(k) of the Regulations recognizes that the government often has unforeseen or extraordinary needs which it satisfies by obtaining the use of property under “casual” or “short-term” leases from the private sector — that is, from taxpayers who are able to temporarily forego the use of their Section 38 [26 U.S.C. § 38] property for the convenience of the government. If such a lease to the government would cause the taxpayer to lose the credit, such property would not be available to the government on a lease basis, or would force the taxpayer to require a rental payment of an amount sufficient to compensate the taxpayer for the loss of the credit. It is, therefore, reasonable to allow, by regulation, a taxpayer to lease Section 38 property to the government for a short time without causing the taxpayer to lose the credit. Implicit in this regulatory exception is the requirement that the property be Section 38 property in the hands of the taxpayer— property which the taxpayer has acquired to improve his productivity. The regulation contemplates allowing otherwise qualifying property to continue to qualify even though it is used temporarily by the government, but it does not contemplate allowing property to qualify as Section 38 property when that property is purchased to lease to the government.

We cannot find that the lease in this case either falls within the purpose of the investment credit provisions, or is a “casual or short-term” lease. Therefore, the Tax Court properly denied the investment credit.

The standard of review has been variously expressed by this court in different contexts. In this case petitioners have failed to demonstrate on any issue raised, under any of these standards, that the Commissioner’s method of determining their income tax deficiencies was either “unreasonable, arbitrary, or capricious,” Myron v. United States, 550 F.2d 1145, 1146 (9th Cir. 1977), or that the Tax Court’s decision was “clearly erroneous,” Coliman v. C. I. R., 511 F.2d 1263, 1267 (9th Cir. 1975), Photo-Sonics, Inc. v. C. I. R., 357 F.2d 656, 659 (9th Cir. 1966), Penn v. C. I. R., 219 F.2d 18, 20 (9th Cir. 1955).

Affording the proper deference, as we must, the Tax Court is AFFIRMED.

1 . H.R.Rep. No. 1447, 87th Cong., 2d Sess. 8 (1962), reprinted in 1962-3 C.B. 405, 411-13.