DocketNumber: Docket Nos. 25259-86; 25260-86.
Citation Numbers: 54 T.C.M. 1009, 1987 Tax Ct. Memo LEXIS 544, 1987 T.C. Memo. 552
Filed Date: 11/2/1987
Status: Non-Precedential
Modified Date: 11/20/2020
MEMORANDUM FINDINGS OF FACT AND OPINION
POWELL,
FINDINGS OF FACT
*546 Some of the facts have been stipulated. The stipulation of facts and accompanying exhibits are so found and incorporated herein by reference.
Petitioners Michael and Rosanne Strouth were married during the years in question and resided in Wappingers Falls, New York when they filed their petition. Petitioners Josef and Evelyn Bieber were also married during the years in question, and resided in Poughkeepsie, New York at the time they filed their petition. Both sets of petitioners timely filed joint returns with the Internal Revenue Service Center in Andover, Massachusetts.
During the calendar years 1981 and 1982, petitioner Michael Strouth had a 2.325 percent interest in S.L. Leasing Company, a partnership. For the calendar year 1981, petitioner Josef Bieber was a partner in the following partnerships:
Partnership | Partnership Interest |
C&R Leasing Company | 3-1/3 percent |
Northeastern Leasing Company | 6-2/3 percent |
J.K. Leasing Company | 6.74 percent |
Pursuant to their respective partnership agreements, the partnerships each engaged H.V. Funding Inc., a New York corporation, to provide certain services to each partnership. *548 In consideration for H.V. Funding, Inc.'s services, each of the partnerships paid to H.V. Funding, Inc. an amount equal to 10 percent (11 percent for leases entered into after March 22, 1982) of at the cost of each item of equipment leased by each of the partnerships at the time the equipment was leased. The aggregate amounts of management fees paid by each partnership to H.V. Funding, Inc. during the years at issue are as follows: Aggregate Partnership Year Amount paid S.L. Leasing Company 1981 $ 23,517.97 S.L. Leasing Company 1982 12,426.59 C&R Leasing Company 1981 20,942.75 Northeastern Leasing 1981 10,619.21 Company J.K. Leasing Company 1981 8,396.70
Except for the fees paid to H.V. Funding, Inc., the partnerships had no other expenses with respect to each property leased that are alleged to be an ordinary and necessary business expense under
The partnership leases were arranged through personal contacts of the principals of H.V. Funding, Inc., and through contacts made by Robert Vitale, a vice president of H.V. Funding, Inc., in his position as sales manager of Telequip Electronics, a company that manufactured and installed*549 office telephone systems. A small percentage of the 1982 leases was obtained through another salesman's efforts. The salesman was compensated in an amount equal to 2.5 percent of the cost of any equipment purchased and leased through his efforts.
On its Partnership Return of Income (Form 1065), each of the partnerships reported the cost of new property acquired and placed in service by the partnership during the years in question and deducted as an ordinary and necessary expense, in the year paid the amount paid to H.V. Funding Inc. with respect to each item of equipment. The aggregate amounts reported and deducted by each partnership are as follows:
Cost of | |||
Property | Amount | ||
Partnership | Year | Reported | Deducted |
S.L. Leasing Company | 1981 | $ 218,841.00 | $ 24,041.00 |
S.L. Leasing Company | 1982 | 124,143.00 | 14,796.00 |
C&R Leasing Company | 1981 | 206,685.00 | 22,942.00 |
Northeastern Leasing | 1981 | 102,840.00 | 10,621.00 |
J.K. Leasing Company | 1981 | 79,394.00 | 8,822.00 |
In computing their taxable income for the years at issue petitioners Michael and Rosanne Strouth and petitioners Josef and Evelyn Bieber included their distributive shares of the ordinary*550 income of each partnership in which they were partners during the years at issue and claimed investment tax credit based on their distributive shares of the cost of new property placed in service by each such partnership. The amounts included in income and the amounts of investment tax credit claimed by petitioners are as follows:
Amount of | ||||
Amount | Investment | |||
Included | Tax Credit | |||
Petitioners | Partnership | Year | In Income | Claimed |
Michael & Rosanne | S.L. Leasing | 1981 | $ 19.00 | $ 509.00 |
Strouth | Company | |||
Michael & Rosanne | S.L. Leasing | 1982 | 749.00 | 289.00 |
Strouth | Company | |||
Josef & Evelyn | C&R Leasing | 1981 | 1,158.00 | 689.00 |
Bieber | Company | |||
Josef & Evelyn | Northeastern | 1981 | 2,915.00 | 686.00 |
Bieber | Leasing | |||
Company | ||||
Josef & Evelyn | J.K. Leasing | 1981 | 1,448.00 | 535.00 |
Bieber | Company |
In addition to the monthly rental payments, each partnership received at the time the lease commenced advanced rentals equal to three months' rent. Under the terms of the leases used by the partnerships for equipment leased after June 8, 1982, the partnership was required to hold the advance rents as security. As a matter*551 of practice, each partnership held such advance rentals as security and, if the lessee complied with all of the terms of the lease, applied such advance rentals to the last three rental payments due under the lease. Each partnership followed this practice for those leases entered into before June 8, 1982, even though the lease was silent on the treatment of such advance rentals.
The partnerships had unrestricted use and control of the advance rent during the entire lease terms. Pursuant to the terms of the leases entered into by the partnerships, the partnerships were not required to, and in fact did not, segregate the advance rent from their operating funds or pay interest to the lessees on account of their payment of the advance rent. The partnerships included the advance rent in the rental income which they reported on their income tax returns.
Pursuant to the terms of the lease entered into by S.L. Leasing Company subsequent to June 8, 1982, S.L. Leasing Company was obligated, if the lessee was not in default under the terms of the lease involved or any other lease with S.L. Leasing Company, to either refund the advance rent to the lessee upon return of the leased equipment*552 or, solely at the option of S.L. Leasing Company, to apply the advance rent to the rent due for the last three months of the lease term.
Respondent determined that the fee paid by each partnership to H.V. Funding, Inc. with respect to each lease was a capital expenditure that should be amortized over the term of each lease. In addition, respondent disallowed the investment tax credit claimed by petitioners Michael and Rosanne Strouth and Josef and Evelyn Bieber for property placed in service by the partnerships on the ground that the partnerships did not meet the requirement of
OPINION
(e) Limitations with Respect to Certain Persons. --
* * *
(3) Noncorporate Lessors. -- A credit shall be allowed by
* * *
(B) the term of the lease (taking into account options to renew) is less than 50 percent of the useful life of the property, and for the period consisting of the first 12 months after the date on which the property is transferred to the lessee the sum of which are allowable to the lessor solely by reason of
Thus petitioners may not claim an investment tax credit if, during the first 12 months of the lease term, the deductions with respect to the leased property which are allowable solely by reason of
The first consideration is whether the fees paid by each partnership to H.V. Funding, Inc., or any portion thereof, are deductible under
The principal function of the term "ordinary" in
Petitioners contend that the majority of the services rendered by H.V. Funding, Inc. with respect to each lease occurred during the first twelve months after the property was placed in service by the partnerships. Consequently, the minor services rendered after the first twelve months are*555 insufficient to support a finding that the fees were paid to secure future benefits in the nature of separate and distinct capital assets.
Respondent argues that the services rendered by H.V. Funding, Inc. after the first 12 months of each lease were significant and that the partnerships thus acquired a separate and distinct additional asset, i.e., the right to receive such future services. In addition, a number of services initially rendered by H.V. Funding, Inc., such as the arranging of the leases, the preparation of the lease documents and the preparation of the coupon books to facilitate rent payments, resulted in a benefit to the partnerships for the entire lease term. Consequently, the payment of each fee must be amortized over the life of the lease.
Generally, expenditures to acquire assets or secure benefits beyond the taxable year must be capitalized.
Applying these principles to the instant facts, we conclude that the fees paid to H.V. Funding, Inc. were capital in nature. First, a substantial portion of each fee must be attributed to the services rendered in securing each lease. As we said in
It is now well settled that commissions paid by a lessor to brokers or agents for securing and negotiating a lease for a term of years are not ordinary and necessary expenses that can be deducted in the year paid, but are capital expenditures to the amortized over the term of the lease.
The procurement services performed by H.V. Funding, Inc. included securing potential leases, reviewing the lessee's application, checking the lessee's credit and trade references, drafting lease documents, ordering the equipment which was to be leased, insuring that the equipment to be leased was properly delivered and installed, and arranging for the payment of each partnership for the equipment. The expenses for these services are capital, since they secure for the partnerships the right to receive benefits under each lease that last well beyond the taxable year of the expenditure.
Second, we find that the remaining services rendered by H.V. Funding, Inc. after the first twelve months of the lease were not insubstantial and "insignificant."
The second issue is whether the advance rentals received by the partnerships at the time of signing the leases are required to be included in the rental income produced by the leased property for purposes of the "15-percent test" of
There were no restrictions on use of these funds, and, accordingly, the advance rents must be included in the partnerships' gross rental incomes in the years in which they were received, and in fact the rents were included on the partnerships' income tax returns. See
Petitioners content that the advance rentals should not be included in rental income produced by the leased property during the first 12 months for purposes of the 15-percent test because such rental is not "attributable to" said period within the meaning of
Petitioners' reliance on
Finally, while the petitioners' argument that we take into account the intention of Congress in enacting
In drafting
1. This case was assigned pursuant to the provisions of section 7456(d) (redesignated as section 7443A by the Tax Reform Act of 1986, Pub. L. 99-514, section 1556, 100 Stat. 2755) and Rule 180 et seq. ↩
2. All statutory references are to the Internal Revenue Code of 1954, as amended, and as in effect during the years in issue. ↩
3. The partnerships S.L. Leasing Company, C&R Leasing Company, J.K. Leasing Company and Northeastern Leasing Company are hereinafter collectively referred to as "the partnerships." ↩
4. For Northeastern Leasing company, such engagement was pursuant to a management contract; the other partnerships engaged H.V. Funding pursuant to their respective partnerships agreements. Under the agreements H.V. Funding was required to provide the following services to each partnership: (a) securing potential leases; (b) reviewing the application of each lessee; (c) checking the credit of each lessee; (d) checking the references of each lessee; (e) drafting the required lease documents; (f) giving to each partnership recommendations concerning each lease; (g) ordering the equipment to be leased; (h) insuring that the delivery and the installation were proper; (i) insuring that each lessee was satisfied; (j) taking car of any problems that might arise between the lessee and vendor of the equipment; (k) arranging payments by each partnership for the equipment; (l) insuring that the equipment was insured by the lessee; (m) preparing and filing UCC-1 statements to perfect the partnership interest in the equipment; (n) insuring that each lessee paid rent promptly and correctly, receiving rental payments and depositing them into the partnership checking account, and maintaining the partnership checking account; (o) preparing coupon books for rent payment for the term of each lease; (p) paying sales tax from the partnership checking account and filing New York State sales tax returns on a monthly or quarterly basis as required; (q) preparing annual financial statements for the partnerships and Federal income tax returns including Schedule K-1 for each partner; (r) contacting delinquent lessees and recommending legal action when necessary. ↩
5. Petitioners argue that the services to be rendered by H.V. Funding, Inc. after the first twelve months of the lease were of insignificant future benefit and that consequently the service fees were not capital in nature. They cite
6. Petitioners also contend that even if the fee is characterized as a capital expenditure, this Court must then determine the portion of the fee that is attributable to the first twelve months of the lease and the portion that is considered to be paid for the capital asset. However, the cases cited by petitioners in support of this proposition,
Home Trust Co. v. Commissioner of Internal Revenue , 65 F.2d 532 ( 1933 )
Ncnb Corporation, a North Carolina Corporation North ... , 684 F.2d 285 ( 1982 )
Lowell E. Nelson and Jacqueline N. Nelson v. Commissioner ... , 793 F.2d 179 ( 1986 )
Briarcliff Candy Corporation, (Formerly Loft Candy ... , 475 F.2d 775 ( 1973 )
Astor Holding Co. v. Commissioner of Internal Revenue , 135 F.2d 47 ( 1943 )
Commissioner v. Lincoln Savings & Loan Ass'n , 91 S. Ct. 1893 ( 1971 )
Commissioner v. Tellier , 86 S. Ct. 1118 ( 1966 )
Griffiths v. Commissioner of Internal Revenue , 70 F.2d 946 ( 1934 )
milton-j-seligman-and-estate-of-francine-seligman-v-commissioner-of , 796 F.2d 116 ( 1986 )