DocketNumber: Docket No. 3576-86.
Filed Date: 8/4/1988
Status: Non-Precedential
Modified Date: 11/21/2020
MEMORANDUM OPINION
RAUM,
The case was submitted on the basis of a stipulation of facts and attached exhibits. At the time the petition herein was filed, petitioners resided in Minnesota.
During 1982 petitioner owned 90*375 percent of the stock of Decision Systems, Inc. (hereinafter sometimes referred to as Decision or Decision Systems or the corporation), and his wife owned the remaining 10 percent of the stock. He was its president, with a salary of $ 169,400, and she was its secretary, with a salary of $ 5,000. They were its only officers. Both were directors.
Decision Systems was incorporated in Minnesota in 1974, and is engaged in the business of providing a variety of computer related services. In 1982, it reported $ 115,313 taxable income.
In 1982, petitioner leased computer equipment to Decision Systems. He leased only to that corporation in 1982. Lease payments made to him by Decision in that year amounted to $ 49,299. *376 investment tax credit, relates only to the computer equipment purchased by petitioner and then leased to Decision in 1982.
In 1982 petitioner purchased the following used equipment for $ 124,968 which it then leased to Decision:
Lease | ||
Equipment | Cost | Date |
IBM Key/Diskette | $ 3,000 | 4-1-82 |
Three Teleray 10 N CRT | 3,891 | 4-1-82 |
Two Honeywell Disk Drives | 9,900 | 4-1-82 |
Alpha L62 CPU | 38,990 | 9-15-82 |
DPS 16 & Printer | 43,187 | 12-15-82 |
2-390 Disk Drives | 26,000 | 12-28-82 |
$ 124,968 |
The parties agree for the purpose of this case that the useful life of the foregoing equipment was not less than three years. On brief, petitioner contends and the Government concedes that the useful life of the property is six years. Original Lease Re-lease Equipment Cost Date Date North Star Micro Processor $ 6,540.75 6-11-81 7-12-82 HIS Computer System 29,000.00 6-11-81 7-12-82 Four Telerays; One printer 7,288.00 12-23-81 12-23-82 Four IBM 3742 12,200.00 12-23-81 12-23-82 One ECRM, Scanner 16,500.00 12-23-81 12-23-82 $ 71,528.75
*377 All of the equipment purchased in 1982 and originally leased to Decision in 1982 was leased again to it on the same date one year later in 1983. Of the equipment which was first leased in 1981 and re-leased in 1982, the pieces which were leased again in 1983 are listed below:
Original | 1983 | |
Lease | Lease | |
Equipment | Date | Date |
North Star Micro Processor | 6-11-81 | 7-12-83 |
HIS Computer System | 6-11-81 | 7-12-83 |
In all cases in which equipment was re-leased, the rental fee required under the new lease was not the same as that in the original lease.
The 1981, 1982, and 1983 equipment leases were all effectuated by the execution of form lease documents. These form leases allowed for the insertion of a description of the property leased, its "total cost" to the lessor, the "term in months" of the lease, the periodic rental required, the "number of installments" covered by the lease, and the "total rent" due under the lease. In each of the leases executed in 1981, 1982, and 1983 the "term in months" indicated was 12 months. The leases did not include provisions governing renewal thereof.
The standard contact language of the form leases provided that*378 "Title to the equipment shall at all times remain in Lessor". It further provided that the "Lessee * * * shall protect and defend the title of Lessor". In addition, the lessee was obligated to "promptly pay when due all sales, use, property, excise and other taxes and all license and registration fees". It was also obligated to "maintain the Equipment in good repair, condition and working order * * * at its expense" and to maintain insurance on the equipment. Moreover, if the equipment was "lost, stolen, destroyed, damaged beyond repair or rendered permanently unfit", on payment of certain amounts to the lessor, the equipment would "become the property of Lessee". Each lease described itself as "a completely net lease" in which the "Lessee's obligation to pay the rent and other amounts payable by Lessee hereunder is unconditional". In the leases, the "Lessor makes no warranty with respect to the equipment" and the "Lessee agrees to make the rental and other payments required hereunder without regard to the condition of the Equipment and to look only to persons other than Lessor * * * should any item of equipment for any reason be defective".
Although in each lease a specific*379 rental payment was inserted into the space therefor in the form document, the standard language of the lease made provision for the adjustment of that amount under certain conditions. It provided that:
If the actual cost of the Equipment is more or less than the Total Cost as shown above, the amount of each installment of rent will be adjusted up or down to provide the same yield to Lessor as would have been obtained if the actual cost had been the same as the Total Cost. Adjustments of 10% or less may be made by written notice from Lessor to Lessee. Adjustments of more than 10% shall be made by the execution of a new lease reflecting the change in Total Cost and rent but otherwise being the same as this lease.
Also during 1982 petitioner sold computer equipment, receiving $ 14,000 therefor. Of this $ 14,000 sold in 1982, $ 7,500 was sold to Extendicom, a company in Indianapolis, after having been placed on consignment in 1981. The record does not disclose either the purchaser of the remaining $ 6,500 equipment, or when or at what cost petitioner had acquired any of the $ 14,000 equipment or whether any of it had ever been leased to petitioner's corporation.
On Form 3468, *380 "Computation of Investment Credit", filed with petitioners' 1982 Federal income tax return, a $ 12,497 "investment credit" was claimed with respect to the $ 124,968 computer equipment purchased in 1982. The Commissioner disallowed the credit "because it has not been established that the lease term entered into between you and Decision Systems, Inc. was for less than one-half the useful life of the equipment as required under
(3) Noncorporate lessors. -- A credit shall be allowed by
* * *
(B)
The parties have stipulated that the latter of the two conditions contained in subparagraph (B) is satisfied, i.e., that "the deductions * * * [to petitioner] by reason of section 162 exceeded 15% of the rental income produced by such property during the first 12 months after the date of transfer of the equipment to the lessee, Decision Systems, Inc." Thus, the question presented to us is whether under
The leases before us provide, on their face, for 12-month lease terms with no provision for renewal. These terms are clearly less than 50 percent of the six year useful life of the computer equipment leased. The Government does not dispute that the literal terms of the 12-month leases cover less than half of the equipment's life, but, instead, argues that the leases were really for an indefinite term.
In deciding whether a lease is of indefinite duration or limited to the definite term specified in the lease, all*382 the facts and circumstances are considered.
The types of facts and circumstances which have in the past aided us in determining whether a lease term was indefinite are as follows: (1) an established practice on the part of the lessor of buying equipment for lease in order to meet the special needs of the lessee (
In a recent Court-reviewed case,
1. Only $ 47,649 lease payments were reported on petitioner's 1982 return. Petitioner has not challenged the Commissioner's adjustment in his notice of deficiency increasing petitioner's lease income by $ 1,650. ↩
2. Petitioner, however, listed the $ 124,968 equipment purchased in 1982 as "5 yr property" for the purpose of depreciation. ↩
3. As was noted in
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