DocketNumber： Docket No. 2612-84.
Citation Numbers： 51 T.C.M. 1464, 1986 Tax Ct. Memo LEXIS 313, 1986 T.C. Memo. 300
Filed Date： 7/21/1986
Status： Non-Precedential
Modified Date： 11/20/2020
MEMORANDUM FINDINGS OF FACTS AND OPINION
WRIGHT,
| Deficiencies | ||
| Year | Donald G. and | Robert F. and |
| Valerie J. McNamara | Lucille L. Christiansen | |
| 1977 | $2,804.00 | $2,804.00 |
| 1978 | 7,307.00 | 7,307.00 |
| 1979 | 6,300.00 | 6,811.00 |
Petitioners dispute respondent's*314 denial of investment tax credits to D & B Associates ("D & B"), a general partnership.
FINDINGS OF FACT
Some of the facts have been stipulated and are so found. The stipulation of facts and accompanying exhibits are incorporated herein by reference.
Petitioners Donald G. McNamara ("McNamara") and Valerie J. McNamara resided in Whitefish Bay, Wisconsin, when the petition herein was filed. Petitioners Robert F. Christiansen ("Christiansen") and Lucille L. Christiansen resided in Glendale, Wisconsin, when the petition herein was filed. McNamara and Christiansen will hereinafter sometimes be referred to as "petitioners."
F.J.A. Christiansen Roofing Co., Inc. ("Roofing") operated as a roofing contractor during the years in issue. At that time the stock of Roofing was owned as follows:
| Voting Class A | Nonvoting Class B | Preferred | |
| Stockholder | Common Stock | Common Stock | Stock |
| Donald McNamara | 50% | 39% | 0 |
| (petitioner) | |||
| Robert F. Christiansen | 33.8% | 5% | 0 |
| (petitioner) | |||
| Christiansen Family | 16.2% | 56% | 0 |
| Trust | |||
| Joyce Church | 0 | 0 | 100% |
| Totals | 100% | 100% | 100% |
Joyce Church is Christiansen's sister. During*315 the years in issue, the preferred stock of Roofing was nonvoting. Christiansen exercised the voting rights for the stock held by the Christiansen Family Trust. Neither Donald G. McNamara nor Valerie J. McNamara is related to either Robert F. Christiansen or Lucille L. Christiansen. McNamara is the president and treausrer of Roofing and Christiansen is the vice president and secretary. During the years in issue the board of directors of Roofing had four members: McNamara, Christiansen, Joyce Church, and one outside director who was an officer of the Marine National Exchange Bank.
In late 1967, Roofing needed additional equipment in order to operate its roofing business competitively. It had a low net worth and limited working capital, however, and at that time it did not want to incur additional indebtedness because excessive liabilities on its balance sheet would limit its ability to obtain the bid bonds necessary to bid on projects and would jeopardize operations by impairing its available working capital. In response to this situation, Roofing's board of directors decided to lease the needed equipment. It considered leasing the equipment from another entity but found that*316 the cost would be prohibitive. Therefore, early in 1968 McNamara and Christiansen formed a leasing partnership, D & B Associates ("D & B"), in which they each owned a one-half interest. Thereafter, Roofing fulfilled approximately 40 percent of its equipment needs by leasing from D & B.
Another reason for the formation of D & B was McNamara's and Christiansen's desire to acquire assets which would be insulated from the risks of the construction business. In addition to leasing equipment, D & B owns real estate which it leases to a related company and has invested in stock and in partnerships involved in oil and gas activities.
During the years here in issue, D & B leased the following items to Roofing: a 1977 Mack truck, a 1978 Mack truck, a Toshiba copier model 702A, a 1979 25-ton Grove hydraulic truck crane, and a 1979 35-ton P & H hydraulic truck crane.
The above assets were neither manufactured nor produced by D & B, but were purchased by it to meet the needs of Roofing. D & B paid the purchase price of each of these assets and took legal title and, where necessary, registration in its name. However, the purchase orders and price quoations for the 1979 35-ton P & H hydraulic*317 truck crane, the 1978 Mack truck, and the 1977 Mack truck were in Roofing's name. The equipment purchased by D & B and leased to Roofing was not unique, but was of the type commonly used by construction companies and could have been leased or sold by D & B to other construction contractors. However, D & B does not lease equipment to anyone but related corporations.
The acquisition of major pieces of construction equipment requires substantial lead time. For example, it can take six to nine months from the time of placing an order for a crane to the date of delivery. Here, when a purchase order and price quotation were issued for a particular piece of equipment, it was often not decided whether D & B or Roofing would actually purchase the equipment. That decision was made later and was based on their relative financial positions.
With respect to each of the assets at issue, the original written lease document provided that the term of the original lease was a period of less than 50 percent of the useful life of the respective asset and contained a fixed date of termination without an option to renew. Four of the five original leases were renewed. With respect to the property*318 which was the subject of the fifth lease, a subsequent lease was entered into between a partnership related to D & B and a subsidiary of Roofing. The renewal leases were not negotiated simultaneously with the original lease, but upon the expiration of the existing lease. The details of the original and subsequent leases are as follows:
On January 21, 1977, D & B acquired a 1977 Mack truck with an economic useful life of 8 years. D & B entered into the following leases with Roofing with respect to the truck:
| Date of Lease | Stated Lease Term |
| February 1, 1977 | 29 months |
| July 1, 1979 | 12 months |
| July 1, 1980 | 12 months |
| July 1, 1981 | 12 months |
At the time of trial, the truck was still being leased by D & B to Roofing under a lease which was entered into on July 1, 1984, for a term of 12 months. All the material provisions of the aforementioned leases are identical with the following exceptions:
a. The monthly rent was reduced after 36 months from $1,680 per month to $1,090 per month;
b. The lease dated February 1, 1977, provided that the lessee was to pay all expenses except that the lessor was to reimburse the lessee for expenses not to exceed $3,100. *319 The lease dated July 1, 1979, provided that the lessor was to pay all expenses, while the lease dated July 1, 1980, provided that the lessee was to pay all expenses; and
c. The initial lease, dated February 1, 1977, contained an option in favor of the lessee to purchase the equipment. This option was not contained in any subsequent lease.
On March 31, 1977, D & B acquired a Toshiba copier model 702A with an economic useful life of 8 years. D & B entered into the following leases with Roofing with respect to the copier:
| Date of Lease | Stated Lease Term |
| April 1, 1977 | 24 months |
| April 1, 1979 | 12 months |
| April 1, 1980 | 12 months |
| April 1, 1981 | 12 months |
There is no evidence of any lease between D & B and Roofing with respect to the copier after March 31, 1982. All of the leases provided that the lessee was obligated to provide insurance for the copier and to maintain the copier in good working condition. All of the material provisions of the aforementioned leases are identical with the following exceptions:
a. The monthly rent was reduced from $120 a month to $80 a month in the April 1, 1980 lease; and
b. The lease dated April 1, 1977, provided*320 that the lessor was to pay expenses, not to exceed $225, for the first 12-month period. The lessee was required to pay the remaining expenses for such period. The subsequent leases provided that the lessee was to pay all expenses.
On January 10, 1978, D & B acquired a 1978 Mack truck with an economic useful life of 5 years. D & B entered into the following leases with Roofing with respect to the truck:
| Date of Lease | Stated Lease Term |
| February 1, 1978 | 29 months |
| July 1, 1980 | 12 months |
| July 1, 1981 | 12 months |
At the time of trial, the truck was still being leased by D & B to Roofing under a lease which was entered into on July 1, 1984, for a term of 12 months. All of the material provisions of the aforementioned leases are identical with the following exceptions:
a. The monthly rent was reduced from $1,140 per month to $741 per month after 36 months;
b. The lease dated February 1, 1978, provided that the lessee was to pay for all expenses except that the lessor was to reimburse the lessee for expenses not to exceed $2,100, while the leases entered into on July 1, 1980, and July 1, 1981, provided that the lessor was to reimburse the lessee for all*321 expenses of license fees, insurance, repairs, and maintenance; and
c. The initial lease contained an option in favor of the lessee to purchase the equipment. This option was not contained in any subsequent lease.
On March 29, 1979, D & B acquired a 1979 35-ton P & H hydraulic truck crane with an economic useful life of 10 years. D & B entered into a lease with Roofing with respect to that crane dated April 1, 1979, for a term of 40 months. At the time of trial the crane was still being leased by D & B to Roofing under a lease which was entered into on August 1, 1984, for a term of 12 months. The leases provide that the lessee is to pay all expenses except that within the first 12 months of operation the lessor was to pay the expenses, not to exceed $6,500. Under the initial lease dated April 1, 1979, the rent was $3,400 per month, whereas the rate in the subsequent lease dated August 1, 1984, was $2,200 per month.
On October 1, 1978, D & B acquired a 1979 25-ton Grove hydraulic truck crane with an economic useful life of 10 years. On the same day, D & B and Roofing entered into a lease agreement with respect to that crane for a stated term of 40 months. It was subsequently*322 determined that the Grove crane was better suited to the operations of Roofing's wholly owned subsidiary, F.J.A. Christiansen Corp. Therefore, approximately six months after it was acquired, the Grove crane was distributed by D & B to its partners who then contributed it to D & BJ Associates as a contribution to capital. D & BJ Associate (also known as DB & J Associates and BD & J Associates) is a partnership whose partners are Donald McNamara, Robert Christiansen, and James McNamara (Donald's brother). Each partner has a one-third interest in the partnership with respect to the Grove crane.
On March 15, 1979, D & BJ Associates and F.J.A. Christiansen Corp. entered into a lease agreement with respect to the Grove crane for a term of 40 months. There is no evidence as to whether, at the time of trial, the Grove crane was still being leased to F.J.A. Christiansen Corp. The lease agreement for the Grove crane between D & BJ Associates and F.J.A. Christiansen Corp. contained a provision requiring D & BJ Associates to pay up to $5,000 of
For the time during which it leased the 1979 25-ton Grove crane to Roofing, D & B*323 paid $1,026 of the
Except with respect to the 1979 25-ton Grove crane, petitioners paid
McNamara has degrees in both business administration and in law. Petitioners were advised as to and were aware of the tax aspects of the leasing arrangements before entering into the leases which are the subject of this case.
During the years in issue, D & B entered into several agreements with Marine National Exchange Bank to borrow funds. These agreements state that such funds are to be used "for the purpose of financing equipment leased to the F.J.A. Christiansen Roofing Co., Inc. * * * or any of its subsidiaries." The agreements further required that Donald McNamara and Robert Christiansen remain in principal management positions of Roofing for the term of the loan agreements, except in the event of the death or incapacity of either of them.
During the years in issue D & B claimed investment tax credit based on the five assets described above, all of which qualify as
The sole issue presented is whether petitioners, as partners in D & B, are entitled to investment tax credits for equipment purchased by the partnership and leased to a related corporation.
The respondent's determination in his statutory notice of deficiency to disallow the investment tax credit is presumptively correct, and petitioners have the burden of proving otherwise.
(3) Noncorporate Lessors. -- A credit shall be allowed by
(A) the property subject to the lease has been manufactured or produced by the lessor, or
*326 (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 the deductions with respect to such property which are allowable to the lessor solely by reason of
As this Court explained in
The property which was the subject of the leases under consideration here was not manufactured or produced by D & B. Thus, petitioners, as noncorporate lessors, must satisfy the requirements of subsection 46(e)(3)(B) in order to be entitled to the investment tax credit. With respect to each asset, these requirements are: (1) a lease term of less than 50 percent of the useful life of the property; and (2)
For petitioners to prevail, they must*328 first show that the term of each lease was less than 50 percent of the useful life of the property. On its face, each of the original written lease documents specified a term of less than 50 percent of the useful life of the subject property. Respondent argues, however, that the facts presented herein reflect a reasonable certainty that the corporate lessee would continue leasing the properties from D & B for an indefinite period. He concludes, therefore, that the stated "terms" of the leases should be disregarded in determining the terms of the leases under
The provisions of written documents are not necessarily conclusive for tax purposes.
All facts and circumstances that shed light on a transaction should be considered in deciding whether a lease is of indefinite duration rather than limited to the term stated in the lease agreement.
The evidence shows that D & B purchased equipment in order to meet the specific operating needs of Roofing. Although the purchased equipment could have been used by other companies in the roofing industry, the property was selected not for its general marketability but according to the particular needs of Roofing. This tailoring of D & B's purchases to the needs of Roofing indicates that, at the time the original leases were entered into, the parties intended such leases to continue beyond their stated terms.
The record also shows that Roofing explored the possibility of leasing equipment from other companies but found the cost to be prohibitive and, therefore, arranged to fulfill its equipment needs by leasing from D & B. It is not unreasonable to expect that the cost of leasing from*332 a non-related company would continue to be higher than the cost of leasing from D & B. Thus, it can be inferred that, at the time of entering into the subject leases, Roofing and D & B anticipated continuing such leases beyond their stated termination dates, for as long as Roofing needed the equipment. In addition, there is no indication that Roofing's reasons for leasing rather than purchasing the needed equipment, namely its desire to limit its balance sheet liabilities and to preserve capital, would change over time. Therefore, we do not believe that Roofing expected to exercise the option to purchase contained in some of the original leases, but intended to continue the lease agreements for as long as the equipment was needed.
The evidence also shows that D & B leased equipment only to related parties. While this fact, standing alone, is not determinative, when considered with the entire record it suggests that it was within the contemplation of the parties that the leases would be continued on a long-term basis, past their termination dates.
Finally, common control of the lessor and lessee is a factor to be considered in determining whether the stated term of a lease should*333 be disregarded. See
Because of our determination that the 50 percent test for use of the investment tax credit by a noncorporate lessor under
In support of their contention that the terms set forth in the written lease documents should control in determining the terms of the leases for purposes of
Petitioners maintain that underlying the leasing transactions here were real economic and business considerations and that although they were aware of the tax benefits resulting from their leasing activities, these activities were not primarily tax motivated. They conclude that because their transactions were not an intentional abuse of the investment credit provisions, such credits should not be denied. We accept as true McNamara's testimony that he and Christiansen had valid business reasons for forming D & B, in addition to their intent to lease equipment to Roofing. We do not require persons engaged in business activities to be ignorant of the tax consequences of those activities. Under the facts presented here, however, the presence*337 or absence of valid business reasons for entering into the instant leasing transactions is irrelevant. See
For the foregoing reasons, we find that petitioners are not entitled to the investment credit with respect to the equipment discussed herein.
1. Unless otherwise indicated, all section references are to the Internal Revenue Code of 1954, as amended and in effect during the years in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2.
3. We disagree with petitioner's contention that
4.
5. See also
6. At trial, McNamara candidly admitted that renewals of the subject leases were not negotiated by "independent parties facing each other," but that the parties tried to be "logical" and to make "intelligent business decisions," which were in the best interests of all concerned.↩
Commissioner v. Court Holding Co. , 65 S. Ct. 707 ( 1945 )
G. W. Van Keppel Company v. Commissioner of Internal Revenue , 295 F.2d 767 ( 1961 )
Laurence M. And Phyllis W. Carlson v. Commissioner of ... , 712 F.2d 1314 ( 1983 )
Highland Hills Swimming Club, Inc., a Corporation v. Earl R.... , 272 F.2d 176 ( 1959 )
Ragnar v. Hokanson and Marilyn L. Hokanson v. Commissioner ... , 730 F.2d 1245 ( 1984 )