DocketNumber： Docket No. 288-84
Judges： Parr
Filed Date： 4/14/1986
Status： Precedential
Modified Date： 11/14/2024
*124
Petitioners incorporated their farm operation in 1974. At that time, they transferred some property to the corporation but retained ownership of certain farm equipment. Petitioners entered into an agreement with the corporation whereby they would lease that equipment and any subsequently acquired farm equipment to the corporation for use in the business. Petitioners claimed investment tax credits for these assets. In 1979, they transferred the farm equipment to the corporation.
*644 Respondent determined a deficiency in petitioners' 1979 Federal income tax return in the amount of $ 12,765.04. The sole issue for decision is whether petitioners must recapture investment tax credits previously taken for certain farm implements and machinery upon the transfer of such property to petitioners' wholly owned corporation.
FINDINGS OF FACT
This case was submitted to the Court without trial pursuant to Rule 122. *127 and grain farm in the form of a sole proprietorship. The assets of the farm consisted of grain, livestock, real property, farm implements, machinery, buildings, and cash. On November 15, 1974, petitioners formed a corporation known as Borgic Farms, Inc. (hereinafter the corporation). Following this incorporation, the corporation operated the farm previously operated by petitioners, and petitioners *645 became employees of the corporation. Petitioners received wages from such employment during the years 1975 Year Petitioner Amount 1975 Erval J. Borgic $ 12,000.00 Betty Borgic 3,900.00 1976 Erval J. Borgic 13,200.00 Betty Borgic 4,801.18 1977 Erval J. Borgic 16,800.00 Betty Borgic 3,600.00 1978 Erval J. Borgic 13,200.00 Betty Borgic 3,300.00 1979 Erval J. Borgic 12,000.00 Betty Borgic 3,300.00
Upon formation of the corporation, *128 petitioners transferred to the corporation all grain and livestock inventories previously used by them in operating the farm, plus cash, in exchange for 1,000 shares of voting common stock in the corporation. Petitioner Erval J. Borgic received 750 of these shares, while petitioner Betty Borgic received 250.
In addition to transferring the grain and livestock inventories to the corporation, petitioners entered into a lease agreement with the corporation whereby the real property, farm implements, machinery, and buildings owned by petitioners and previously used by them in the operation of the farm, plus any farm implements and machinery thereafter acquired by petitioners, were leased to the corporation. Thereafter, the corporation used this property, both real and personal, in the operation of the farm. Pursuant to the lease agreement, the corporation paid the following amounts of rent to petitioners for this property during the years 1975 Year Amount 1975 $ 64,085.00 1976 88,962.00 1977 109,438.00 1978 108,934.48 1979 55,786.00
*129 *646 The farm implements and machinery which were owned by petitioners on November 15, 1974, or acquired by them subsequent to that date, were assets qualifying for the investment credit under section 38 and petitioners claimed investment credits for this property. The following table lists the farm implements and machinery which were leased to the corporation Estimated Investment Date useful credit Item acquired Cost life claimed Grain dryer 3/1/73 $ 426 7 $ 29.82 Crop sprayer 5/1/73 823 7 57.61 Auger-Mayer 8/1/73 813 7 56.91 Chev. 2 ton pickup 11/1/73 7,455 7 521.85 Hog equip.-IHC 11/1/73 664 7 46.48 Tractor-IHC 12/1/73 7,245 7 507.15 Elec. equip.-fan 3/1/74 397 7 27.79 Hog. equip.-rotary 3/1/74 818 7 57.26 Hog. equip.-vent 3/1/74 844 7 59.08 Grain dryer 4/1/74 3,817 7 267.19 Fuel tank 8/1/74 283 7 19.81 Wagon unloader 8/1/74 1,948 7 136.36 Harrow-26' 12/1/74 1,100 7 77.00 Rotary mower 12/1/74 848 7 59.36 Field mower 12/1/74 1,132 7 79.24 Hog equip. 3/1/75 2,100 7 210.00 Hog equip. 4/1/75 735 7 73.50 Rotary hoe 4/1/75 2,032 7 203.20 Tractor 9/1/75 14,000 7 1,400.00 Farm mower 9/1/75 1,995 7 199.50 Tractor 12/1/75 22,563 7 2,256.30 Field cultivator 12/1/75 4,200 7 420.00 Plow 12/1/75 5,458 7 545.80 Grader blade 12/1/75 840 7 84.00 Truck top 9/1/76 999 5 66.60 3/4 Ton truck 12/1/76 6,817 7 681.70 Water system 12/1/76 671 7 67.10 Combine 12/1/76 24,300 7 2,430.00 35'8" Kewanee 12/1/76 1,312 7 131.20 20' Grain head 12/1/76 4,788 7 478.80 Snow blower 12/1/77 1,132 7 113.20 Van 8/1/78 3,272 7 327.20 Auger 9/1/78 1,907 7 190.70 Chisel plow 9/1/78 2,888 7 288.80 Honey wagon 11/1/78 10,804 7 1,080.40 Corn planter 12/1/78 $ 17,133 7 $ 1,713.30 Cultivator 12/1/78 6,725 7 672.50
*647 The above-listed farm implements and machinery were leased, rather than transferred, to the corporation by petitioners due to the existence of an Illinois personal property tax which was then assessed against all corporate personal property. That tax was abolished on January 1, 1979. On that date, petitioners transferred to the corporation all of the items of farm implements and machinery listed above, as well as some of the buildings and some of the land they were then leasing to the corporation for use in the farming business. The assets transferred had an undepreciated cost at the time of such transfer of $ 345,470. In exchange for contributing these assets, petitioners received from the corporation 660 shares of voting common stock, worth $ 117,513., and debentures totaling $ 227,957.
Respondent, in his notice of deficiency, determined that petitioners*131 were liable for investment tax credit recapture upon the January 1, 1979, transfer of the farm implements and machinery to the corporation. Respondent determined the amount to be $ 12,765.04, Investment credit Item Date acquired subject to recapture Grain dryer 3/1/73 $ 9.94 Crop sprayer 5/1/73 19.20 Auger-Mayer 8/1/73 18.97 Chev. 2-ton pickup 11/1/73 173.95 Hog equip. - IHC 11/1/73 15.49 Tractor - IHC 12/1/73 169.05 Elec. equip. - fan 3/1/74 18.53 Hog equip. - rotary 3/1/74 38.17 Hog equip. - vent 3/1/74 39.39 Grain dryer 4/1/74 178.13 Fuel tank 8/1/74 13.21 Wagon unloader 8/1/74 90.91 Harrow-26' 12/1/74 51.33 Rotary mower 12/1/74 39.57 Field mower 12/1/74 52.83 Hog equip. 3/1/75 140.00 Hog equip. 4/1/75 49.00 Rotary hoe 4/1/75 135.47 Tractor 9/1/75 $ 933.33 Farm mower 9/1/75 133.00 Tractor 12/1/75 1,504.20 Field cultivator 12/1/75 280.00 Plow 12/1/75 363.87 Grader blade 12/1/75 56.00 Truck top 9/1/76 66.60 3/4-ton truck 12/1/76 681.70 Water system 12/1/76 67.10 Combine 12/1/76 2,430.00 35'8" Kewanee 12/1/76 131.20 20' grain head 12/1/76 478.80 Snow blower 12/1/77 113.20 Van 8/1/78 327.20 Auger 9/1/78 190.70 Chisel plow 9/1/78 288.80 Honey wagon 11/1/78 1,080.40 Corn planter 12/1/78 1,713.30 Cultivator 12/1/78 672.50 Total 12,765.04
*648 In his notice of deficiency, respondent stated that the above investment tax credits were subject to recapture because the property on which the credit was taken had ceased to qualify as section 38 property.
OPINION
Respondent's determination that a portion of the investment credits claimed on the property transferred to the corporation is subject to recapture is based on
If during any taxable year any property is disposed of, or otherwise ceases to be section 38 property with respect to the taxpayer, before the close of the useful life which was taken into account in computing the credit under section 38, then the tax under this chapter for such taxable year shall be increased by an amount equal to *133 the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted solely from substituting, in determining qualified investment, for such useful life the period beginning with the time such property was placed in service by the taxpayer and ending with the time such property ceased to be section 38 property.
Respondent's position is that since the farm implements *649 and machinery transferred to the corporation on January 1, 1979, ceased to be section 38 property with respect to the petitioners prior to the close of their estimated useful lives, the recapture provisions are triggered. Petitioners concede that if
For purposes of subsection (a), property shall not be treated as ceasing to be section 38 property with respect to the taxpayer*134 by reason of a mere change in the form of conducting the trade or business so long as the property is retained in such trade or business as section 38 property and the taxpayer retains a substantial interest in such trade or business.
(a) The section 38 property * * * is retained as section 38 property in the same trade or business,
(b) The transferor * * * of such section 38 property retains a substantial interest in such trade or business,
(c) Substantially all the assets (whether or not section 38 property) necessary to operate such trade or business are transferred to the transferee to whom such section 38 property is transferred, and
(d) The basis of such section 38 property in the hands of the transferee is determined in whole or in part by reference to the basis of such section 38 property in the hands of the transferor.
All four of the conditions set forth in the regulation must be satisfied in order to find that
For the reasons stated herein, we agree with petitioners, and find that the property transferred to the corporation on January 1, 1979, was retained in the same trade or business. As all the conditions set forth in
The case law under this regulation, as well as the legislative history of the statute, sheds some light on the meaning of the phrase "same trade or business" as used in the regulation. In
the phrase "trade or business" as it is used in those paragraphs refers to the trade or business as it existed prior to the disposition but without regard to the form in which the business activity was carried on. In other words, not only the type but also the scope of the trade or business must continue substantially unchanged after the change in form in order for the exception to recapture under
The legislative history of
There is no dispute as to the fact that the corporation *651 used the farm implements and machinery after January 1, 1979, in the business of farming. Whether these assets were used in the same trade or business as they had been used before that transfer thus turns on the determination of whether petitioners were in the farming business or the leasing business, as respondent contends. In this connection, respondent states that while petitioners operated the farm prior to the 1974 incorporation, those activities ceased once the corporation took over the farm operation. Subsequent to incorporation, until the January 1, 1979, transfer of the farm implements and machinery to the corporation, petitioners engaged in the leasing*138 of such property, as well as land and buildings, and received substantial sums as rent under such leases. The leasing of real property and buildings continued in 1979 and petitioners continued to receive rental income from the corporation. Accordingly, respondent submits that we must find that petitioners were in the leasing business from November 15, 1974, until at least 1979, and used the section 38 property at issue here in that business.
Petitioners, on the other hand, argue that they have always been farmers, not lessors, and that the farm equipment and machinery which they leased to the corporation was always used for farming. According to their brief, petitioners "never * * * conducted business activities as lessors, never received any income tax advantage as such and never exercised any right to claim or use the leased property for purposes separate from their farming activities." Petitioners insist that they were passive lessors, for tax purposes only, and were always farmers. Petitioners further point out that they had a valid business purpose for not transferring the section 38 property at incorporation; i.e., avoidance of the State tax. Therefore, they argue, their*139 leasing activities should be overlooked and the January 1, 1979, transfer should be deemed part of the original transfer upon incorporation.
The issue in this case is essentially one of fact. Based on the facts before us, we conclude that petitioners were farmers. Although they set up a corporation to carry on the business, they in fact continued to operate the farm as its *652 employees. In substance, then, petitioners remained farmers even though they operated in corporate form.
The farm implements and machinery were likewise always used in farming. No change in the use of this property took place as a result of the January 1, 1979, transfer. The only change effected by that transfer was one of legal ownership.
We recognize that, as respondent points out, petitioners indeed were lessors of this property, and received rental income and tax advantages as such. *140 However, we are reluctant to find that such activities rose to the level of a trade or business.
In
The instant case is similar to
Our holding today is based on our finding of fact that the farm implements and machinery*142 transferred by petitioners were always used in the farming business.
Nor was our decision in
We also note that by so holding, we are not frustrating the objective of the recapture rules. Those rules were enacted to prevent the "quick turnover of assets" by taxpayers in an effort to obtain "multiple tax credits." H. Rept. 1447, 87th Cong., 2d Sess. 13 (1962),
In conclusion, we find that petitioners' farm implements and machinery were retained in the same trade or business following their transfer to petitioner's corporation. Under
*. By order of the Chief Judge, this case was reassigned to Judge Parr for opinion and decision.↩
1. All section references are to the Internal Revenue Code of 1954 as amended and in effect during the year in issue, and all Rule references are to the Tax Court Rules of Practice and Procedure.↩
2. The parties have stipulated that the amount of wages paid to petitioners during 1974 is not readily ascertainable.↩
3. The parties have stipulated that the amount of rent paid in 1974 is not readily ascertainable.↩
4. The table omits certain other items of farm implements and machinery which were also leased to the corporation, but are not at issue in this case.↩
5. This amount is in addition to the investment credit recapture already reported by petitioners for the year 1979, in the amount of $ 1,249, resulting from the disposition of other items of tangible personal property for which investment tax credits had been claimed.↩
6. The record is silent as to whether petitioners claimed depreciation on the farm implements and machinery it leased to the corporation. We assume they did. In any event, it is clear that they claimed investment tax credits on the purchase of these assets, which provided substantial tax advantages. However, these benefits would have been available to petitioners as sole proprietors.↩
7. We find that petitioners' activities in connection with leasing this property were merely passive, and would not constitute an "active trade or business" under secs. 346(b) (subsequently recodified as sec. 302(e)) and 355(b). See
8. Compare
9.
10.