730 F.2d 1245 (9th Cir. 1984), 82-7768, Hokanson v. C.I.R.
|Citation:||730 F.2d 1245|
|Party Name:||Ragnar V. HOKANSON and Marilyn L. Hokanson, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.|
|Case Date:||February 07, 1984|
|Court:||United States Courts of Appeals, Court of Appeals for the Ninth Circuit|
Argued and Submitted Sept. 7, 1983.
Robert G. Burt, Burt & Hagen, P.C., Portland, Or., for petitioners-appellants.
William Wong, Asst. Atty. Gen., Washington, D.C., for respondent-appellee.
Appeal from the Decision of the United States Tax Court.
Before FLETCHER and ALARCON, Circuit Judges, and JAMESON, [*] District Judge.
FLETCHER, Circuit Judge:
This is an appeal from a decision of the tax court that the Hokansons were not entitled to an investment tax credit on tractor-trailer trucks they purchased for lease to a farm cooperative during 1977 and 1978. We affirm.
The Hokansons leased the trucks in question to North Pacific Canners and Packers, Inc. (Nor-Pac), an Oregon farm cooperative engaged in the food distribution business. In 1970, Nor-Pac had become dissatisfied with the commercial trucking companies it had been using to transport its food products to distribution points throughout the country and decided to set up its own transportation department. Because of a shortage of capital, Nor-Pac decided not to purchase its own fleet of trucks but rather to enter into a lease-employment relationship with the Hokansons.
In 1970, Ragnar Hokanson joined Nor-Pac as transportation director, in charge of managing the shipping division. The Hokansons also agreed to lease tractor-trailer trucks to Nor-Pac pursuant to a master lease agreement, which became effective on January 1, 1971.
Under the leasing arrangement, the Hokansons were to purchase on their own credit trucks needed by Nor-Pac. The master lease served as the governing instrument for all trucks acquired and leased to Nor-Pac. Schedules describing the trucks subject to the lease were periodically attached and incorporated into the master lease.
According to the terms of the master lease, each party had the right to cancel the lease each January by giving 30 days written notice, but neither party had an option to renew. Without any action on the part of either party to cancel, the lease would continue indefinitely.
At the time the parties first entered into the lease, neither was willing to make an irrevocable commitment. The Hokansons leased only three trucks to Nor-Pac in the first year, and the Nor-Pac board of directors wanted to be free to cancel the lease if the new arrangement did not prove
to be an improvement over the old. After the first year and each January thereafter, Hokanson reviewed the lease rates and occasionally proposed new ones. The Nor-Pac board then also reviewed the lease and determined whether to continue or modify the leasing agreement. The parties periodically amended the lease to incorporate higher lease rates. Neither party exercised the right to cancel until March of 1980, when Hokanson terminated the leasing arrangement largely because of his bad health.
In 1977 and 1978, the tax years at issue, the Hokansons purchased and then leased to Nor-Pac 18 tractor and trailer units that the parties stipulated were "new section 38 property." Nor-Pac made no loans or loan guarantees to assist the Hokansons in purchasing the trucks.
On their 1977 and 1978 federal income tax returns, the Hokansons claimed investment credits based on the units purchased and put into service in those years. The Commissioner disallowed taxpayers' investment credit claims and issued a notice of deficiency, determining that the terms of the leases for the trucks at issue were open-ended and were not realistically contemplated to last for less than 50 percent of the stipulated 8-year useful life of the trucks.
The Tax Court agreed with the Commissioner and denied the credits, ruling that the taxpayers failed to meet their burden of demonstrating that the parties realistically contemplated that the leases would terminate prior to the expiration of one-half of the useful life of the trucks. The tax court found that "the parties intended this equipment to be leased for its entire useful life" and that the annual reviews were but "periodic examinations of a continuing and indefinite lease."
The Hokansons argue...
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