Bloomberg v. Comm'r of Internal Revenue
| Citation | 74 T.C. 1368 |
| Decision Date | 23 September 1980 |
| Docket Number | Docket No. 2977-78. |
| Parties | LEROY BLOOMBERG and SALLY BLOOMBERG, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT |
| Court | United States Tax Court |
OPINION TEXT STARTS HERE
1. Petitioner purchased medical equipment and furnishings in 1974 which he immediately leased to a corporation of which he was an employee under a written lease dated Aug. 1, 1974, with a term of 5 years. The property had estimated useful lives of 5 to 7 years. The lease was purportedly canceled on June 10, 1977, prior to the expiration of 50 percent of the useful lives of the property. Held, cancellation of the lease does not permit petitioner to meet the conditions of sec. 46(e)(3), I.R.C. 1954, for allowance of an investment credit with respect to the property.
2. Petitioner purchased two automobiles in 1974 which he purportedly used in his business of being an employee of the corporation. Held, petitioner failed to prove the business usage of the automobiles and is not entitled to an investment credit with respect thereto in excess of the amount conceded by respondent. David M. Buda, for the petitioners.
Charles M. Layton, for the respondent.
Respondent determined a deficiency in petitioners' income tax for the year 1974 in the amount of $6,849.33. Due to concessions of the parties, the only issues for decision are (1) whether petitioners are entitled to an investment credit under sections 38 and 46, I.R.C. 1954, for equipment owned by petitioners and leased to petitioners' professional corporation, Leroy Bloomberg, M.D., Inc., and (2) whether petitioners are entitled to an investment credit in excess of $65.86 for two automobiles owned by them and purportedly used by them in their business as employees of Leroy Bloomberg, M.D., Inc.
The stipulated facts are incorporated herein by this reference.
Petitioners Leroy and Sally Bloomberg, husband and wife, resided in Newark, Ohio, when they filed their petition herein. They filed a joint Federal income tax return for the year 1974 with the District Director of Internal Revenue, Cincinnati, Ohio.
Leroy Bloomberg (herein petitioner) is an ophthalmologist and is employed as a physician by a professional corporation known as Leroy Bloomberg, M.D., Inc., in Newark, Ohio (hereinafter referred to as the corporation). Leroy was president of the corporation during 1974. On August 1, 1974, the corporation leased certain medical equipment and office furniture and fixtures from petitioner under a written lease agreement. The equipment and furnishings were purchased by petitioner in 1974 and were transferred to and first placed in service by the corporation in 1974.
The lease agreement between petitioner and the corporation was for a period of 5 years commencing on August 1, 1974, and provided that the lessee should pay lessor an aggregate rental of $40,954.20 over the term of the lease, payable in monthly installments. Title to the equipment was to remain in lessor's name and, upon termination, the equipment was to be returned to the lessor in the same condition as when received by lessee, reasonable wear and tear excepted. Upon default by the lessee, the lease could be terminated by lessor by written notice, but there was no provision for termination by the lessee.
The furnishings and equipment leased were purchased by petitioner for an aggregate cost of $35,979.56, were reported on the depreciation schedule attached to petitioners' 1974 return at that cost, and depreciation deductions on the furnishings and equipment were claimed on the return, based on estimated useful lives of 7 years for all items except one, which used a useful life of 5 years. Petitioners also reported the rent received from the corporation as income on their 1974 return.
Thomas E. Brock, Jr., is president of Medical Management, Inc., of Columbus, Ohio. The business of Medical Management, Inc., is to render accounting and tax service to physicians and dentists, which it did for the corporation and petitioners. Brock was secretary of the Bloomberg corporation in 1974.
On June 10, 1977, Brock, as president of Medical Management, Inc., wrote a letter to petitioners, advising This letter also advised petitioner not to pay himself any further lease payments from the corporation.
Petitioner purchased a 1974 Chrysler Imperial automobile on September 25, 1974, at a cost of $5,638, and a 1974 Mercedes Benz automobile on August 26, 1974, at a cost of $16,939. Petitioner did not lease these automobiles to the corporation but was paid an automobile allowance by the corporation which he included in taxable income. On the depreciation schedule attached to petitioner's 1974 return, an estimated life of 3 years was claimed for the Imperial, depreciation of $930.21 was claimed, and also an investment credit of $131.55. The Mercedes was also listed on the depreciation schedule with an estimated useful life of 7 years; depreciation in the amount of $1,580.92, and an investment credit of $1,185.73 was claimed.
In the notice of deficiency, respondent disallowed the entire investment credit claimed on the return, which included the credit claimed on the leased equipment and furnishings, and on the automobiles. On brief, respondent concedes that petitioner is entitled to 5 percent of the investment credit, or $65.86, on the automobiles.
OPINIONSection 38, I.R.C. 1954, provides for a credit against tax for investments in certain depreciable property, in an amount determined under section 46. Section 46(a)(2) provides that the amount of the credit shall be certain specified percentages of the qualified investment in the property. Section 46(c) defines “qualified investment” to mean the aggregate of the applicable percentages of the basis of new and used section 38 property placed in service by the taxpayer during the taxable year. Section 46(e)(3) provides:
A credit shall be allowed by section 38 to a person which is not a corporation with respect to property of which such person is the lessor only if—-
(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 section 162 * * * exceeds 15 percent of the rental income produced by such property.
Section 48(a) defines the term “section 38 property” as including tangible personal property (among other things). Section 48(b) defines “new section 38 property” as including section 38 property acquired after December 31, 1961, if the original use of such property commences with the taxpayer and commences after such date. Section 48(d) provides that a person who is a lessor of property may (in accordance with regulations) elect with respect to new section 38 property to treat the lessee...
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