Borchers v. Comm'r of Internal Revenue
| Decision Date | 19 July 1990 |
| Docket Number | Docket No. No. 3576-86. |
| Citation | 95 T.C. No. 7,95 T.C. 82 |
| Parties | RICHARD J. BORCHERS AND JANE E. BORCHERS, Petitioners v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Ps claimed an investment tax credit for 1982 in respect of computer equipment purchased by P in 1982 and leased by him to a corporation wholly owned by Ps. On their face the leases were for 12-month terms and contained no provision for renewal. All of the leases were in fact renewed in 1983, again for 12-month terms. Similarly, P had leased other equipment to the corporation in 1981 on 12-month leases which were renewed in 1982, some of which were again renewed in 1983. All the renewals were for 12-month periods with substantially the same provisions, except that individual leases had different rentals. P did not enter into any leases with any other lessees in 1982, and the record fails to show whether he entered into leases with any other lessees in any other year. The useful life of the leased equipment was 5 or 6 years. At issue is whether the 1982 leases, although in form stated to be for 12-month terms, were in fact intended to be indefinite in duration so as to bring into play section 46(e)(3)(B), I.R.C. 1954, which allows the investment tax credit to noncorporate taxpayers only if two conditions are satisfied, one of which requires that the term of the lease be ‘less than 50 percent of the useful life of the property.‘ The case was submitted on a fully stipulated record.
HELD, 1. The fact that the case was submitted on the basis of a stipulated record does not change petitioners' burden of proof. The stipulated facts are to be treated in the same manner as facts found by the Court on the basis of evidence offered in the trial of a case. Although Ps made out a prima facie case by presenting leases that were formally only for 12-month periods, the Commissioner discharged his burden of going forward by showing facts in the stipulated record that overcame that prima facie case, notwithstanding that such facts may not have been sufficient to carry the burden of proof, if such burden of proof were on the Commissioner. But the burden of proof was not upon the Commissioner; it was upon Ps and never shifted.
2. Ps failed to carry their burden of proof to establish that the formal 12-month 1982 leases were not in fact intended to be substantially indefinite in duration. Connor v. Commissioner, 847 F.2d 985 (1st Cir. 1988), affg. T.C. Memo. 1987-223, followed. Sauey v. Commissioner, 90 T.C. 824 (1988), affd. without published opinion 881 F.2d 1086 (11th Cir. 1989), distinguished. Bernie H. Beaver, for the petitioners.
Gail K. Gibson, for the respondent.
The Court Of Appeals for the Eighth Circuit vacated our decision in this case and remanded the case for further proceedings. See Borchers v. Commissioner, T.C. Memo. 1988-349, vacated and remanded 889 F.2d 790 (8th Cir. 1989). We have re- examined the entire case, and have concluded that the decision should be in favor of respondent. Before undertaking to apply the relevant principles of law to the facts of this case, we will, for convenience, restate in full the bulk of our prior opinion, including the facts and the general discussion of the law in this field.
The Commissioner determined a $13,322 deficiency in the 1982 income tax of petitioners, husband and wife. The issue before us is whether they are entitled to an investment tax credit under section 38, I.R.C. 1959, with respect to computer equipment leased by the husband (petitioner) to their wholly owned corporation.
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 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. 1
A portion of the equipment leased to Decision in 1982 had been purchased by petitioner in 1982. Other pieces leased to Decision that year had been purchased by petitioner before 1982. However, the issue before us, petitioner's entitlement to an 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 than leased to Decision:
+------------------------------------------+
¦ ¦ ¦Lease ¦
+-------------------------+-------+--------¦
¦Equipment ¦Cost ¦date ¦
+-------------------------+-------+--------¦
¦IBM key/diskette ¦$3,000 ¦04-01-82¦
+-------------------------+-------+--------¦
¦Three Teleray 10 N CRT ¦3,891 ¦04-01-82¦
+-------------------------+-------+--------¦
¦Two Honeywell disk drives¦9,900 ¦04-01-82¦
+-------------------------+-------+--------¦
¦Alpha L62 CPU ¦38,990 ¦09-15-82¦
+-------------------------+-------+--------¦
¦DPS 16 and 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. 2 On his 1982 return, petitioner claimed an investment tax credit in the amount of $12,497 in respect of the above equipment.
The following pieces of equipment were first leased by petitioner to Decision in 1981 and then were re-leased to it in 1982:
+---------------------------------------------------+
¦ ¦ ¦Original ¦ ¦
+-------------------+---------+----------+----------¦
¦ ¦ ¦lease ¦Re-lease ¦
+-------------------+---------+----------+----------¦
¦Equipment ¦Cost ¦date ¦date ¦
+-------------------+---------+----------+----------¦
¦North Star micro ¦$6,540.75¦06-11-81 ¦07-12-82 ¦
+-------------------+---------+----------+----------¦
¦processor ¦ ¦ ¦ ¦
+-------------------+---------+----------+----------¦
¦HIS computer system¦29,000.00¦06-11-81 ¦07-12-82 ¦
+-------------------+---------+----------+----------¦
¦Four Telerays; one ¦7,288.00 ¦12-23-81 ¦12-23-82 ¦
+-------------------+---------+----------+----------¦
¦printer ¦ ¦ ¦ ¦
+-------------------+---------+----------+----------¦
¦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¦ ¦ ¦
+---------------------------------------------------+
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¦06-11-81 ¦07-12-83¦
+--------------------------+----------+--------¦
¦HIS computer system ¦06-11-81 ¦07-12-83¦
+----------------------------------------------+
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 contract language of the form leases provided that ‘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...
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