Borchers v. Commissioner, Docket No. 3576-86.

• Court: United States Tax Court
• Writing for the Court: RAUM
• Citation: 55 TCM (CCH) 1469,1988 TC Memo 349
• Parties: Richard J. Borchers and Jane E. Borchers v. Commissioner.
• Docket Number: Docket No. 3576-86.
• Decision Date: 04 August 1988

55 T.C.M. (CCH) 1469 (1988)

T.C. Memo. 1988-349.

Richard J. Borchers and Jane E. Borchers
v.
Commissioner.

Docket No. 3576-86.

United States Tax Court.

Filed August 4, 1988.

Bernie H. Beaver, 4505 Edina Blvd., Minneapolis, Minn., for the petitioners. Gail K. Gibson, for the respondent.

Memorandum Opinion

RAUM, Judge:

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. 1954, with respect to computer equipment leased by the husband (petitioner) to their wholly owned corporation.

55 TCM (CCH) 1470

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 then leased to Decision:

 Equipment Cost Lease Date
                 IBM Key/Diskette ............. $ 3,000 4-1-82
                 Three Teleray 10 N
                 CRT ........................ 3,891 4-1-82
                 Two Honeywell Disk
                 Drives ..................... 9,900 4-1-82
                 Alpha L62 CPU ................ 38,990 9-15-82
                 DPS 16 & 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 Re-lease
                 Equipment Cost Lease Date Date
                 North Star Micro Processor ........................... $ 6,540.75 6-11-81 7-12-82
                 HIS Computer System .................................. 29,000.00 6-11-81 7-12-82
                 Four Telerays; One printer ........................... 7,288.00 12-23-81 12-23-82
                 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 ............. 6-11-81 7-12-83
                 HIS Computer System .................... 6-11-81 7-12-83
                

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,...