Carlson v. Comm'r of Internal Revenue

• Citation: 79 T.C. 215
• Decision Date: 09 August 1982
• Docket Number: Docket No. 17491-79.
• Parties: LAURENCE M. CARLSON and PHYLLIS W. CARLSON, PETITIONERS v. COMMISSIONER of INTERNAL REVENUE, RESPONDENT
• Court: United States Tax Court

79 T.C. 215

LAURENCE M. CARLSON and PHYLLIS W. CARLSON, PETITIONERS

v.COMMISSIONER of INTERNAL REVENUE, RESPONDENT

Docket No. 17491-79.

United States Tax Court

Filed August 9, 1982.

Petitioner, an individual, leased property to lessee. The property was ordered in a partly assembled condition from a third party by lessee and delivered directly to lessee's place of business. Assembly of the property was then completed by workmen selected by lessee's general manager. Such workmen received no instructions from petitioner, finished assembly of the property at lessee's place of business, and were paid directly by lessee. Petitioner's only involvement with the assembly process was reimbursing lessee for the costs and expenses associated with completing assembling of the property, and allegedly asking lessee's general manager to furnish him with the names of workmen who were competent at assembling the property and then instructing the general manager to arrange for those men to complete assembly of the property. Held: Since petitioner did not personally assemble the property or control the details of its assembly, it was not assembled by him. The property, consequently, is not considered to be manufactured by petitioner in the ordinary course of his business and he is, therefore, not entitled to an investment credit with respect to the property under sec. 46(e)(3)(A), I.R.C. 1954. Scott L. Simpson and Richard Kuhling, for the petitioners.

Jeannette A. Cyphers, for the respondent.

IRWIN , Judge:

Respondent determined the following deficiencies in petitioners' Federal income taxes:

+--------------------+
                ¦Year  ¦Deficiency   ¦
                +------+-------------¦
                ¦      ¦             ¦
                +------+-------------¦
                ¦1971  ¦$209         ¦
                +------+-------------¦
                ¦1972  ¦1,965        ¦
                +------+-------------¦
                ¦1973  ¦2,534        ¦
                +------+-------------¦
                ¦1974  ¦8,726        ¦
                +------+-------------¦
                ¦1975  ¦12,486       ¦
                +------+-------------¦
                ¦1976  ¦3,598        ¦
                +--------------------+
                

Following a concession by petitioners, the sole issue remaining for decision is whether petitioner Laurence M. Carlson¹ is entitled to the investment tax credit provided by section 38² for the years 1974, 1975, and 1976, for “apple-picking” bins that he purchased and leased to Welch Apples, Inc.

The years 1971, 1972, and 1973 are involved in this case only because of the elimination of investment credit carrybacks from 1974 through 1976. The correctness of these adjustments depends upon the resolution of the issue presented for decision.

FINDINGS OF FACT

Some of the facts have been stipulated. The stipulation of facts and the stipulated exhibits are incorporated herein by this reference.

Petitioner was a resident of Wenatchee, Wash., at the time the petition was filed in this case. He timely filed Federal income tax returns for the years in issue with the Internal Revenue Service Center, Ogden, Utah.

At all relevant times, petitioner, who was primarily engaged in the practice of law, was the attorney for Welch Apples, Inc. (hereinafter Welch Apples). ³ Throughout the years in issue, Welch Apples was engaged in the storage, grading, and packing of apples produced by independent growers. Usually, warehousers or processors of apples, such as Welch Apples, for a fee, supply the independent growers with apple-picking bins. As the growers harvest their apples, they deposit them in the apple-picking bins, which are plywood containers. The bins filled with apples are then immediately transferred to controlled atmosphere storage facilities maintained by the warehouser, where they may be stored for 8 to 10 months. From June 1973 through 1976, petitioner leased apple-picking bins to Welch Apples.

Welch Apples had purchased all the apple-picking bins that it needed for each year prior to 1973, except for the year 1969, when it leased bins from H. R. Spinner Co. (hereinafter Spinner).⁴ During the late 1960's and early 1970's, two major changes in the procedures for handling fruit in warehouses were occurring: (1) A switch was being made from regular atmosphere storage to controlled atmosphere storage, and (2) a change was being completed from using boxes to using apple-picking bins. Welch Apples had plans in 1973 to construct a controlled atmosphere storage facility, to be financed by Seattle First National Bank. Welch Apples was advised by both its certified public accountant and Wayne Lanphere, the manager and vice president of Seattle First National Bank, that by leasing apple-picking bins, rather than purchasing them, it would enhance its balance sheet and thereby improve its credit standing. ⁵ In 1973, Welch Apples, consequently, decided to begin leasing apple-picking bins.

In the early spring of 1973, petitioner became aware that Welch Apples was in the process of determining whether to lease bins and, if so, from whom to lease them. Petitioner became interested in leasing the bins to Welch Apples. He discussed with J. W. Welch, Jr., and Reed Johnston (hereinafter Reed), who was employed by Welch Apples as general manager in charge of operations throughout the years in issue, the basic terms of a lease in 1973. Ultimately, Welch Apples decided to lease apple-picking bins from petitioner. Among the reasons for this decision was Reed's feeling that petitioner, as a member of the Welch family (see note 3), might be more lenient than another lessor, if Welch Apples failed to make a lease payment as a result of financial difficulties.

By a written lease agreement reflecting a date of June 11, 1973, petitioner agreed to lease 3,000 apple-picking bins to Welch Apples for a term of 7 years. Reed ordered those bins⁶ in a partly assembled and treated condition from Spinner. Petitioner did not complete assembly of those bins.⁷ Instead, Reed arranged for a worker named Walter Johnson, who had previously assembled bins to his satisfaction, to assemble the bins at a specific rate per bin. Mr. Johnson assembled the bins on his property in Chelan. Petitioner reimbursed Welch Apples after it had paid Mr. Johnson for completing 2,000 bins. He then paid Welch Apples for assembly of the other 1,000 bins.

By written agreements dated July 19, 1974, September 9, 1975, and July 8, 1976, petitioner leased 4,000 apple-picking bins, 5,000 apple-picking bins, and 4,000 apple-picking bins, respectively, to Welch Apples. Each lease provided for a lease term of 7 years.

Reed placed orders with Spinner for the bins to be leased from petitioner in 1974 and 1975. In those orders, he included all specifications for the bins and requested that the bins be shipped to Welch Apples. Spinner sent an “Acknowledgment” to Welch Apples for the order placed by Reed in 1975. An acknowledgment is mailed by Spinner to the customer who places an order, so that he may check the specifications. Spinner acknowledged to Welch Apples an order placed for the bins to be purchased by petitioner and leased to Welch Apples under the 1976 lease agreement.

After Spinner acknowledges an order for partly assembled bins, it then calls its supplier to arrange for the bins to be manufactured to meet the specifications of the customer. The partly assembled bins are then shipped directly from the supplier to the location requested by the customer. In 1974, 1975, and 1976, the bins in question, which were ordered in a partly assembled condition, were shipped to Welch Apples, where their assembly was completed.

Spinner generally invoices its customers for bins following their delivery. In 1974, Spinner invoiced petitioner for the bins ordered by Reed. In 1975, Spinner initially addressed some invoices for the bins ordered by Reed to Welch Apples. Such invoices, however, were changed and all the invoices in 1975 were sent to petitioner. Spinner originally sent invoices in 1976 to Welch Apples for the bins ordered during that year. Later, Spinner issued new invoices to replace the invoices sent to Welch Apples and sent the new invoices to petitioner.

As in 1973, Reed arranged in 1974, 1975, and 1976 for various workmen, whom he knew were competent at completing assembly of bins, to assemble the bins to be leased from petitioner. Since the workmen already knew how to assemble the bins, they required no instruction. All the bins were assembled by them at Welch Apples' place of business. In each of the years 1974 and 1975, petitioner drew a check payable to Welch Apples for the cost of assembling the bins. In 1976, he drew a check jointly payable to Larry V. Zimmerman and Welch Apples for assembly of the bins leased to Welch Apples.⁸

In his notice of deficiency, respondent disallowed investment tax credits claimed on petitioners' income tax returns for the years 1974, 1975, and 1976 for the apple-picking bins.

OPINION

Section 38 allows a credit against income tax for investment in “section 38 property.” Section 48(a)(1) defines the term section 38 property to include generally depreciable, tangible personal property having a useful life of at least 3 years. Section 46(e)(3), however, provides, in pertinent part, as follows:

SEC. 46(e)(3). NONCORPORATE LESSORS .—-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—-

(A) the property subject to the lease has been manufactured or produced by the lessor, or

(B) the term of the lease (taking into account options to renew) is less than 50 percent of the useful life of the property, * * *⁹ Section 108 of the Revenue Act of 1971, Pub. L. 92-178, 85 Stat. 497, added section 46(e)(3) to the Code.¹⁰ In connection with its enactment, the Senate commented as follows:

The committee is concerned, however, as was the House, that the restoration of the credit could once again make leasing arrangements motivated largely by tax reasons quite attractive. The committee agrees with the House that it is appropriate to impose limitations on the availability of the investment credit to...