Comdisco, Inc. v. U.S., 83-3250
| Decision Date | 06 March 1985 |
| Docket Number | No. 83-3250,83-3250 |
| Citation | 756 F.2d 569 |
| Parties | -1006, 85-1 USTC P 9245 COMDISCO, INC., Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Edward C. Rustigan, Mayer, Brown & Platt, Chicago, Ill., for plaintiff-appellant.
Jay W. Miller, Appellate Section, Dept. of Justice, Tax Div., Washington, D.C., for defendant-appellee.
Before ESCHBACH, Circuit Judge, PELL, Senior Circuit Judge, and GORDON, Senior District Judge. *
Comdisco, Inc., a Delaware corporation with its principal place of business in Illinois, appeals from the judgment entered by the district court dismissing its action for refund based upon the Government's refusal to grant investment tax credits. On appeal, this court must determine whether plaintiff is entitled to the credits, which depends upon whether the district court held correctly, under the applicable statutes and regulations, that plaintiff was neither the "lessee" nor the "original user" of the disputed property.
In 1962, Congress added to the Internal Revenue Code provisions establishing an investment tax credit for investments in certain depreciable property. Congress eliminated the credit in 1969 but then re-enacted the legislation, in substantially the same form, as part of the Revenue Act of 1971. Section 38(a) of the Code, 26 U.S.C. Sec. 38(a), provides: "There shall be allowed, as a credit against the tax imposed, the amount determined under" sections 46 through 48 of the Code. The Code refers to property coming within the parameters of the investment tax credit provisions as "section 38 property." Section 46(a) establishes the formula to determine the amount of a credit to which a taxpayer is entitled, section 46(b) provides for the carryback and carryover of unused credits, and section 46(c) defines those investments that qualify for the credit. In this case, neither party questions the amount of the credit claimed, the use of the carryback and carryover provisions, or the qualifying characteristics of the investments.
Rather, the dispute centers around section 48, which governs the use of the investment tax credit with respect to leased property. Section 48(b) allows taxpayers to treat certain leased property as "new section 38 property" as long as the parties lease the property within three months after it is placed in service. Section 48(d)(1) allows the parties to a lease of such new section 38 property to treat the lessee as having acquired the property so that the lessee then may claim the investment tax credit. Section 48(d)(3) also allows a lessee, to whom a lessor has assigned the right to use an investment tax credit, to assign the credit to any subsequent sublessee, subject to the three-month restriction of section 48(b).
The Treasury Department has promulgated a number of regulations pursuant to section 48. Regulation 1.48-1(c), for example, defines tangible personal property, the only property for which a taxpayer may claim a credit, to include "all property (other than structural components) which is contained in or attached to a building," including office equipment. 26 C.F.R. Sec. 1.48-1(c) (1984). Under the regulations, the entitlement of a lessee to the use of an investment tax credit turns upon whether the lessee is an "original user" of the property: "[T]he election is not available if the lessee is not the original user of the property." 26 C.F.R. Sec. 1.48-4(a)(iii). The regulations provide that " 'original use' means the first use to which the property is put, whether or not such use corresponds to the use of such property by the taxpayer." 26 C.F.R. Sec. 1.48-2(b)(7). Furthermore,
The determination of whether the lessee qualifies as the original user of leased property shall be made ... as if the lessee actually purchased the property. Thus, the lessee would not be considered the original user of the property if it had been previously used by the lessor or another person.... However, the lessee would be considered the original user if he is the first person to use the property for its intended function. Thus, the fact that the lessor may have, for example, tested, stored, or attempted to lease the property to other persons will not preclude the lessee from being considered the original user.
The legislative history surrounding passage of the investment tax credit reveals the hope of Congress that the credit would stimulate economic growth by providing a substantial incentive to undertake capital investment projects. Thus, the Report of the House of Representatives stated: "It is believed that the investment credit ... will provide a strong and lasting stimulus to a high rate of economic growth and will provide an incentive to invest comparable to those available elsewhere in the rapidly growing industrial nations of the free world." H.Rep. No. 1477, 87th Cong., 2d Sess., 1962-63 Cum.Bull. 405, 412. The same report also discussed the rationale of the section 48(d) election for leased property, which is "desirable since, as a result of this provision, it is possible for the lessor to pass the benefit of the investment credit on to the party actually generating the demand for the investment." Id., 1962-63 Cum.Bull. at 418.
The Senate Report reflected similar concerns about both the lease provision, S.Rep. No. 1881, 87th Cong., 2d Sess., U.S.Code Cong. & Admin.News 1962, p. 3297, 1962-63 Cum.Bull. 707, 725, and the tax credit in general:
This investment credit, coupled with the depreciation guidelines recently liberalized by the administration, by stimulating capital formation, will provide growth in the economy consistent with the principles of a free economy. This investment credit, by encouraging the modernization and expanded use of capital equipment, will improve our competitive position abroad and thus aid in meeting the balance-of-payments problem. Moreover, the capital formation induced by this credit will both aid in providing the longrun growth needed by our domestic economy and be of major assistance in our immediate problem of economic recovery.
Id., U.S.Code Cong. & Admin.News 1962, p. 3304, 1962-63 Cum.Bull. at 707-08. Furthermore, the Senate Report stated that "[t]he objective of the investment credit is to encourage modernization and expansion of the nation's productive facilities and thereby improve the economic potential of the country, with a resultant increase in job opportunities and betterment in our competitive position in the world economy." Id., U.S.Code Cong. & Admin.News 1962, p. 3314, 1962-63 Cum.Bull. at 717. The Report also noted that, to ensure the intended impact of the tax credit legislation, "[t]angible personal property is not intended to be defined narrowly." Id., U.S.Code Cong. & Admin.News 1962, p. 3318, 1962-63 Cum.Bull. at 722.
Finally, with respect to the 1971 re-enactment of the investment tax credit, the Senate again noted the broad incentive effect that it intended the credit legislation to have. The Senate expressed the concern that, without the credit,
our tax policies do not adequately encourage investment in more modern and efficient machinery which would enable our businessmen to compete more effectively in foreign markets.... The guideline [for this legislation] has been not only the need to adopt a proposal which is fair, but also the restoration of sound and vigorous economic conditions--which requires the stimulation of both consumption by individuals and investment by business.
S.Rep. No. 92-437, 92d Cong., 1st Sess., U.S.Code Cong. & Admin.News 1971, pp. 1825, 1924, 1972-1 Cum.Bull. 559, 563. Similarly, the Report stated that "[t]he new credit is expected to bolster the economy and create additional jobs by encouraging expenditures on machinery and equipment which have been sagging badly." Id. As to the lease election provision, the Report noted that, with respect to noncorporate taxpayers, "the restoration of the credit could once again make leasing arrangements motivated largely by tax reasons quite attractive," but nonetheless agreed that the provision was desirable for corporate taxpayers. Id., U.S.Code Cong. & Admin.News 1971, p. 1950, 1972-1 Cum.Bull. at 583.
Plaintiff buys and sells new and used IBM computer equipment and arranges leases on new and used computer equipment. In late 1973 and early 1974, plaintiff entered three transactions, which formed the basis of this suit, with Decimus Computer Leasing Corporation, a company that also arranges leases of computer equipment. As a subsidiary of a bank holding company, Decimus is subject to the provisions of Regulation Y, promulgated by the Federal Reserve Board. Among other things, Regulation Y has required, and continues to require, that banks and bank holding company subsidiaries that lease personal property must receive a minimum level of return on their leases. 12 C.F.R. Sec. 225.25(b)(5) (1984). See also 12 C.F.R. Sec. 225.4(a)(6) (1983). The determination of the requisite level of return encompasses a variety of factors, including the length of the lease and the amounts of both the rental payments and any penalties for early termination.
The first transaction involved plaintiff, Decimus, and E-Systems, Inc., and originated when plaintiff proposed it to Decimus. On December 28, 1973, Decimus and E-Systems executed a lease whereby E-Systems rented certain equipment from Decimus for sixty months at a monthly rental of $12,725. Decimus retained the right to the investment tax credit under the lease. On the same day, Decimus assigned to plaintiff all its rights and obligations under the lease. Also on the same day, Decimus and plaintiff entered into a lease agreement, with Decimus purportedly leasing to plaintiff, for sixty months at $12,725 per month, the same...
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