Glickman v. Commissioner

Citation63 T.C.M. 1712
Decision Date06 January 1992
Docket NumberDocket No. 23822-89.
PartiesAlan Glickman and Renee C. Glickman, Mitchell Sussman and Lynne Sussman v. Commissioner.
CourtUnited States Tax Court
63 T.C.M. 1712
T.C. Memo. 1992-7
Alan Glickman and Renee C. Glickman, Mitchell Sussman and Lynne Sussman
Docket No. 23822-89.
United States Tax Court.
Filed January 6, 1992.

James F. X. Rudy, 997 Lenox Dr., Lawrenceville, N.J., for the petitioners. David A. Breen, for the respondent.

Memorandum Opinion

RAUM, Judge:

The Commissioner determined deficiencies in the income taxes of Alan Glickman and Renee C. Glickman, husband and wife, as follows:

Year Deficiency
                1983 ........................... $39,286
                1984 ........................... 38,300

He also determined deficiencies in the income taxes of Mitchell Sussman and Lynne Sussman, husband and wife, as follows:

Year Deficiency
                1983 ........................... $26,832
                1984 ........................... 39.977

At the time the joint petition herein was filed, the Glickmans resided in Pennsylvania, and the Sussmans in New Jersey. The case was submitted on the basis of a stipulation of facts and exhibits pursuant to our Rule 122.1

At issue is whether each pair of petitioners is entitled to an investment tax credit (ITC) with respect to six intercity buses that the husbands (referred to sometimes hereinafter as Sussman or Mitchell, and Glickman or Alan, respectively) purchased on April 18, 1983, and which they leased on May 1, 1983, to a family corporation, Starr Transit Co., Inc. (Starr Transit). The year 1984 is involved only by reason of carryovers.

Starr Transit is a New Jersey corporation incorporated in 1948 for the purpose of engaging in the business of transporting persons and goods by motor carrier. Sussman and Glickman appear to have dominated the management of its business during the period here involved. Sussman is Starr Transit's president, and Glickman its vice president, secretary, and treasurer. On May 1, 1983, Sussman and Glickman were two of its three directors. The third director was Shirley Sussman-Klein (Shirley). Shirley was the widow of Gilbert G. Sussman (Gilbert), who died in 1969. Shirley and Gilbert were the parents of petitioner Mitchell Sussman. Gilbert was also the father of petitioner Renee Glickman by a marriage prior to his marriage to Shirley, who adopted Renee as her daughter. Mitchell Sussman, Alan Glickman, and Shirley continued to serve as the directors of Starr Transit as of the time the stipulation herein was entered into in November 1990.

On May 1, 1983, Starr Transit had only one class of stock issued and outstanding. Shirley owned 36.14 percent of the stock. The remaining 63.86 percent was held by a family trust created by Gilbert's will. On May 1, 1983, Shirley was

63 T.C.M. 1713

acting as the sole trustee. Pursuant to the terms of Gilbert's will, Shirley is the life beneficiary of the trust. As simplified to the extent relevant herein, the remainder is divided into three equal parts, two of them for Mitchell and Renee, and the third for Ellen Croen, the sister of Mitchell and the half-sister of Renee.

On or before January 2, 1980, the board of directors of Starr Transit determined that it should take steps to acquire additional buses for use in its business, and that there was a need to retain cash for the eventual funding of such acquisitions. Also at that time, Starr Transit began to consider leasing buses from third parties rather than purchasing additional buses for its fleet, and obtained proposed lease terms from such third parties. However, the record does not show whether it thereafter (or even prior thereto) leased any buses from any third parties.

On May 1, 1983, Sussman and Glickman2 leased the six buses involved herein to Starr Transit for a stated term of 53 months, one month less than half of their useful life of 108 months or 9 years. They had purchased these buses on April 18, 1983, for $860,670.90. They paid only $11,000 of the purchase price in cash, and financed the remaining $849,670.90 with a note in that amount to a bank, secured solely by a security interest in the buses without guaranty or other security given by Starr Transit or anyone else.

Beginning in 1980, and prior to leasing the six buses here at issue on May 1, 1983, Sussman and Glickman had leased 14 other buses to Starr Transit. In 1980, they thus leased three buses, one each by Sussman and Glickman individually, and the third by both acting together. During 1981 Sussman and Glickman, acting either individually or jointly, leased five buses to Starr Transit. During 1982 they leased six additional buses to Starr Transit, four of them in January and February, and two in April. The leases of all 14 of the buses entered into during the period 1980-1982 had stated terms of 47 months, except the last lease, which had a stated term of 53 months.

Upon expiration of the stated terms of all of the leases, (apart from those involving two of the buses leased in 1980),3 Starr Transit continued to lease on a month-to-month basis all of the other 18 buses — the six involved herein and 12 of those leased in prior years. The six buses leased in 1983, which are here in issue, were still being used by Starr Transit on a month-to-month basis when the stipulation of facts herein was entered into by the parties in November 1990. The monthly rental for these six buses remained the same following the end of the stated lease term on September 30, 1987. In the case of 13 of the 14 buses leased earlier, the extended month-to-month periods ranged from about 16 months to 45 months.4 After Starr Transit ceased using the buses on a month-to-month basis, they were sold to various parties, none of whom was related to Starr Transit or to any of the petitioners. The record does not show that Starr Transit leased any buses from anyone other than Sussman and Glickman. Nor does it show that Sussman and Glickman leased any buses to anyone other than Starr Transit except upon the premature termination of two of the 1980 leases and in one instance upon the termination of Starr Transit's month-to-month tenancy that followed the expiration of the fixed term of its lease of that bus. Upon termination of Starr Transit's month-to-month tenancy in respect of each of the remaining 11 buses, Sussman and Glickman promptly sold each bus.

On their tax returns for 1983, petitioners claimed investment tax credits with respect to the six buses they had purchased on April 18, 1983, and leased to Starr Transit on May 1 of that year. The Commissioner determined that petitioners were not entitled to any of these investment tax credits, because "it has not been established that the requirements of Section 46(e)(3) have been met in regard to leased buses." We sustain the determination of the Commissioner.

Section 38(a) provides that "There shall be allowed, as a credit against the [income] tax * * *, the amount determined under Subpart B of this part." Subpart B includes section 46, which is concerned with the amount of the credit and contains various conditions and limitations upon its allowance. There is no dispute between the parties that, apart from section 46(e)(3), petitioners would be entitled to an ITC of 20 percent of the purchase price, consisting of the 10 percent "regular percentage", section 46(a)(2)(B), plus the 10 percent "energy percentage" applicable to the intercity buses herein, section 46(a)(2)(C)(i)(V). On their

63 T.C.M. 1714

respective 1983 tax returns, the Sussmans and the Glickmans each sought the benefit of an investment tax credit equal to 20 percent of the respective couple's claimed one-half share of the purchase price of the six buses bought in 1983 and leased to Starr Transit. The issue here involves the restrictions on the availability of such credit imposed by section 46(e)(3), which provides:

(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, 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 (other than rents and reimbursed amounts with respect to such property) exceeds 15 percent of the rental income produced by such property.

The Commissioner contends that section 46(e)(3) prevents allowance of the investment tax credits claimed on petitioners' returns. That section prohibits a noncorporate lessor from receiving the section 38 credit unless — (A) the lessor manufactured or produced the property, 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 (the 50 percent test), and within the first year after transfer of the property to the lessee, the sum of the deductions allowable with respect to the property solely by reason of section 162 exceeds 15 percent of the rental income produced by the property (the 15 percent test).

The requirements of section 46(e)(3)(A) are not satisfied because Sussman and Glickman did not manufacture the buses they leased to Starr Transit. Accordingly,...

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