Hauptli v. C.I.R.

• Court: United States Courts of Appeals. United States Court of Appeals (10th Circuit)
• Citation: 951 F.2d 1193
• Docket Number: No. 91-9006,91-9006
• Parties: -503, 92-1 USTC P 50,011 August J. HAUPTLI, Jr., and Barbara Hauptli, Petitioners-Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee.
• Decision Date: 19 December 1991

Page 1193

951 F.2d 1193 69 A.F.T.R.2d 92-503, 92-1 USTC P 50,011 August J. HAUPTLI, Jr., and Barbara Hauptli, Petitioners-Appellants,
v.
COMMISSIONER OF INTERNAL REVENUE, Respondent-Appellee. No. 91-9006. United States Court of Appeals,
Tenth Circuit. Dec. 19, 1991.

Page 1194

Thomas J. Kennedy, Kennedy Berkley Yarnevich & Williamson, Chartered, Salina, Kan., for petitioners-appellants.

Shirley D. Peterson, Asst. Atty. Gen., Tax Div., Dept. of Justice, Washington, D.C. (Gary R. Allen, Jonathan S. Cohen and Joel A. Rabinovitz with her on the brief), for respondent-appellee.

Before ANDERSON, TACHA and BRORBY, Circuit Judges.

BRORBY, Circuit Judge.

The issue in this case is whether taxpayers, August J. Hauptli, Jr., and Barbara Hauptli, noncorporate lessors of personal property, are entitled to an investment tax credit because their lease of compressed gas cylinders was for a term of less than fifty percent of the useful life of the cylinders as required for the credit by section 46(e)(3)(B) of the Internal Revenue Code. ¹ Because we agree with the tax court that taxpayers have failed to prove that at the time the lease was executed the parties realistically contemplated that the term of the lease would be less than fifty percent of the useful life of the cylinders, we affirm. ²

In 1983 taxpayers claimed an investment tax credit of $14,135 under section 46(e)(3)(B) ³ then in effect. The credit was claimed pursuant to a lease of one thousand gas cylinders between taxpayers and an unrelated entity. ⁴ Taxpayers and the Commissioner agree that the useful life of the cylinders is thirty-five years. The lease provided for a stated initial term of five years, cancellable thereafter upon twelve months' written notice from either party.

Page 1195

The sole issue in this case is whether this lease was for a term less than fifty percent of the useful life of the cylinders or was in fact a lease for an indefinite term.

Whether the term of the lease is for less than fifty percent of the useful life of the property is a question of fact which we review for clear error. Shumacher v. United States, 931 F.2d 650, 652 (10th Cir.1991).

If the district court's account of the evidence is plausible in light of the record viewed in its entirety, the court of appeals may not reverse it even though convinced that had it been sitting as the trier of fact, it would have weighed the evidence differently. Where there are two permissible views of the evidence, the factfinder's choice between them cannot be clearly erroneous.

Id. (citation omitted).

It is a long established tenet of tax law that tax credits are matters of legislative grace, and the burden is on taxpayers to demonstrate clearly that they are entitled to the credit. Id. The crux of this case is how to formulate the standard which taxpayers are required to meet.

The majority of courts which have considered this issue have required the taxpayer to show that at the beginning of the lease the parties "realistically contemplated" that the lease would be for less than fifty percent of the useful life of the property. This showing has been required despite express language in the lease limiting the term to something less than the fifty percent useful life. Schiff v. United States, 942 F.2d 348, 351-54 (6th Cir.1991) (disregarding lease with stated two year term); Borchers v. Comm'r, 943 F.2d 22, 23 (8th Cir.1991) (disregarding lease with one year stated term); Connor v. Comm'r, 847 F.2d 985, 989 (1st Cir.1988) (same); Hokanson v. Comm'r, 730 F.2d 1245, 1248 (9th Cir.1984) (disregarding lease with an implied one year term); see also Shumacher, 931 F.2d at 653 (adopting realistic contemplation test for verbal leases without termination dates). "[A] minimum duration specified in a lease is not the controlling factor in determining the length of the term of the lease for section 38 purposes." Hokanson, 730 F.2d at...