Hoisington v. C.I.R., 072384 FEDTAX, 24255-81

Docket Nº:24255-81, 24289-81, 24290-81, 24291-81, 24292-81, 24293-81, 24294-81, 24295-81.
Opinion Judge:DRENNEN, Judge:
Attorney:Thomas J. Kennedy, for the petitioners. Mark H. Howard, for the respondent.
Case Date:July 23, 1984
Court:United States Tax Court

48 T.C.M. (CCH) 556




Nos. 24255-81, 24289-81, 24290-81, 24291-81, 24292-81, 24293-81, 24294-81, 24295-81.

United States Tax Court

July 23, 1984

Petitioners were partners in a general partnership, Power Leasing Associates (PLA), which they formed to purchase truck-tractors which would be used to haul freight for a freight transportation company (GTL) in which they were officers and stockholders. The truck-tractor units were leased to employee-drivers of GTL who were required to lease the equipment, as owner-operators, to GTL. The purpose of the plan was to convert the Teamster drivers of GTL to owner-operators. The useful life of the truck-tractor units was five years. The term of the leases from PLA to the drivers was 48 months; however, many of the leases were terminated in less than 2- 1/2 years.

Held: PLA, and hence its partners, was not entitled to an investment credit on the truck-tractor units because, as required by sec. 46(e)(3)(B), IRC 1954, the terms of the leases were not less than 50 percent of the useful lives of the property leased.

Thomas J. Kennedy, for the petitioners.

Mark H. Howard, for the respondent.



Respondent determined deficiencies in petitioners' income tax as follows:

Docket No. Petitioner 1974 1976 1977
24255-81 John R. Hoisington and Marilyn J. Hoisington ..... $ 2,536 $ 3,180
24289-81 William H. Graves and Helen M. Graves ..... 15,755 25,683
24290-81 James T. Graves and Karen M. Graves ..... 11,317 15,598
24291-81 Ronald E. Williams and Angela J. Williams $2,510 ...... 4,019
24292-81 Dwight L. Graves and Elizabeth E. Graves ..... 16,074 22,607
24293-81 John J. Graves and Sharon L. Graves ..... 5,412 8,721
24294-81 Kenneth E. Wallace and Bronice Wallace ..... 4,987 8,768
24295-81 Lowell P. Graves and Wilda J. Graves ..... 16,680 23,733
These consolidated cases concern income taxes for the years 1976 and 1977 for the group of taxpayers first named in the captions above who were officers and employees of a corporation named Graves Truck Lines, Inc. (hereinafter referred to as GTL) and who were partners in a general partnership named Power Leasing Associates (hereinafter referred to as PLA or the partnership). The respective wives of each of the partners of PLA are petitioners herein only because they filed joint returns with their respective spouses. The single issue remaining for decision is whether the partners of PLA are entitled to investment credits with respect to eight new White Freightliner Truck-Tractor units purchased by PLA in 1976 and eight new Kenworth, five new Peterbilt, and one used Kenworth truck-tractor units purchased by PLA in 1977, and then leased to former employee-truck drivers to haul freight for GTL as owner-operators. Respondent determined that PLA (and hence its partners) was not entitled to the investment credit because the term of leases to the owner-operators was not less than 50 percent of the useful lives of the property leased, which precludes allowance of the investment credit to the individuals under section 46(e)(3)(B), I.R.C., 1954, as amended.[2] FINDINGS OF FACT The stipulated facts are found as stipulated. The PLA partnership is a general partnership formed in 1976 and having its principal place of business at Salina, Kansas. The original partners of PLA were William H. Graves, Lowell P. Graves, Dwight L. Graves, John A. Graves, James T. Graves, John J. Graves, Kenneth E. Wallace, and John R. Hoisington. John A. Graves died in April of 1976 and his interest in the PLA partnership was transferred to certain other original partners. John R. Hoisington's interest in the PLA partnership was purchased by petitioner, Ronald L. Williams, effective January 1, 1977. The petitioners and their respective wives filed joint income tax returns for the years indicated with the Office of the Internal Revenue Service at Austin, Texas, and they lived in the places indicated at the time they filed their petitions herein:
Place of
Name Return Years Residence
John R. Hoisington (Marilyn) 1976-1977 Goddard, Kansas
William H. Graves (Helen) 1976-1977 Salina, Kansas
James T. Graves (Karen) 1976-1977 Salina, Kansas
Ronald E. Williams (Angela) 1974-1977 Salina, Kansas
Dwight L. Graves (Elizabeth) 1976-1977 Witchita, Kanass
(Planters Bank and Trust Co.,)
Executor of the Estate of
Dwight L. Graves) .... Salina, Kansas
John J. Graves (Sharon) 1976-1977 Salina, Kansas
Kenneth E. Wallace (Bronice) 1976-1977 Witchita, Kansas
Lowell P. Graves (Wilda) 1976-1977 Mission, Kansas
U.S. Partnership Returns of Income for PLA for its tax years ended December 31, 1976 and 1977, were filed with the Office of the Internal Revenue Service at Austin, Texas. Graves Truck Line, Inc., was a Kansas corporation engaged in the motor freight transportation business in Kansas, Nebraska, Colorado, Oklahoma and Texas, and was subject to regulation by the Interstate Commerce Commission, the Department of Transportation, and various State regulatory agencies. Its general freight trucks were operated with over-the-road Teamsters Union drivers. Effective August 30, 1978, GTL was acquired by American Natural Resources Co. pursuant to a merger agreement entered into on or about January 30, 1978. In 1970 GTL started a refrigerated freight division known as its Jayhawk Division. The method of operation of the Jayhawk Division was distinguished from its general freight division in that the over-the-road Teamsters drivers were not utilized, but instead truck-tractors were leased from owner-operators. By 1977 the Jayhawk Division was leasing approximately 120 tractors from owner-operators under leases that were generally terminable by either party on 30 days notice. GTL did not own or finance any of the truck-tractors it leased from owner-operators. GTL expanded its refrigerated freight division in 1975 when it made arrangements to purchase all the stock of Luper Transportation Company (hereinafter referred to as Luper), a refrigerated truck line that eventually was merged into GTL and became a part of its refrigerated freight division. At the time of its acquisition by GTL, Luper did not utilize the owner-operator system, but instead conducted its business with approximately 25 to 30 over-the-road Teamsters drivers. Soon after it acquired Luper, GTL decided to attempt to persuade the Teamsters drivers of Luper to convert their relationship to that of owner-operators of the vehicles they drove rather than that of Teamsters drivers of the vehicles. GTL believed this arrangement would be more beneficial because the Luper refrigerated unit drivers would then be in a comparable relationship with the drivers of GTL's refrigerated unit drivers (Jayhawk Division), the drivers would be responsible for the maintenance and upkeep of the vehicles, for fuel and repair parts, for insurance, and for loading and unloading the refrigerated cargo. Under the Teamsters contract, the drivers were responsible only for driving the truck-tractors for which they were paid wages on a mileage or hourly basis. The owner-operators were to receive as compensation for use of their truck-tractors a percentage of gross revenues generated by transportation services in which their equipment participated. GTL realized that it would take time to convert all of the refrigerator truck drivers into owner-operators and that there would probably be a considerable turn about by those drivers that did agree to participate in the plan. In negotiations with the Teamsters Union it was agreed that the drivers who became owner-operators would retain their seniority in the union for six months, but after that they would lose their seniority. This was to give the Teamsters drivers an opportunity to determine whether they could make it on their own as owner-operators. GTL also realized that many of the Teamsters drivers would be unable financially to either buy outright or finance the purchase of the equipment to be used. PLA was formed to provide this function and to avoid possible claims of discrimination that might be lodged against GTL if GTL, the carrier, financed the equipment. PLA borrowed from local banks and lending institutions, where the partners had accounts, the funds necessary to buy or at least make down-payments on the equipment, most of which was new. The partnership signed the notes evidencing the loans and each of...

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