Lockhart Leasing Company v. United States, No. 91-70

• Decision Date: 08 June 1971
• Docket Number: No. 91-70,289-70 and 290-70.
• Citation: 446 F.2d 269
• Parties: LOCKHART LEASING COMPANY, Appellee, v. UNITED STATES of America, Appellant. LOCKHART LEASING COMPANY, Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant (two cases).
• Court: U.S. Court of Appeals — Tenth Circuit

446 F.2d 269 (1971)

LOCKHART LEASING COMPANY, Appellee, v. UNITED STATES of America, Appellant.

LOCKHART LEASING COMPANY, Appellee, v. COMMISSIONER OF INTERNAL REVENUE, Appellant (two cases).

Nos. 91-70, 289-70 and 290-70.

United States Court of Appeals, Tenth Circuit.

June 8, 1971.

Stephen H. Hutzelman, Atty., Dept. of Justice, Washington, D. C. (Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson and Elmer J. Kelsey, Attys., Dept. of Justice, Washington, D. C., and C. Nelson Day, U. S. Atty., with him on the Brief), for appellants.

J. Jay Bullock, Salt Lake City, Utah, for appellee.

Before HILL, SETH, and DOYLE, Circuit Judges.

SETH, Circuit Judge.

These appeals come to this court as two cases from the Tax Court and one case from the United States District Court for the District of Utah. Each case raises the question whether the taxpayer was entitled to the investment credit which was allowable under section 38 of the Internal Revenue Code of 1954. The Tax Court held, 54 T.C. 301, that the taxpayer for its tax years ended in 1962 and 1964 was entitled to the investment credit with certain exceptions, and the Commissioner has taken appeals from those decisions. The Tax Court opinion contains a detailed statement of the facts and detailed statistics. The United States District Court in the refund action brought by the taxpayer also decided the taxpayer was entitled to the investment credit for the fiscal year ended in 1963. The United States has taken an appeal from that decision.

In each of the cases the initial question is whether the taxpayer was engaged in the business of leasing equipment and machinery as it contends, or whether it was instead, as the appellants contend, selling the items and financing the sales or just financing purchases by its customers.

It appears from the record that the taxpayer purchased machine tools, store equipment, business or office equipment, and similar items from a variety of sources as they were requested by its customers. The customer would request a particular machine, taxpayer would purchase it from the maker or a dealer, and it would be placed in the customer's possession and use usually under a form called an Equipment Lease Agreement. Often the customer would first contact the maker or dealer and discuss an item of equipment before negotiating with taxpayer. The agreement provided the term or length of time for the arrangement, the rental, an option to renew if such was negotiated, and occasionally an option to purchase in the customer.

The taxpayer entered into, for its fiscal year ended in 1962, thirty-two such arrangements, for the year 1963 sixty, and for 1964 one hundred eleven, and in all but four of these the same form was used. The terms of this agreement, and the general business conducted by the taxpayer constitute the center of the dispute.

The Equipment Lease Agreement states that the arrangement is a lease and that title does not pass. It also provides that the customer assume all the risks of loss of the property. If the customer does not perform its obligations, it is stated that the equipment may be repossessed. The customer was to pay any taxes on the equipment, to insure it against loss, and pay for repairs and maintenance. The "loss value" was stated in the agreement as was the place where the equipment was to be kept. The taxpayer had no repair or storage facilities. The taxpayer did not transfer or assign its ownership or its position under the agreement to others. The issue relates only to transactions with a term of more than four years.

The trial courts found that in a number of instances the taxpayer was required to retake possession of the equipment as provided in the agreement before the end of the term and to make some disposition of it, and was also required on occasion to dispose of equipment at the end of the term. The record shows that the parties to each agreement negotiated the provisions with a view to the worth of the equipment at the end of the term. The record does not show that the total amount paid by the customer during the term was disproportionate to the value of the equipment for such period. The record shows that where the agreement contained an option to buy in the customer, it was an amount based upon the expected value of the property at the time the option could be exercised. In two out of some two hundred agreements, there was an arbitrary option price of one or ten dollars. When the agreement contained no option to buy the courts below found that if the customer was to buy a price was then negotiated.

The Revenue Act of 1962 added section 38 to provide for a special credit against tax for the investment in certain depreciable property. The provisions were limited to tangible property other than buildings put to qualified uses and limited to property to which depreciation, or amortization in lieu thereof, is allowable, and having a useful life of four years or more. This last limitation relating to depreciation raises the issue here, as the person who has the depreciable interest is the one who can claim the credit. The investment credit provisions were repealed by section 703 of the Tax Reform Act of 1969.

The purpose of the investment credit was to encourage the purchase and use of new productive machinery by giving a limited tax incentive to those who would invest in such new equipment. It is apparent that the incentive was not for the sellers of such equipment nor for those who were merely financing the purchases. The Act did make express reference to leased property in section 48(d) to provide that a lessor of qualified property may under appropriate regulations "* * * elect with respect to any new section 38 property to treat the lessee as having...