Northwest Acceptance Corp. v. Comm'r of Internal Revenue
| Decision Date | 14 August 1972 |
| Docket Number | Docket No. 4846-70. |
| Citation | 58 T.C. 836 |
| Parties | NORTHWEST ACCEPTANCE CORPORATION, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
Frederick H. Torp and Harry S. Chandler, for the petitioner.
Gary R. De Frang, for the respondent.
Petitioner, a sales finance company, purchased contracts from heavy-equipment dealers under which the equipment was placed in the possession of the user. Some of the contracts were identified as security agreements, while others were designated as leases. Under the terms of the ‘leases' the users were called upon to pay rental over the term of the contract, and had an option to purchase the equipment at a percentage of its cost to petitioner at the termination of the contract. Many of the contracts contained a guaranty by the dealer or a third party of the user's performance of the lease and some contained a guaranty by the dealer of the exercise of the option to purchase. Held, the contracts purchased by petitioner designated as leases were actually leases, instead of sales contracts, and petitioner is entitled to depreciation deductions and investment credits with respect to the equipment covered by the contracts. Lockhart Leasing Co., 54 T.C. 301,affd. 446 F.2d 269 (C.A. 10, 1971), followed. DRENNEN, Judge:
Respondent determined deficiencies in petitioner's income taxes in the amounts of $38,592 and $244,931 for the taxable years ended April 30, 1966, and April 30, 1967, respectively. The sole issue for our decision is whether petitioner is entitled to depreciation deductions and investment credits for equipment placed in the possession of its customers under the terms of certain contracts which are purported to be leases.
The stipulated facts, together with the exhibits attached thereto, are incorporated herein by this reference.
Northwest Acceptance Corp. (hereinafter sometimes referred to as petitioner or NAC) is an Oregon corporation formed in 1958 with its principal office and place of business in Portland, Oreg. Petitioner duly filed Federal corporate income tax returns for its fiscal years ending April 30, 1966 and 1967, with the district director of internal revenue, Portland, Oreg., reporting its income on an accrual basis.
Petitioner is a sales finance company. Since about 1965 its principal business has been the purchase of contracts from heavy equipment and other capital goods dealers. The bulk of the contracts concerns motortrucks, heavy-duty construction equipment and logging towers, and related machinery, placed in the possession of the user. Petitioner designates the documents as either ‘security agreements' or ‘leases.'1 The security agreements are essentially conditional sales contracts resulting from the purchase of capital goods by a user. Until 1965 petitioner was engaged solely in the acquisition of this type of contract. With respect to the contracts identified as leases, petitioner either receives by assignment the dealer's interest in the original lease or acquires title to the equipment from the dealer and is identified as lessor in the instrument.
For the fiscal year ended April 30, 1966, petitioner acquired a total of $25,728,862 of security agreements and leases from all dealers.2 In the following year petitioner acquired from all dealers $18,114,790 of security agreements and leases, of which $14,542,467 constituted balances due on security agreements and $3,572,323 balances due on lease agreements.
During the years involved herein, petitioner had branch offices in Eugene, Oreg., Redding, Calif., and Seattle and Spokane, Wash. Petitioner financed its business operations by obtaining the large sums of money it needed from banks and life insurance companies. At no time during the years in question did petitioner have an inventory of equipment to lease, or storage or maintenance facilities for such equipment.
In 1966 and 1967 Automotive Equipment Co. of Portland (hereinafter referred to as Automotive) was a distributor of heavy-duty trucks and related equipment and parts with offices in Portland and Eugene, Oreg., and Seattle, Wash. Through its subsidiaries, Motor Truck Distributors Co. and Shasta Truck & Equipment Co., Automotive also engaged in such business in, respectively, Los Angeles and Redding, Calif. Substantially all of the contracts created by Automotive with respect to the distribution of equipment, except those created in Los Angeles, Calif., were sold by Automotive to petitioner.
During NAC'S 1966 and 1967 tax years, Louis Courtemanche, Jr., and members of his family held all of its capital stock, with the exception of its preferred stock held by an institutional investor. Also, during the same period, they owned all of the outstanding stock of Automotive. Members of the Courtemanche family, as corporate officers and as stockholders, played a dominant role in the management of both NAC and Automotive.
In 1965, when petitioner began transacting some of its business as leasing operations, the company officers instituted a program in which potential customers had a choice of three types of standard lease arrangements or a custom lease arrangement.
Petitioner's standard lease arrangements are executed on printed forms designated L-1, L-2, or L-3.3 All of the forms contain the following provisions:
(a) Identification of the lessee, lessor, and property subject to the lease.
(b) Designation of the lease term, total rentals, advance rentals, and monthly rentals.
(c) Identification of the geographic area where the equipment is to be used or located.
(d) The lessee's duty to inspect the equipment to determine its condition within 48 hours of delivery.
(e) The lessor's right to enter the lessee's premises to inspect the equipment and observe its use.
(f) The lessee's duty to have the equipment operated only by competent employees.
(g) The lessee's duty to obtain written permission from the lessor before making alterations to the equipment.
(h) The lessee's duty to keep the equipment in good repair at its own expense, furnishing parts and labor.
(i) The lessee's assumption of the entire risk of loss and damage to the equipment.
(j) The lessor's right of indemnification from the lessee for all claims connected with or resulting from the delivery, use, possession, maintenance, or return of the equipment. The lessee's duty to provide liability insurance on the equipment with the lessor named as the insured.
(k) The lessee's duty to provide theft and fire insurance for the equipment.
(l) The lessee's duty to comply with all laws and pay all license fees, taxes, and assessments relating to the ownership, possession, and use of the equipment. The lessee's duty not to mortgage the equipment.
(m) The lessor's right to perform the neglected duties of the lessee and demand repayment plus interest.
(n) The lessor's retention of legal title to the equipment. The lessee's duty to surrender the equipment in good condition, at the expiration of the lease.
(o) The lessor's disclaimer of all warranties, either express or implied, including those concerning the equipment's condition, its merchantability or fitness for any particular purpose.
(p) The lessor's right to assign the rents from the lease and to prohibit lessee from subletting the equipment without prior written consent.
(q) The lessor's right upon the lessee's default on any of the lease covenants to declare all rentals under the lease due and to repossess the equipment. 4
(r) The lessor's right to attorney's fees incurred to enforce the lease and to interest on delinquent rent.
(s) The lessee's option to purchase the equipment upon its payment of all rental payments.5
(t) Provision for a third party to guarantee the lessee's performance under the lease.
The standard lease contracts in question generally cover one or two pieces of new or used heavy-duty equipment and provide rental periods of from 14 to 61 months. However, there are five contracts concerned with office or medical equipment. NAC is named as the original lessor in 68 of the 94 standard lease contracts, and various equipment dealers are named as the original lessors in the remaining agreements, which have been assigned to NAC by the respective dealers, together with the transfer of title to the underlying equipment.
The option purchase prices contained in the form contracts reflect a percentage of the initial cost of the equipment to petitioner. Of the 94 standard contracts acquired during the years involved herein, 78 contain an option purchase price of approximately 10 percent of the original cost of the equipment to petitioner. The other 16 contracts have option purchase prices ranging from 12 to 35 percent.
Generally, rental payments under the contract terms are equally spaced over the lease term with an advanced payment of 1 month's rent or the first and last month's rent required.6 The rental payments are based on a percentage of the equipment's original purchase price, or its fair market value at the contract date if the equipment is used, less an estimated residual value of the equipment at the end of the contract term. The size of the percentage is based primarily on the term of the contract, but petitioner's officers also have considered the type of equipment involved, whether the equipment is new or used, and the particular use to which the equipment is to be subjected. Rental payments on equipment leased in Idaho, Washington, and California also include sales and use taxes required for leased equipment. Additional charges are made under several contracts for collision and credit life insurance. Seventeen of the contracts for equipment used by logging and construction businesses provide that rental payments will not be required for the 3 or 4 months of the year when those businesses are generally inactive, unless the equipment is actually operated in those months.
The guaranty contained in the form contracts guarantees payment of the rental amounts...
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