Paccar, Inc. v. Comm'r of Internal Revenue
| Decision Date | 13 November 1985 |
| Docket Number | Docket No. 22221-82. |
| Citation | 85 T.C. No. 45,85 T.C. 754 |
| Parties | PACCAR, INC. AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
BLAKE W. FERGUSON, MICHAEL R. McMAHON and THOMAS N. TOMASHEK, for the respondent.
Respondent determined deficiencies in petitioner's income taxes for the years and in the amounts as follows:
+------------------+
¦Year¦Deficiency ¦
+----+-------------¦
¦1975¦$566,352 ¦
+----+-------------¦
¦1976¦1 1,578,202 ¦
+----+-------------¦
¦1977¦1,117,128 ¦
+------------------+
Some of the issues raised by the pleadings have been disposed of by agreement of the parties, leaving for our decision (1) whether petitioner's transfer of surplus and obsolete material to SAJAC, an unrelated warehouse facility, constituted a sale entitling petitioner to claimed deductions for inventory losses based on the scrap value of the materials transferred; (2) whether the 10 percent purchase discount petitioner granted its wholly owned subsidiary upon the sale to it of trucks and parts which were resold by the subsidiary in the foreign market represented a discount that would have been afforded unrelated parties dealing at arm's length and, if not, what is the proper adjustment, if any, under section 482. 2
Some of the facts have been stipulated and are found accordingly.
Petitioner is a corporation organized under the laws of the State of Washington. It is engaged in the manufacture and distribution of transportation equipment. Petitioner operates through separate and independent divisions. At the time of filing its petition in this case, petitioner maintained its principal place of business in Bellevue, Washington. Petitioner and its subsidiaries filed consolidated Federal income tax returns on Form 1120 for taxable years 1975, 1976 and 1977 with the Internal Revenue Service Center, Ogden, Utah.
Paccar Parts, a division of petitioner, sells heavy duty truck parts. Dart Truck Co. (Dart), a division of petitioner during the years in issue, is engaged in the manufacture and distribution of above-ground mining vehicles. Wagner Mining Equipment Co. (Wagner), a division of petitioner, is engaged in the manufacture and distribution of underground mining vehicles. Kenworth Truck Co. (Kenworth) and Peterbilt Motors Co. (Peterbilt), both divisions of petitioner, are engaged in the manufacture of trucks. Pacific Car and Foundry Co. (PC&F), also a division of petitioner, is engaged primarily in the manufacture of rail cars.
During the years in issue in this case, petitioner's inventory was valued on the LIFO method of accounting.
1. TRANSFER OF INVENTORY TO SAJAC.
SAJAC Company, Inc. (SAJAC), is a Wisconsin corporation formed in 1971. SAJAC is in the business of storing slow moving excess parts from the inventory of large manufacturers throughout the United States. On November 15, 1976, November 30, 1976, and March 23, 1977, three divisions of petitioner, Paccar Parts, Dart, and Wagner, respectively entered into written agreements with SAJAC for the disposition of certain inventory. These agreements provided as follows:
AGREEMENT
This agreement, between ___________, a division or PACCAR Inc., and SAJAC Company, Inc., whose principal place of business is at 1100 Green Valley Road, Beaver Dam, Wisconsin 53916.
_________ hereby sells and SAJAC hereby accepts on the following terms and conditions set forth selective excess, inactive or unusable parts hereinafter referred to as scrap material.
1. SAJAC shall from time to time purchase from __________ scrap material at a price to be determined by the then prevailing market price in the Chicago area for scrap metals or like kinds, quality and weight.
2. Title to, property in and ownership or all scrap material shall pass to SAJAC upon delivery to a designated carrier at any regional warehouse. All goods are sold F.O. B. seller's warehouse, and all risk of loss shall be borne by SAJAC.
3. SAJAC Company is not, in any manner, expressed or implied, a bailed of the scrap material, nor is SAJAC in any way an agent of ___________.
4. __________ retains the right to repurchase any portion of the scrap material so sold for a period of at least four years after delivery of such goods to SAJAC. SAJAC will advise or any other disposition or material during this period of time.
5. The repurchase cost to ________ shall not exceed 90% of _________ last acquisition cost, adjusted for inflation. If SAJAC's invoices to PACCAR exceed 10% or the inventory purchased from _________ in any calendar year, SAJAC will reduce its selling price on parts for the remainder of the year to 70% or PACCAR's cost. If SAJAC's invoices to PACCAR exceed 20% of the inventory purchased from __________ in any calendar year, SAJAC will reduce the selling price on parts for the remainder of the year to 50% or PACCAR's cost.
6. After the expiration of said four year minimum period, SAJAC agrees to dispose of such goods by destroying, scrapping, dismantling, mutilating, or recycling in a commercially accepted manner. All of such goods shall be dismantled or otherwise made unusable. SAJAC agrees to notify ___________ when goods are to be disposed of and will allow a PACCAR representative to be present at SAJAC facilities to witness disposal of said goods.
7. This Agreement shall inure to the benefit of and be binding upon the parties, their successors and assigns.
8. This Agreement may be canceled by either party by giving written notice to the other party, provided that such cancellation shall not be effective until sixty days after receipt of such written notice. In the event this Agreement is canceled, all goods then in the possession of SAJAC shall be destroyed, disposed or, scrapped, recycled or otherwise made unusable in accordance with paragraph 6.
Beginning in 1976 parts were transferred to SAJAC by the divisions of petitioner which had entered into the above agreement with SAJAC.
The following chart is a random sample of eleven parts transactions occurring in 1978 as if the 90 percent repurchase price applied between Paccar Parts and SAJAC:
+-------------------------------------------------------------------------------+
¦ ¦ ¦ ¦Quantity ¦ ¦ ¦PACCAR ¦ ¦
¦ ¦ ¦ ¦of ¦ ¦ ¦ ¦ ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦ ¦ ¦ ¦part to be¦ ¦SAJAC ¦Parts ¦ ¦
¦ ¦ ¦ ¦sent ¦ ¦cost ¦ ¦ ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦ ¦Balance ¦Quantity ¦to SAJAC ¦Approximate¦to ¦division ¦Price ¦
¦ ¦ ¦ ¦ ¦ ¦acquire¦cost ¦billed¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦ ¦in PACCAR¦of part ¦from other¦weight of ¦part ¦to ¦PACCAR¦
¦ ¦Parts ¦sent ¦ ¦ ¦from ¦reacquire¦ ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦Parts ¦inventory¦to SAJAC ¦PACCAR ¦part in ¦PACCAR ¦part from¦dealer¦
¦number and ¦before ¦from ¦Parts ¦ ¦Parts ¦ ¦ ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦description¦shipment ¦Chicago ¦warehouses¦pounds ¦at 0.02¦SAJAC ¦for ¦
¦ ¦to SAJAC ¦warehouse¦ ¦ ¦/pounds¦ ¦part ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦K053-217CP ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦Bracket ¦2 ¦2 ¦0 ¦1 ¦$.02 ¦$ 3.69 ¦$ 7.85¦
¦Chrome ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦904940-1 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦Slip Joint ¦1 ¦1 ¦0 ¦42 ¦.84 ¦42.24 ¦66.97 ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦01871419 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦Post Assy -¦4 ¦4 ¦0 ¦19 ¦.38 ¦7.91 ¦19.24 ¦
¦Side RH ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦01871421 ¦ ¦ ¦ ¦ ¦ ¦ ¦ ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦Spacer ¦5 ¦5 ¦0 ¦2 ¦.04 ¦1.00 ¦2.61 ¦
+-----------+---------+---------+----------+-----------+-------+---------+------¦
¦K188-61 ¦ ¦ ¦ ¦ ¦ ¦...To continue reading
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