Peterson v. Commissioner
| Decision Date | 02 August 1982 |
| Docket Number | Docket No. 8237-80. |
| Citation | 44 TCM (CCH) 674,1982 TC Memo 442 |
| Parties | Van D. Peterson, Jr., et al. v. Commissioner. |
| Court | U.S. Tax Court |
William W. Sumner, 455 Capital Mall, Sacramento, Calif., for the petitioners. Robert W. Towler, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies against the petitioners for the year 1976 in the following amounts:
Amount of
Petitioner Deficiency
Van D. Peterson, Jr. .......... $1,771
Frederick W. King and
Margaret G. King .............. 1,772
Stanley J. Smiley and
Louise Smiley ................. 1,775
Edward B. Butler, Jr., and
June E. Butler ................ 1,769
John M. Johannessen and
Felicia K. Johannessen ........ 1,780
Ivan D. Siddons and
Sharon V. Siddons ............. 1,776
James M. Moorefield and
Helen M. Moorefield ........... 1,776
Arthur A. White and
Katie S. White ................ 1,776
Ellis J. Andras, Jr., and
Barbara T. Andras ............. 1,781
Franklin L. Banker and
Karen W. Banker ............... 1,791
Tommy J. Poirier and
Virginia C. Poirier ........... 1,732
With respect to each petitioner, only $1,440 of the asserted deficiency is in dispute. The sole issue for decision is the application of the dual requirements of section 46(e)(3)(B)2 to the facts of this case. The parties have stipulated that the 15-percent requirement is met. The issue, therefore, is whether the partnership in which petitioners were partners is precluded from claiming an investment credit with respect to equipment leased to a corporation also controlled by petitioners on the ground that the term of the lease was more than 50 percent of the useful life of the equipment.
Some of the facts have been stipulated and are so found.
The parties have stipulated that Ivan and Sharon Siddons resided in Houston, Texas, and all the other petitioners resided in California when the petition in this case was filed.
Messrs. Peterson, King, Smiley, Butler, Johannessen, Siddons, Moorefield, White, Andras, and Banker and Mrs. Poirier were partners in Sacramento Radiology Group, a general partnership (hereinafter the Partnership), during the fiscal year of the Partnership ending September 30, 1976. The other petitioners are the spouses of the partners and are involved in this case only because they filed joint income tax returns with their spouses in 1976.
From its formation in 1959 until May 1, 1970, the Partnership engaged in the practice of medicine and acquired personal property to use in such practice. In 1970 the Sacramento Radiology Medical Group, Inc. (hereinafter the Corporation), was incorporated. All the partners in the Partnership purchased stock in the Corporation in proportion to their partnership interests, and there were no shareholders in the Corporation who were not partners in the Partnership. When the Corporation began business on May 1, 1970, the Partnership ceased the practice of medicine; instead, the partners continued their practice of medicine solely as employees of the Corporation.
The Partnership leased all its personal property to the Corporation under a lease effective on the day the Corporation began business with a stated term of three years. This lease was superseded by a new lease executed on June 1, 1972, with a stated expiration date of September 30, 1975. On December 29, 1975, another lease of all the Corporation's personal property was executed with a stated expiration date of September 30, 1978. Like its predecessors, it contained no reference to any option to renew. This third lease covered all items of personal property described in an appraisal dated September 26, 1975, together with "all those items of personal property of similar nature purchased by Lessor subsequent to said Appraisement and used by Lessee" less any property removed from use.3 Under the parties' practices, items acquired after the signing of a lease would be included under the lease simply by listing the items on a schedule attached to the lease agreement. The stipulation recites that the term of this third lease commenced on October 1, 1975, although the document is somewhat unclear on this point.4
Included among the items of property leased to the Corporation under the December 29, 1975, lease was an IBM typewriter that was acquired in October 1975 at a cost of $724.59. This typewriter had been acquired by the Partnership specifically to replace a worn-out typewriter at one of the Corporation's diagnostic offices.
In 1975 or early 1976 the Corporation decided it would be more economical to use an "in-house" computer to perform its billing rather than continue its contract with a computer service bureau. The business manager of the Corporation5 spent a substantial amount of time in his capacity as a corporate employee investigating different types of computer systems. The Corporation decided that a particular IBM computer was best for its needs. Thereafter, the Partnership purchased that IBM computer and printer and printer keyboard for the computer (hereinafter peripheral equipment) in July 1976 at a cost of $162,901.26, and added them to the schedule of leased equipment. The $162,901.26 cost for the computer and peripheral equipment included $3,183 paid for installing wiring, air conditioning and movable partitions to accommodate the computer in the Corporation's premises. When placed in service, the typewriter and the computer had useful lives of 84 months, and the peripheral equipment had a useful life of 60 months.
By September 30, 1976, the Corporation contracted with IBM for the purchase of between $8,500 and $9,000 worth of computer programs. By early 1977, the Corporation's employees had learned to program the computer themselves and had written some programs. The Corporation subsequently sold some of these programs to other medical practitioners for approximately $11,500.
Under the December 29, 1975, lease, the Corporation paid the Partnership rent equal to 2½ percent of the original cost of the typewriter, computer and peripheral equipment for each month the property was used by the Corporation until the stated date of expiration of the lease on September 30, 1978. Subsequent to September 30, 1978, the Corporation continued to use the typewriter, computer and peripheral equipment but rent was reduced to 2 percent of the value of the property as determined by an appraisal on or about September 30, 1978, and the Corporation assumed all responsibility for maintenance of this equipment.
We conclude that the Partnership and its partners and the Corporation and its stockholders operated from the initial incorporation under an informal agreement or understanding that whenever the doctor employee-stockholders of the Corporation needed additional or replacement items of personal property to carry out their medical practice, the Partnership would acquire and lease such items. There is no evidence that this practice served any real or presumed business purpose.
Through the Partnership's fiscal year ending September 30, 1976, the partners in the Partnership owned stock in the Corporation in the same proportion they held their partnership interests. Since September 30, 1976, it has been the position of the Partnership that no new partners will be admitted even if new shareholders are permitted to acquire stock of the Corporation. It has also been the position of the Partnership since September 30, 1976, that partners will not be required to dispose of their partnership interests if they dispose of their stock in the Corporation. Therefore, after September 30, 1976, it was possible that the membership of the Corporation and the Partnership would no longer remain identical. On October 1, 1976, one of the partners withdrew from the Partnership and also sold all his stock in the Corporation. Since that date, there have been no further withdrawals from the Partnership. On October 1, 1978, three of the partners had their corporate stock redeemed but retained their partnership interests, and on April 1, 1979, another of the partners had his stock in the Corporation redeemed but retained his partnership interest. On October 1, 1976, an individual acquired stock of the Corporation but did not enter into the Partnership. Likewise, on October 1, 1978, October 1, 1979, and April 1, 1980, three individuals acquired stock in the Corporation but did not enter into the Partnership. Thus, in the five years subsequent to September 30, 1976, there was some change in the stockholding of the Corporation, but individuals who were partners in the Partnership on May 1, 1970, still retained control of the Corporation.
It has been stipulated that the deductions with respect to the typewriter, computer and peripheral equipment allowable to the Partnership solely by reason of section 162 () exceeded 15 percent of the rental income produced by these properties during the first 12 months after they were transferred to the Corporation. This satisfies that requirement of section 46(e)(3)(B).
We find as an ultimate fact that the lease dated December 29, 1975, was not limited to its stated three-year term but was of indefinite duration, thus violating the other applicable requirement of section 46(e)(3)(B).
OpinionSection 38 allows a credit for investments in "section 38 property," which respondent concedes the typewriter, computer and peripheral equipment in this case are However, section 46(e)(3) limits the availability of the credit to noncorporate lessors, such as the Partnership. This subsection provides:
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