Sanders v. Commissioner, Docket No. 23503-82.
| Decision Date | 25 September 1984 |
| Docket Number | Docket No. 23503-82. |
| Parties | Wiley C. Sanders, Jr. and Gloria J. Sanders v. Commissioner. |
| Court | U.S. Tax Court |
Alan E. Rothfeder, P.O. Drawer 4540, Montgomery, Ala., Jo Karen Parr, Lester C. Sanders, and Nicholas J. Cervera, for the petitioners. John B. Harper and Helen C. Theo, for the respondent.
Memorandum Findings of Fact and Opinion
Respondent determined deficiencies in petitioners' Federal income tax for the calendar years 1975, 1976 and 1977 in the amounts of $13,776.85, $32,873.15 and $52,132.96, respectively.1
The only issue for decision is whether petitioners are entitled to investment tax credits under section 46(e)(3)(B)2 for trucks and trailers leased to a wholly owned corporation.
Some of the facts have been stipulated and are found accordingly.
Petitioners, Wiley C. Sanders, Jr., and Gloria J. Sanders, husband and wife, who resided in Troy, Alabama, at the time of the filing of the petition in this case, filed joint Federal income tax returns for the calendar years 1975, 1976, 1977, 1978, 1979, 1980, 1981 and 1982.
At all times relevant to this case, Wiley C. Sanders, Jr., (petitioner) was the sole stockholder of an Alabama corporation, Wiley Sanders Truck Lines, Inc. (WSTL). The corporation has been in business since 1972, has its principal offices in Troy, Alabama, and is regulated by the Interstate Commerce Commission and the Alabama Public Service Commission. Petitioner was president of WSTL in 1978 and part of 1979. He was also chairman of the board throughout those years. WSTL is a common carrier engaged in the interstate hauling of cargo for shippers.
WSTL filed its Federal corporate tax returns for fiscal years ending May 31, and for fiscal years ending May 31, 1978, and May 31, 1980, filed its returns under the name of Wiley Sanders, Inc.
WSTL had investment credits for its fiscal years ending May 31, 1978, 1979 and 1980 as follows:
______________________________________________________________________________________________
Investment Credit Tentative
Fiscal Year Carryover from Investment Investment
Ending Prior Year(s) Credit Credit*
______________________________________________________________________________________________
5/31/78 . ........... $ —0— $116,859 $40,335
5/31/79 ............. 76,523 96,967 64,775
5/31/80 ............. 24,232 40,386 25,504
*Amount credited against tax liability after taking limitations into account
______________________________________________________________________________________________
WSTL was unable to claim a carryback of investment credits to fiscal years ending May 31, 1975, 1976 and 1977 because investment credits had been used against all available preinvestment credit tax liability for those years.
Sanders Lead Company, Inc., an Alabama corporation, is engaged in the lead smelting business and has its principal place of business in Troy, Alabama. The stock of Sanders Lead Company is owned as follows:
Stockholder Percent of Ownership
Wiley C. Sanders, Sr. 45 percent
Wiley C. Sanders Jr. (Petitioner) 45 percent
George Saunders 10 percent
In 1978, WSTL needed additional operating authority from the Interstate Commerce Commission to properly service its shippers and additional trucks and trailers to implement the increased operating authority.
In 1978, WSTL did not have the cash available to purchase needed equipment and petitioner was unwilling to personally guarantee any financing obtained by WSTL. In addition, there was a limit on the number of vehicles WSTL could purchase on credit without adversely affecting its ability to borrow money for the company's operating expenses. Although WSTL had leased some equipment on 30-day leases, it had difficulty leasing the necessary equipment because hauling lead acid batteries for Sanders Lead Company had caused corrosive damage to some of the leased equipment and had resulted in litigation.
In order to supply WSTL with the necessary equipment petitioner purchased trucks and trailers from various dealers and in October 1978 began leasing them solely to WSTL under the name Southern Truck Leasing, a sole proprietorship.3 The total cost of the trucks and trailers purchased by petitioner was $1,903,430 in 1978 and $4,606,182.18 in 1979. At the time of the trial, November 1983, petitioner continued to lease to WSTL equipment purchased in 1978 and 1979.
Subject to the final decision of petitioner, management personnel at WSTL determined the number of trucks and trailers that were needed to operate the business satisfactorily.
Petitioner alone decided whether Southern Truck Leasing should purchase trucks and trailers and selected the type of equipment to be purchased. Petitioner also determined which equipment Southern Truck Leasing would lease to WSTL.
Petitioner purchased the trucks and trailers on credit and entered into installment payment agreements with the sellers. No downpayments were made on the purchases. Petitioner entered into security agreements with various lending institutions and the trucks and trailers were pledged as collateral. The payment of certain notes was guaranteed by Sanders Lead Company and/or WSTL. Payments on the loans were only made by petitioner.
Southern Truck Leasing had office space in Sanders Lead Company's offices, but Southern Truck Leasing paid no rent to Sanders Lead Company from 1978 through 1982. The only employee of Southern Truck Leasing was a bookkeeper.
As a result of the purchases, petitioner's inventory of trucks and trailers was as follows:
Existing Year-End
Year Inventory Purchases Inventory
Trucks
1978 ....... —0— 32 32
1979 ....... 32 59 91
Trailers
1978 ....... —0— 54 54
1979 ....... 54 179 233
The leases of new trucks and trailers by petitioner to WSTL were for 1 year, and these leases did not include renewal options. The useful life of the trucks and trailers for depreciation purposes was 5 years. When the original leases were executed, successive leases were not executed by petitioner and WSTL.
In pertinent part the representative lease agreement for trucks and trailers provides:
The terms of the leases provided that all operating expenses (except certain taxes, licenses and insurance) were to be paid by the lessee. At the expiration of an existing lease, additional 1-year leases were entered into by petitioner and WSTL for the trucks and trailers that were acquired new in 1978 and 1979. The rental charge, but not the terms of the lease, was sometimes changed with each successive lease. Except for trucks and trailers sold by petitioner because they were no longer desirable for use in WSTL's operation, new 1-year lease agreements were entered into for all trucks and trailers. At the stated termination of a lease, WSTL did not seek alternative leasing arrangements.4
Petitioner's sole proprietorship, Southern Truck Leasing, received rental income from WSTL for the use of the trucks and trailers which totaled $139,079.56 for calendar year 1978 and $1,536,576 for calendar year 1979. All rents represented fair rental values.
Petitioner sold trucks and trailers which his wholly owned corporation did not continue to lease in 1980, 1981 and 1982. When the operating needs of WSTL dictated an equipment change, petitioner sold the equipment which WSTL no longer needed. He did not lease or attempt to lease that equipment to other persons.
The following chart shows the disposition and date of disposition of trucks and trailers by petitioner's sole proprietorship, Southern Truck Leasing:
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