U.S. Bancorp v. Comm'r of Internal Revenue

• Decision Date: 21 September 1998
• Docket Number: No. 27342–96.1,27342–96.1
• Citation: 111 T.C. No. 10,111 T.C. 231
• Parties: U.S. BANCORP and Its Consolidated Subsidiaries, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.
• Court: U.S. Tax Court

111 T.C. 231

111 T.C. No. 10

U.S. BANCORP and Its Consolidated Subsidiaries, Petitioner,

v.COMMISSIONER OF INTERNAL REVENUE, Respondent.

No. 27342–96.1

United states Tax Court.

Sept. 21, 1998.

Richard A. Edwards and David W. Brown, for petitioner.

William P. Boulet, Jr. and Virginia L. Hamilton, for respondent.

OPINION

BEGHE, J.

This matter is before the Court on the parties' motions for partial summary judgment filed under Rule 121.² Petitioner's principal office was located in Portland, Oregon, when it filed the petition.

The sole issue for decision is whether the charge incurred by a lessee in terminating a lease of a mainframe computer and simultaneously initiating a new lease of a more powerful mainframe computer with the same lessor is deductible in the year incurred or must be capitalized and amortized over the 5–year term of the new lease. We hold that the charge must be capitalized and amortized over the term of the new lease.

The background facts set forth below are derived from the pleadings in this case, petitioner's request for admissions, respondent's responses to petitioner's request, affidavits and exhibits attached to petitioner's motion for partial summary judgment, respondent's cross-motion for partial summary judgment, the declaration and exhibits attached to respondent's response to petitioner's motion, the exhibits attached to petitioner's reply to respondent's response, and the exhibits and affidavits attached to petitioner's first and second supplemental replies to respondent's response. The background facts do not appear to be in dispute and are set forth solely for purposes of deciding the motions and are not findings of fact for this case. Fed.R.Civ. P. 52(a); Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th Cir.1994).

Background

Petitioner is a successor in interest by merger of West One Bancorp. Moore Financial Group, Inc. (Moore Financial), was a national bank holding company incorporated in the State of Idaho in 1981. In 1989, Moore Financial changed its name to West One Bancorp (West One). In 1995, West One merged into U.S. Bancorp (Old Bancorp), a bank holding company incorporated in the State of Oregon. In 1997, Old Bancorp merged into First Bank System, Inc., a bank holding company incorporated in the State of Delaware, which then changed its name to U.S. Bancorp (petitioner). West One was a calendar year taxpayer that used the accrual method of accounting for 1989 and 1990, the tax years in issue.

The leases at issue in this case were between West One as lessee and IBM Credit Corp. (ICC) as lessor. For purposes of leasing computer equipment, ICC uses a document captioned “Term Lease Master Agreement” (the Master Agreement), which contains an umbrella set of terms. Customers of ICC sign the Master Agreement, whose terms then govern all future lease transactions between ICC and the customer. When a customer enters into an individual lease transaction, it signs a document captioned “Term Lease Supplement” (Supplement), which expressly incorporates the terms of the Master Agreement and contains a description of the leased equipment, price terms, financing arrangements, and other factors unique to the transaction. The Master Agreement explicitly provides that the lease cannot be canceled and does not provide for a specific charge in case of early termination of the lease or for a formula for computing any such charge.

West One, at the time still named Moore Financial, executed the Master Agreement with ICC in March 1989. In August 1989, West One leased an IBM 3090 mainframe computer (the 3090) from ICC (the First Lease). The lease term commenced August 30, 1989, and was to end on June 28, 1994, and called for monthly payments of $128,701. The Supplement for the First Lease has not been provided to the Court.

During 1990, West One determined that the 3090 was no longer adequate for its needs and that an upgrade to a more powerful mainframe computer would be required. Accordingly, in October 1990, West One and ICC executed a document captioned the “Rollover Agreement” (the Agreement). Under the Agreement, ICC released West One from its obligations under the First Lease on several conditions, including that West One finance its replacement computer equipment with ICC (“Lessee commits to finance the replacement Equipment with IBM Credit Corporation”). Under the Agreement, the termination of the First Lease took effect on November 15, 1990, at which time the payments yet to be made under the First Lease in accordance with its terms would have amounted to approximately $5,662,844. However, the Agreement required West One to pay a “Rollover Charge” of $2.5 million, which was financed by ICC over the 5–year period of the new lease (discussed in the next paragraph). The Agreement concludes with the following statement:

This Agreement is valid when accepted by both parties and payment in full (Rollover charge plus all lease payments due through the Rollover Date) or a signed Term Lease Supplement financing the Rollover charge is received by Lessor on or before November 15, 1990. This supercedes [sic] any prior Rollover quote for this equipment.

On October 31, 1990, West One executed a lease with ICC for an IBM 580 mainframe computer (the 580) for a 5–year term (the Second Lease). Under the Second Lease, West One was required to make 60 monthly payments, each in the total amount of $182,484, consisting of $128,709 for the Second Lease and $53,775 for the rollover charge. The form of Supplement used by ICC refers, as does the Supplement for the Second Lease, to the charge for canceling an old lease as a rollover charge that is to be billed monthly along with the lease payments under the Second Lease.

Under the description of the equipment to be leased, the Supplement for the Second Lease provides: “Option S financing for ICC lease termination of the 3090/74299 complex is contingent upon ICC financing of the 9021/580. If the 9021/580 is not financed via ICC, the ICC lease termination charges for the 3090 complex will be due under quote # E320999A” (the document containing this alternative quote has not been located). Although ICC does not have a fixed formula for calculating a termination charge and takes a number of factors into account in determining its negotiating position with the terminating lessee, the termination charge is generally less if the lessee agrees to obtain financing from ICC for replacement equipment.³

Although the Supplement does not expressly so state, it implies, consistently with the concluding paragraph of the Rollover Agreement, that if the replacement equipment had not been financed through ICC, whatever termination charge the parties had agreed upon would have been immediately due and payable.

On its 1990 Federal consolidated income tax return, petitioner claimed a deduction of $793,753 as an expense of terminating the First Lease. In the statutory notice of deficiency issued to petitioner on September 20, 1996, respondent disallowed the deduction and increased petitioner's income for the 1990 taxable year by $793,753. The explanation of adjustments section of the notice stated that the termination charge was a capital expenditure under section 263 because petitioner entered into a lease with ICC for replacement equipment, and that, because no payments under the new lease were made until 1991, no amortization deduction would be allowed for 1990.

In the petition filed December 24, 1996, petitioner alleged that respondent erred in determining that the termination charge was a capital expenditure and not an ordinary and necessary business expense within the meaning of section 162. On December 15, 1997, petitioner amended its petition, alleging that the full $2.5 million charge for termination of the First Lease was deductible as an expense in 1990. Petitioner explained that the $793,753 deducted on the 1990 return was the amount of the lease termination charge recorded on its books for financial statement purposes, using capital lease accounting rules, but that for Federal tax purposes petitioner was taking the position that it was entitled to deduct the full termination charge of $2.5 million for the taxable year in which it became legally obligated to pay that amount.

A supplement to respondent's response to petitioner's motion for partial summary judgment partially alters respondent's position. Respondent now concedes that petitioner is entitled “to an amortization deduction for one month in 1990, or to one-sixtieth of the total $2.5 million rollover payment” because petitioner is an accrual basis taxpayer, and because the obligation to make the first monthly payment for the rollover charge accrued on December 1, 1990.

Discussion

Summary judgment is intended to expedite litigation and avoid unnecessary and expensive trials. Florida Peach Corp. v. Commissioner, 90 T.C. 678, 681 (1988). Summary judgment is appropriate where there is no genuine issue of material fact and decision may be rendered as a matter of law. Rule 121(b); Sundstrand Corp. v. Commissioner, 98 T.C. at 520; Jacklin v. Commissioner, 79 T.C. 340, 344 (1982). In deciding whether to grant summary judgment, the factual materials and inferences drawn from them must be considered in the light most favorable to the nonmoving party. Bond v. Commissioner, 100 T.C. 32, 36 (1993); Naftel v. Commissioner, 85 T.C. 527, 529 (1985). If the conditions for summary judgment are otherwise satisfied with respect to a single issue or fewer than all the issues in a case, then partial summary judgment may be granted, notwithstanding that all the issues in the case are not disposed of. Rule 121(b); Naftel v. Commissioner, supra.

The parties agree, and we concur, that no issues of material fact are in dispute. Consequently, we may render judgment on the issue in this case as a matter of law. Rule 121(b). The issue for decision is whether the obligation incurred by pet...