Western Contracting Corporation v. CIR
| Decision Date | 10 November 1959 |
| Docket Number | No. 16202.,16202. |
| Citation | 271 F.2d 694 |
| Parties | WESTERN CONTRACTING CORPORATION, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent. |
| Court | U.S. Court of Appeals — Eighth Circuit |
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Ralph E. Davis. Chicago, Ill. (Peter L. Wentz, Samuel H. Horne, and Hopkins, Sutter, Owen, Mulroy & Wentz, Chicago, Ill., on the brief), for petitioner.
Carolyn R. Just, Atty., Dept. of Justice, Washington, D. C. (Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Robert N. Anderson, and S. Dee Hanson, Attys., Dept. of Justice, Washington, D. C., on the brief), for respondent.
Before WOODROUGH and MATTHES, Circuit Judges, and MICKELSON, District Judge.
The Commissioner of Internal Revenue determined deficiencies in petitioner's (sometimes referred to herein as "Western") income for the taxable years of 1948 and 1949. After an extended trial on petition for redetermination, the tax court found and adjudged that for 1948 and 1949 there was a deficiency in petitioner's income tax in the amounts of $158,105.81 and $120,160.90, respectively. From this ruling petitioner has brought the case to this court on petition for review.
Two questions are presented. First, whether monthly payments made by Western to dealers in heavy construction equipment in the total amount of $731,046 during 1948 and $586,837.23 during 1949, constituted rentals so as to be deductible under § 23(a) (1) (A), 1939 Internal Revenue Code Title 26 U.S.C.A. § 162(a) (3), 1954 I.R.C., as contended by petitioner, or, whether by making said payments petitioner acquired an equity in the equipment, as found by the Tax Court. Second, if the payments were not deductible as rent, is petitioner entitled to depreciation deductions for the property involved in amounts greater than that allowed by the Commissioner and approved by the Tax Court?
While the record is voluminous, we find little dispute as to the relevant facts which are set out in detail in the memorandum findings of fact and opinion of the Tax Court. See Western Contracting Corp. v. Commissioner, 17 T.C.M. 371, T.C.Memo. 1958-77, CCH Dec. 22,960 (M).
Prior to 1946, Western, an Iowa corporation, was engaged in what is referred to in the record as light construction work, such as building highways and airports. During 1946 Western entered into contracts for heavier types of construction, such as grading and earth moving in the building of dams, tunnels, canals and turnpikes. The performance of these contracts required the use of heavy equipment. While Western owned some of the equipment needed for the heavier construction work, it required more. Its working capital was low and banks were unwilling to permit it to tie up short term borrowings in capital assets. In an effort to obtain the required working capital Western undertook, but unsuccessfully, to sell equipment debentures. In order to conserve what capital it had and to acquire the needed equipment, arrangements were worked out and consummated which give rise to the first issue in this case.
For use on these projects, Western obtained 123 pieces of heavy equipment by leases for varying terms. Thirty of the items were returned to lessors at the end of the lease terms, and deduction of the rent paid therefor is not in controversy. The remaining 93 pieces, in issue here, were obtained by Western under 75 different written instruments, each of which was called "Lease Agreement." Typical of all the leases is the following:
The questioned leases were in the main entered into with regular franchise equipment dealers. The dealer was designated in the written instrument as lessor and Western as lessee. All but 3 pieces of equipment which Western obtained under the leases were new. None of the 75 leases contained a clause or agreement giving Western, as lessee, an option to purchase the equipment at any time during or at the end of the rental term. Neither was there any evidence that a side agreement, written or oral, had been entered into between Western and any of the equipment dealers, granting Western such a right or option. In fact, all of the direct testimony of the witnesses was to the contrary, that is, no such agreement was entered into or existed.
The leases were for varying terms ranging from 7 to 28 months. In this connection, the Tax Court found that the average length of the lease term was 13.98 months.
Upon execution of a lease, the dealer-lessor would procure a loan from a bank, in nearly all instances the Toy National Bank of Sioux City, Iowa. The amount borrowed apparently varied but in most situations it equalled the normal purchase or list price of the equipment described in the lease. To evidence the loan, the dealer gave its note to the bank and to secure payment thereof also gave a chattel mortgage upon the leased equipment. Additionally, the dealer assigned the lease to the bank. Western consented in writing to each assignment and thereafter Western made payments of the stipulated rent to the bank which had made the loan. Throughout the terms of the leases, it is admitted that the equipment was subject to unusually heavy use under adverse geographical conditions. On one project, equipment was worked three 8-hour shifts. Most dealers made periodic inspections of the equipment.
In each case Western made all payments due under the lease, and at the end of the "minimum period" designated in each of the 75 leases, Western purchased the property described therein, thus eventually becoming the owner of all 93 pieces.1 The dealers arrived at the amount which they offered to accept for the property, described in the record as end payments, by taking their list price and adding thereto their finance charges, such as the interest paid to the banks, and deducting therefrom the total of the rental payments made by Western. The sales came about and were consummated in this manner: At or near the expiration of the minimum period, the dealer-lessor formally offered to sell to Western each item of equipment covered by the lease. Typical of the letter containing the offer is the following:
Western accepted each offer in writing and upon receipt of an invoice from the dealer showing the amount due, issued its check to the dealer for such amount. Thereupon, the dealer executed and delivered to Western a conventional type bill of sale. Thereafter, Western used the amount paid at the time it acquired title to the property as the cost basis of the equipment and claimed depreciation on that basis. Some pieces so acquired were subsequently sold or tradedin by Western for amounts well in excess of the express "end payment," capital gain being reported according to applicable statutes.
The question presented is whether the payments made by Western under and pursuant to the lease agreements constituted rental payments deductible as a trade or business expense within the meaning of § 23(a) (1) (A) of the Internal Revenue Code of 1939, which provides:
The provisions of the foregoing statute relating to the taking of title to or acquiring an equity in property, being stated in the alternative, it follows that if the controverted amounts paid by Western were for the use or possession of property to which...
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