Swift Dodge v. Commissioner of Internal Revenue

Ninth Circuit

Swift Dodge v. Commissioner of Internal Revenue

692 F.2d 651, 51 A.F.T.R.2d (RIA) 333, 1982 U.S. App. LEXIS 23944

CourtCourt of Appeals for the Ninth Circuit

DecidedNovember 19, 1982

Docket81-7440

StatusPublished

Cited by29 cases

This text of 692 F.2d 651 (Swift Dodge v. Commissioner of Internal Revenue) is published on Counsel Stack Legal Research, covering Court of Appeals for the Ninth Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook

Swift Dodge v. Commissioner of Internal Revenue, 692 F.2d 651, 51 A.F.T.R.2d (RIA) 333, 1982 U.S. App. LEXIS 23944 (9th Cir. 1982).

Pincite

Opinion

FARRIS, Circuit Judge:

Swift Dodge, a California corporation, claimed an investment tax credit on its 1974 and 1975 federal income tax return for its investment in motor vehicles that were purchased for use under a “Lease Agreement” in the amounts of $25,923 and $22,168, respectively. After an audit of Swift Dodge, the Commissioner determined that the lease agreements were essentially conditional sales contracts. The Commissioner disallowed the claimed credit because he determined that the taxpayer was not the owner of the vehicles for which the credit was claimed.

The Internal Revenue Code permits a tax credit (7% during 1974-75) of a taxpayer’s qualified investment in “Section 38” property. 26 U.S.C. §§ 38, 46. Section 48(a) defines Section 38 property to include tangible personal property “with respect to which depreciation ... is allowable and having a useful life ... of 3 years or more.” Property owned by a taxpayer and leased to others by him in his business is depreciable property and qualifies for the credit. Property purchased for resale is not depreciable under Section 167 and therefore *652 is not Section 38 property eligible for the credit. Whether the investment tax credit was properly disallowed turns on whether, for purposes of federal tax law, the transactions between Swift Dodge and the vehicle users are leases or conditional sales contracts.

The taxpayer, Swift Dodge, operates an automobile dealership and sells automobiles, vans, and light trucks manufactured by the Chrysler Corporation. In addition to the usual sales business, the taxpayer offers vehicles of any manufacturer to its customers under a standard form lease provided by Chrysler. During the tax years in dispute, Swift Dodge’s selling and leasing operations were treated as separate divisions, were located in separate buildings, and had separate bookkeeping and computer operations.

The typical lease lasted 36 months. Although the form permitted different terms, the typical agreement executed by Swift Dodge and its customers required the lessee to provide a specified amount of insurance for the benefit of Swift Dodge, to pay all taxes, and to perform all necessary maintenance and repairs for the vehicle. The agreement also contained provisions showing the amount of money which the lessee would have to pay Swift Dodge in the event of premature termination, loss due to theft or damage, or normal expiration of the agreement. The agreement shifted the risk of depreciable loss to the vehicle user. In contrast to a “close-ended” lease, under this “open-ended” type of lease, see Swift Dodge v. Commissioner, 76 T.C. 547, 568-69 & n. 11 (1981), the lessee was required to pay, when the lease terminated, the amount, if any, by which the estimated “depreciated value” of the vehicle, as set forth in the agreement, exceeded its actual wholesale value. Similarly, if the actual wholesale value of the vehicle exceeded its estimated “depreciated value,” the lessee would “receive any gain which resulted] from final disposition of the vehicle.” Although the lease did not contain an option to purchase, the tax court found that Swift Dodge’s practice was to permit the lessee to retain the vehicle at the expiration of the agreement and to pay only the “depreciated value” to Swift Dodge — regardless of the actual value of the vehicle. Approximately one-half of the lessees paid the specified balance and retained the vehicle when the lease ended.

To purchase the vehicles, Swift Dodge borrowed money from the Bank of America National Trust and Savings Association and the United California Bank. Swift Dodge usually borrowed an amount needed to cover the purchase price of the vehicles.

Swift Dodge contends that the questioned transactions are leases, and that it owned and leased the vehicles and therefore was entitled to the claimed investment tax credit. The Commissioner contends that the transactions are conditional sales contracts, and that Swift Dodge did not own the vehicles and was not entitled to the credit.

The tax court held that the agreements were leases. Swift Dodge v. Commissioner, 76 T.C. 547 (1981). The Commissioner appeals.

The parties do not dispute the specific factual findings of the tax court concerning the operation and terms of the agreements. The issue is whether the tax court erred by holding that these agreements were leases rather than conditional sales contracts. Whether the agreement is a “sale” or a “lease” for federal tax purposes is a question of law and is therefore fully reviewable on appeal. See Frank Lyon Co. v. United States, 435 U.S. 561, 581 n. 16, 98 S.Ct. 1291, 1302 n. 16, 55 L.Ed.2d 550 (1978); Estate of Franklin v. Commissioner, 544 F.2d 1045, 1047 n. 3 (9th Cir. 1976).

The characterization of a transaction for federal tax purposes is controlled by the substantive provisions of the agreement and the parties’ conduct, rather than by the particular terminology used in the agreement. Frank Lyon, 435 U.S. at 573, 98 S.Ct. at 1298.

Before determining the nature of this transaction, we first note that this transaction was not a multiple-party sale and financing transaction in which Swift Dodge *653 served merely as a conduit of funds from the vehicle users to the banks which loaned the money for the purchase of the vehicles. In Frank Lyon the Supreme Court determined that where the third-party participant in a multiple-party transaction assumed actual risks and therefore was not a mere conduit of funds, the sale and leaseback transaction was not a sham and the form of the transaction adopted by the parties governed for tax purposes.

In Frank Lyon, as in this case, the third-party (Swift Dodge) assumed risks that were both actual and significant. In both cases the taxpayer, and not the user of the asset, was liable on the loan instrument to the bank. In both eases the taxpayer’s accounting system was consistent with a lease. There were independent parties who negotiated at arm’s length. Frank Lyon, 435 U.S. at 576-81, 98 S.Ct. at 1299-1302; Davis v. Commissioner, 585 F.2d 807, 814-15 (6th Cir.1978), cert. denied, 440 U.S. 981, 99 S.Ct. 1789, 60 L.Ed.2d 241 (1979). Further, in both cases the user of the asset could walk away from the lease at its expiration. In this case the taxpayer, Swift Dodge, also had the responsibility of disposing of the asset when the lease ended. Swift Dodge was not merely a conduit in a financing transaction between the vehicle user and the bank.

The Commissioner, however, asserts that the transaction was a two-party sales transaction between Swift Dodge and the vehicle user. Swift Dodge counters that the transaction was a lease.

Free access — add to your briefcase to read the full text and ask questions with AI