1980 U.S. Tax Ct. LEXIS 56">*56
1. Petitioner purchased medical equipment and furnishings in 1974 which he immediately leased to a corporation of which he was an employee under a written lease dated Aug. 1, 1974, with a term of 5 years. The property had estimated useful lives of 5 to 7 years. The lease was purportedly canceled on June 10, 1977, prior to the expiration of 50 percent of the useful lives of the property.
2. Petitioner purchased two automobiles in 1974 which he purportedly used in his business of being an employee of the corporation.
74 T.C. 1368">*1368 Respondent determined a deficiency in petitioners' income tax for the year 1974 in the amount of $ 6,849.33. Due to concessions of the parties, the only issues for decision are (1) whether petitioners are entitled to an investment credit under
FINDINGS OF FACT
The stipulated facts are incorporated herein by this reference.
Petitioners Leroy and Sally Bloomberg, husband and wife, resided in Newark, Ohio, when they filed their petition herein. They filed a joint Federal income tax return for the year 1974 with the District Director of Internal Revenue, Cincinnati, Ohio.
Leroy Bloomberg (herein petitioner) is an ophthalmologist and is employed as a physician by a professional corporation known as Leroy Bloomberg, M.D., Inc., in Newark, Ohio (hereinafter referred to as the corporation). Leroy was 1980 U.S. Tax Ct. LEXIS 56">*59 president of the corporation during 1974. On August 1, 1974, the corporation leased certain medical equipment and office furniture and fixtures from petitioner under a written lease agreement. The equipment and furnishings were purchased by petitioner in 1974 and were transferred to and first placed in service by the corporation in 1974.
The lease agreement between petitioner and the corporation was for a period of 5 years commencing on August 1, 1974, and provided that the lessee should pay lessor an aggregate rental of $ 40,954.20 over the term of the lease, payable in monthly installments. Title to the equipment was to remain in lessor's name and, upon termination, the equipment was to be returned to the lessor in the same condition as when received by lessee, reasonable wear and tear excepted. Upon default by the lessee, the lease could be terminated by lessor by written notice, but there was no provision for termination by the lessee.
The furnishings and equipment leased were purchased by petitioner for an aggregate cost of $ 35,979.56, were reported on the depreciation schedule attached to petitioners' 1974 return at that cost, and depreciation deductions on the furnishings1980 U.S. Tax Ct. LEXIS 56">*60 and equipment were claimed on the return, based on estimated useful lives of 7 years for all items except one, which used a useful life of 5 years. Petitioners also reported the rent received from the corporation as income on their 1974 return.
Thomas E. Brock, Jr., is president of Medical Management, Inc., of Columbus, Ohio. The business of Medical Management, 74 T.C. 1368">*1370 Inc., is to render accounting and tax service to physicians and dentists, which it did for the corporation and petitioners. Brock was secretary of the Bloomberg corporation in 1974.
On June 10, 1977, Brock, as president of Medical Management, Inc., wrote a letter to petitioners, advising "Effective date of this letter, all equipment leases between you, shareholder, and the corporation will be terminated. You will receive a monthly office equipment and/or office furniture allowance in the amount of $ 232.42, to commence 7/1/77." This letter also advised petitioner not to pay himself any further lease payments from the corporation.
Petitioner purchased a 1974 Chrysler Imperial automobile on September 25, 1974, at a cost of $ 5,638, and a 1974 Mercedes Benz automobile on August 26, 1974, at a cost of $ 16,939. 1980 U.S. Tax Ct. LEXIS 56">*61 Petitioner did not lease these automobiles to the corporation but was paid an automobile allowance by the corporation which he included in taxable income. On the depreciation schedule attached to petitioner's 1974 return, an estimated life of 3 years was claimed for the Imperial, depreciation of $ 930.21 was claimed, and also an investment credit of $ 131.55. The Mercedes was also listed on the depreciation schedule with an estimated useful life of 7 years; depreciation in the amount of $ 1,580.92, and an investment credit of $ 1,185.73 was claimed.
In the notice of deficiency, respondent disallowed the entire investment credit claimed on the return, which included the credit claimed on the leased equipment and furnishings, and on the automobiles. On brief, respondent concedes that petitioner is entitled to 5 percent of the investment credit, or $ 65.86, on the automobiles.
OPINION
74 T.C. 1368">*1371 A credit shall be allowed by
* * * * (B) the term of the lease (taking into account options to renew) is less than 50 percent of the useful life of the property, and for the period consisting of the first 12 months after the date on which the property is transferred to the lessee the sum of the deductions with respect to such property which are allowable to the lessor solely by reason of section 162 * * * exceeds 15 percent of the rental income produced by such property.
With regard to the equipment, furniture, and fixtures purchased by petitioner in 1974 and leased to the corporation on August 1, 1974, there is no question that petitioner qualifies for the applicable investment credit on that property, or the amount thereof, if he meets the requirements of
On its face, the term of the lease, 5 years, exceeded 50 percent of the estimated useful lives of the assets claimed on petitioner's depreciation schedule, being 5 to 7 years. Petitioner claims, however, 1980 U.S. Tax Ct. LEXIS 56">*64 that the lease was effectively canceled by Brock's letter of June 10, 1977, which was prior to the expiration of 50 percent of the useful lives of any of the leased assets, and that the cancellation made the lease null and void ab initio so the property should be considered as first placed in service by petitioner in 1974. We disagree.
First, there is considerable doubt in our minds that Brock's letter of June 10, 1977, could have effectively canceled the lease. His letter was written in his capacity as adviser to the 74 T.C. 1368">*1372 corporation-lessee, and there was no provision in the lease for the lessee to cancel even if Brock had authority to act for the lessee. But be that as it may, there is nothing in the letter to even suggest that it was intended to be retroactive. Its terms are prospective only. In addition, there is no evidence that the parties adjusted their accounts to return the rentals previously received to the lessor.
Second, it is clear that the determination of entitlement to the investment credit must be made under the conditions that existed in 1974, the year the equipment was first placed in service (
The entire thrust of the investment credit provisions relates to the taxable year the property is first placed in service. The credit is allowable only for that year.
Looking at the circumstances existing in 1974 at the time petitioner purchased the assets and transferred them to the lessee who first placed them in service at that time, the term of the lease clearly exceeded 50 percent of the useful life of the assets, so petitioners do not qualify for the investment credit with respect to those assets under
With regard to the two automobiles, they were not leased to the corporation but were purportedly used by petitioner in his business of being an employee of the corporation. Suffice it to say that petitioner offered no evidence regarding either his general use of the cars or the percentage of business usage of the cars. If the cars were not used in petitioner's trade or business or in the production of income, petitioner would not be entitled to depreciation on them. Sec. 167(a). And if depreciation1980 U.S. Tax Ct. LEXIS 56">*67 on the cars was not allowable to petitioners, the cars do not qualify as
1. Petitioner did not elect to pass thru the investment credit to the lessee under
