1975 Tax Ct. Memo LEXIS 65 | Tax Ct. | 1975
MEMORANDUM OPINION
DAWSON,
The case was submitted under
Petitioners, Joseph L. and Ruth Ann Holloman, were husband and wife during the taxable years in question. Their legal residence was in Harlingen, Texas, at the time they filed their petition in this case. Their joint Federal income tax return for the year 1971 was filed with the District Director of Internal Revenue at Austin, Texas. Joseph L. Holloman will be referred to herein as the "petitioner."
Petitioner, a dentist, became an employee of Dr. B. J. Blankenship, also a dentist, in October 1970. They formed an equal partnership under the name of Blankenship and Holloman on January 1, 1971, when petitioner purchased one-half of the accounts receivable of Dr. Blankenship's practice. Dr. Blankenship retained ownership of all the dental equipment used in his business as a sole practitioner, and leased the equipment to the partnership from January 1, 1971, until August 31, 1971, when the partnership was terminated. On that date, petitioner purchased Dr. Blankenship's 50 percent1975 Tax Ct. Memo LEXIS 65" label="1975 Tax Ct. Memo LEXIS 65" no-link"="" number="4" pagescheme="<span class=">1975 Tax Ct. Memo LEXIS 65">*68 interest in the partnership as well as his dental equipment. The purchase price of the equipment was $31,500.
Respondent disallowed a claimed investment credit in 1971 on petitioner's purchase of the dental equipment, thereby resulting in the determined deficiency for that year, and also disallowed a claimed carryback of 1971 unused investment credit to petitioner's 1968 taxable year, thus resulting in a determined deficiency for that year.
We are concerned in this case with the investment credit, a credit which may be offset directly against income tax liability. Generally, the credit is an amount equal to seven percent of "qualified investment," which includes purchases of
The key question here is whether there was a real change in ownership and use, or whether the abuse which Congress sought to prevent has occurred. The resolution of this question depends upon whether or not the limiting provisions of section 48(c)(1) are applicable to these facts. Put another way, did the dental equipment purchased by petitioner in 1971 constitute "used section 38 property" for which a limited investment credit is provided in section 48(c)(1)? 2
1975 Tax Ct. Memo LEXIS 65" label="1975 Tax Ct. Memo LEXIS 65" no-link"="" number="6" pagescheme="<span class=">1975 Tax Ct. Memo LEXIS 65">*70 This same question was decided previously in the case of
The Commissioner contended that the taxpayer was not entitled to an investment credit since the property in question was used, after the taxpayer acquired it, by "a person who used such property before such acquisition." The Commissioner argued that use of the grapevines by the partnership should be attributed to each partner individually. The result of that would have been that since Edward "used" the grapevines
This Court, however, held that the partnership should be treated as a separate entity or "person" for purposes of section 48(c)(1), and, since two separate partnerships used the grapevines, the taxpayers were entitled to the investment credit. The result in the
The facts in the present case are substantially the same as those in
Section 48(c)(1) is determinative on this issue. It is set out earlier in this opinion, and contains two limitations. The second limitation, involving the parenthetical portion of section 48(c)(1), is concerned with whether or not the property is used by a person who bears a relationship described in section 179(d)(2)(A) or (B) to a person who used such property before such acquisition.
Section 179(d)(2)(A) describes such a person as a person from whom the acquisition of property would result in the disallowance of losses under section 707(b). Section 707(b)(1)(A) describes such a person as a partnership in which the taxpayer as a partner owned directly or indirectly
Respondent1975 Tax Ct. Memo LEXIS 65" label="1975 Tax Ct. Memo LEXIS 65" no-link"="" number="9" pagescheme="<span class=">1975 Tax Ct. Memo LEXIS 65">*73 urges that petitioner is not entitled to an investment credit for "used section 38 property" under the first limitation in section 48(c)(1). The crux of respondent's position is that the dental equipment was used by "a person who used such property before such acquisition." Petitioner's physical use of the equipment, while he was a partner in Blankenship and Holloman, respondent argues, was use by the same person who used it after acquisition. His contention is based on the premise that use by the partnership is attributable to each partner individually. The partnership, he argues, should be treated as an aggregate of individuals for the purposes of section 48(c)(1). To support this argument, respondent relies heavily on
(ii) For purposes of applying subdivision (i) of this subparagraph, (a)
We rejected a similar argument in
We have considered the relationship of section 48(c)(1) with other sections of the Code. We have also determined in our best judgment the intent of Congress in introducing the concept of investment credit and the reasons behind its limitations. In our view, under the particular facts in this case the respondent's position and regulations cited to the extent they support his position are contrary to the intent of Congress as expressed in the statute and in the committee reports and are to that extent invalid.
Consistent with our prior opinion in
In our opinion this conclusion is consistent with Congressional intent. Congress added the investment credit to our tax laws in the Revenue Act of 1962 in order to stimulate the nation's economy through investment in producers goods. Petitioner has purchased the assets of a pre-existing business, and, at least indirectly, has stimulated investment. If Dr. Blankenship should decide to continue in business as a dentist, he will have to go out and purchase new or used dental equipment to replace the equipment he sold to the petitioner. The abuse which Congress sought to prevent has not occurred. There has been a change in the use as well as a change in the ownership of assets. A change in use occurred because the Holloman-Blankenship partnership and the petitioner are separate entities. The "person" who used the property in question after the acquisition, the petitioner, is not the same or related to the "person" who used such property before such acquisition, the partnership. Petitioners, therefore, are entitled to the investment credit they claimed in 1971, and to a carry-back of the excess 1971 investment1975 Tax Ct. Memo LEXIS 65" label="1975 Tax Ct. Memo LEXIS 65" no-link"="" number="12" pagescheme="<span class=">1975 Tax Ct. Memo LEXIS 65">*76 credit to the year 1968.
Footnotes
1. All section references are to the Internal Revenue Code of 1954, as amended, unless otherwise indicated.↩
2. Sec. 48. Definitions; Special Rules.
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(c) USED SECTION 38 PROPERTY.--
(1) In general.--For purposes of this subpart, the term "used section 38 property" means section 38 property acquired by purchase after December 31, 1961, which is not new section 38 property. Property shall not be treated as "used section 38 property" if, after its acquisition by the taxpayer, it is used by a person who used such property before such acquisition (or by a person who bears a relationship described in section 179(d)(2)(A) or (B) to a person who used such property before such acquisition).↩