1992 Tax Ct. Memo LEXIS 352 | Tax Ct. | 1992
SUPPLEMENTAL MEMORANDUM OPINION
GOLDBERG,
Petitioners seek reconsideration with respect to our redetermination that the IES - (I) property was not placed in service within the taxable period.
We held that no depreciation or energy credit was allowable on the basis of our finding that the IES - (I) property was not placed in service in 1982. The IES - (I) prospectus said that the purpose of IES - (I) was to sell or lease the1992 Tax Ct. Memo LEXIS 352" label="1992 Tax Ct. Memo LEXIS 352" no-link"="" number="2" pagescheme="<span class=">1992 Tax Ct. Memo LEXIS 352">*353 on-farm energy plant. The portion of the on-farm energy plant held by IES - (I) was intended as a prototype to be refined and used as the basis for manufacturing. IES - (I) clearly did not intend to lease or sell the prototype. Multiple copies of the prototype were necessary as a prerequisite to a sales and leasing business. (Petitioners cannot claim that their on-farm energy plant was inventory, because then it would not be depreciable or qualify for the energy credit.) Efforts to manufacture the product were undertaken, but no manufacturing was ever done due to litigation with the vendor of the manufacturing plant. The business activity of IES - (I) thus never reached the point where there was any inventory available for sale or lease.
The provisions of
(i) The taxable year in which, under the taxpayer's depreciation practice, the period for depreciation with respect to such property begins; or
(ii) The taxable year in which the property is placed in a condition or state of readiness and availability for a specifically1992 Tax Ct. Memo LEXIS 352" label="1992 Tax Ct. Memo LEXIS 352" no-link"="" number="3" pagescheme="<span class=">1992 Tax Ct. Memo LEXIS 352">*354 assigned function, whether in a trade or business, in the production of income, in a tax-exempt activity, or in a personal activity.
Thus, if property meets the conditions of subdivision (ii) of this subparagraph in a taxable year, it shall be considered placed in service in such year notwithstanding that the period for depreciation with respect to such property begins in a succeeding taxable year because, for example, under the taxpayer's depreciation practice such property is accounted for in a multiple asset account and depreciation is computed under an "averaging convention" * * * or depreciation with respect to such property is computed under the completed contract method, the unit of production method,or the retirement method.
Since, under petitioners' depreciation method, depreciation was claimed for 1982, the applicable provision is
Petitioners point to the phrase "placed in a condition or state of readiness and availability for a specifically assigned function".
Examples provided in the same regulation make it clear that it has no application when there1992 Tax Ct. Memo LEXIS 352" label="1992 Tax Ct. Memo LEXIS 352" no-link"="" number="5" pagescheme="<span class=">1992 Tax Ct. Memo LEXIS 352">*356 is no active trade or business:
(2) In the case of property acquired by a taxpayer for use in his trade or business (or in the production of income), the following are examples of cases where property shall be considered in a condition or state of readiness and availability for a specifically assigned function --
(i) Parts are acquired and set aside during the taxable year for use as replacements for a particular machine (or machines) in order to avoid operational time loss.
(ii) Operational farm equipment is acquired during the taxable year and it is not practicable to use such equipment for its specifically assigned function in the taxpayer's business of farming until the following year.
(iii) Equipment is acquired for a specifically assigned function and is operational but is undergoing testing to eliminate any defects. * * *
All of these examples involve an ongoing trade or business in which equipment is acquired and is available for service, but, for a particular reason, its use is delayed. The investment credit is allowable for such year by virtue of
The criteria for placement in service for a sales or leasing business are stringent. The product must be, in effect, "on the shelves", and the doors must be open for business. The fact that the on-farm energy plant was capable of producing energy is not controlling in this case. In a business which contemplates the sale or leasing of inventory, there must be inventory in existence for business to have begun.
In a case dealing with the availability of the depreciation deduction,
Petitioners state in their Motion for Reconsideration that IES - (I) was "promoting future sales of the same type of equipment". The absence of actual sales or leasing activity indicates to us that IES - (I) was a "future commercial enterprise" rather than a going concern.
As stated above,
We are convinced that the activity of IES - (I) was sporadic; it never rose to the level of an active trade or business. Hence it was not possible for its equipment to be placed in service. The on-farm energy plant was stored on the Caldwell farm until harvest was over and then demonstrated from time to time. The smaller components were shipped to Kiel, Wisconsin, for further testing in preparation for manufacturing. These1992 Tax Ct. Memo LEXIS 352" label="1992 Tax Ct. Memo LEXIS 352" no-link"="" number="9" pagescheme="<span class=">1992 Tax Ct. Memo LEXIS 352">*360 components were returned to the Caldwell farm or the Tonn farm. Their exact whereabouts is now unknown. IES - (I) was described as "dormant". Manufacturing was never undertaken. Financial records were not kept for 1982. This is a description of sporadic activity, not continuous, regular business activity.
Consequently, IES - (I) was in the start-up phase of its operations. Start-up expenditures are required to be capitalized, except when the taxpayer elects, after the commencement of business, to amortize them as deferred expenses as provided in
For the reasons stated above, we reaffirm our decision that the on-farm energy plant was never "placed in service" within the meaning of
We have considered various other contentions made by petitioners, but have found them unpersuasive and unnecessary to address in this opinion. Accordingly, we reaffirm our earlier opinion.