Summary
In Alzfan, paragraph three of the syllabus, we held a lease that transfers title to property to the lessee, when the lessee must pay a certain sum, to be a conditional sale of the property to the lessee.
Summary of this case from Bush Cook Leasing, Inc. v. TracyOpinion
No. 38099
Decided December 18, 1963.
Conditional sale — Purported lease of personal property may amount to, when — Lease giving possession to lessee — Title to pass when certain sum paid — Lease a conditional sale — Taxation.
1. An agreement may amount to a conditional sale of personal property even though such agreement states that it is a lease and purports to lease that personal property.
2. There may be a conditional sale of personal property where it is leased to another on condition that it will belong to the lessee when the amount paid is a certain sum, the title to it to remain in the lessor until such sum has been paid.
3. Where a lease, which gives the lessee possession of real and personal property, specifically provides for transfer of title to the personal property to the lessee on payment of "a certain sum" which the lessee is obligated thereunder to pay, such lease is a conditional sale of such personal property even though it is not possible to determine what part of that certain sum is the agreed-upon price for the personal property.
APPEAL from the Board of Tax Appeals.
The Tax Commissioner levied an increased 1961 personal property tax assessment against the taxpayers by reason of the claimed ownership and use in business by the taxpayers of certain tangible personal property.
In applying for a review and redetermination of this increased assessment, the taxpayers contended that they were not engaged in business in Ohio during 1961, and that in 1958 they had "transferred the personal property assessed, under a conditional sales contract."
The taxpayers had been in business operating a grocery supermarket in Dayton. In 1956, they mortgaged to a bank the real estate on which the business was being conducted and certain equipment and chattels used by the taxpayers in conducting that business. This mortgage was recorded both as a real estate and as a chattel mortgage.
In 1958, the taxpayers entered into a formal agreement entitled "Lease." Under the terms of this so-called lease, the taxpayers expressly leased that real estate and the foregoing equipment and chattels. That so-called lease reads in part:
"Lessors * * * do * * * grant, lease and demise unto the said lessees the following described real estate:
"Being a building * * * situated on the following described premises:
"* * * together with all improvements and hereditaments, and chattel property and equipment more fully described in schedule hereto attached marked exhibit `A' [describing the property sought to be taxed in the instant case] * * *.
"* * * for * * * the term of five (5) years * * * said lessees * * * paying therefor * * * ninety thousand dollars ($90,000) for the term, payable one thousand five hundred dollars ($1,500) per month * * *.
"* * *
"1. Lessors grant lessees the option and privilege of one (1) renewal of this lease, for a period of five (5) years, to commence on the expiration of the five-year term aforesaid, under and subject to all the covenants, provisions, terms and conditions of this lease, except that the rental shall be as follows: For the first three (3) years of said renewal term, the rental shall be a minimum of one thousand dollars ($1,000) per month, and for the last two (2) years, at a minimum of five hundred dollars ($500) per month, and as additional rent * * * [a certain percentage of gross sales in excess of certain amounts] * * *.
"* * *
"21. Lessees and lessors covenant and agree that it is understood that the equipment and chattels leased hereunder are subject to a mortgage to the * * * bank * * *, and the lessees agree, during the term of this lease, to keep all of said equipment and chattels in good repair and working condition, and that at the termination of the original term of this lease, lessees agree to purchase said equipment and chattels for the sum of twenty thousand dollars ($20,000) cash, at which time lessors agree to convey and transfer title to said equipment and chattels, free and clear of any encumbrances."
All payments under the so-called lease were assigned as additional collateral to the mortgagee bank, and all payments thereunder were made directly to the bank.
Possession and control of the real estate and equipment and chattels were transferred to the lessees in accordance with the terms of the so-called lease, and they were thereafter used by the lessees in conducting a supermarket business in the leased building.
There is no evidence of any failure to perform in accordance with the terms of the so-called lease.
The final order of the Tax Commissioner, confirming the increased assessment, was affirmed by the Board of Tax Appeals on the ground that the taxpayers had leased the personal property involved and had not made a conditional sale thereof. The cause is now before this court on appeal from that decision of the board.
Messrs. Froug Froug, for appellants.
Mr. William B. Saxbe, attorney general, and Mr. Daronne R. Tate, for appellee.
Both parties recognize that any tax on tangible personal property can be levied only against the owner (Section 5711.01 (B), Revised Code); and that the vendee in possession under a conditional sales contract who is not in default is such an owner. See Estrich, Installment Sales (1926), 470; Singer Sewing Mach. Co. v. Cooper, Treas. (D.C. Ohio, 1920), 263 F., 994; annotation 116 A.L.R., 325.
Certainly, under such an agreement, the vendor would never have any right either to possession or control of the property conditionally sold as long as the vendee fully performed his obligations thereunder. In such an instance, the vendee in possession of and using the property in the conduct of his business would be the equitable owner thereof. National Cash Register Co. v. Cervone (1907), 76 Ohio St. 12, 80 N.E. 1033; Albright v. Meredith (1898), 58 Ohio St. 194, 50 N.E. 719.
Since it has not been argued, we will not consider whether any tax on tangible personal property used by a lessee thereof in the business of the lessee should be levied only against such lessee rather than against the lessor of such property.
As we view it therefore, the only question to be determined is whether the 1958 agreement, made by the taxpayers with respect to the property taxed, was a conditional sale of that property. If it was, then the decision of the Board of Tax Appeals would admittedly be unreasonable and unlawful and must be reversed.
Where, as here, a so-called lessee is obligated to accept and pay for personal property at some future time and has no option to return it, the transaction is held to be a conditional sale even though terms commonly used in leases have been used. As stated in 47 American Jurisprudence, 23, Section 836:
"The test most frequently applied is whether the so-called `lessee' is obligated to accept and pay for the property at some future time, or, on the other hand, whether his primary obligation is to return or account for the property to the so-called `lessor' according to the terms of the `lease'." See annotation, 175 A.L.R., 1366, 1384.
An agreement may amount to a conditional sale of personal property even though such agreement states that it is a lease and purports to lease that personal property. Actually, our statutes in effect at the time of this transaction specifically recognized this.
Thus, the applicable statutes with regard to conditional sales expressly stated that "when personal property * * * is leased * * * to another on condition that it will belong to the person * * * leasing * * * it, when the amount paid is a certain sum * * * the title to it to remain in the * * * lessor * * * until such sum * * * has been paid." See Section 1319.11, Revised Code (as effective until July 1, 1962). See also Section 1301.01 (KK), Revised Code, defining "security interest" and stating that "(b) an agreement that upon compliance with the terms of the lease the lessee shall become * * * the owner of the property for no additional consideration * * * does make the lease one intended for security," and comment one under Section 1309.01, Revised Code, indicating substitution in the Uniform Commercial Code (effective July 1, 1962) of term "security agreement" ( i.e., one creating or providing for "security interest") for conditional sale.
In order to avoid the apparent applicability of these words to the so-called lease of the property sought to be taxed in the instant case, the Tax Commissioner contends that these words do not describe the so-called lease of the equipment and chattels in the instant case because the amount to be paid thereunder for the equipment and chattels is not "a certain sum." In support of this argument, it is pointed out that part of the $90,000 for the original five-year term would be payment for use of the real estate, so it would be impossible to determine how much of the $90,000 was to be payment for the equipment and chattels. However, it is certain that the lessees were obligated to pay $90,000 at the rate of $1,500 a month for five years, and that, at the end of those five years, they were obligated to pay $20,000 for the equipment and chattels; and that the taxpayers would then be obligated to convey to the lessees title to the equipment and chattels.
Under our statute, "the amount paid" is the amount paid under the "lease"; and, if a lease, which gives the lessee possession of real and personal property, specifically provides for transfer of title to the personal property to the lessee on payment of "a certain sum" which the lessee is obligated thereunder to pay, such lease is a conditional sale of such personal property even though it is not possible to determine what part of that "certain sum" is the agreed upon price for the personal property. See 47 American Jurisprudence, 39, 50, Sections 847 and 860.
In the instant case, the $90,000, payable at $1,500 a month, plus the $20,000 payable at the end of five years, clearly represented "a certain sum" within the meaning of Section 1319.11, Revised Code.
The brief of the Tax Commissioner contains the following argument:
"The appellants mortgaged the personal property here in question to the * * * bank * * * and the bank acquired the title to the property and became the owner of such property. Consequently, the agreement cannot be interpreted as a sales agreement since the appellants had no property to sell."
This argument destroys itself. If the bank had title and was owner and the taxpayers (appellants) had nothing to sell, then the taxpayers would not be the owners, and there would be no basis whatever for levying the tax against them.
There is not even any factual foundation for such an argument. The record discloses that, before the so-called lease was executed, the taxpayers and the bank agreed upon an amendment to the mortgage note, which amendment contained an express approval by the the bank of "the leasing of the supermarket storeroom and fixtures" and provided that "$20,000, the proceeds of the sale of machinery and equipment, as provided for in the * * * lease, shall be applied on the principal" of the mortgage note.
Since the decision of the Board of Tax Appeals is both unreasonable and unlawful, it is reversed.
Decision reversed.
ZIMMERMAN, MATTHIAS, O'NEILL, GRIFFITH, HERBERT and GIBSON, JJ., concur.