Hill

John Y. Merrell, Esq., Daniel S. Ring, Esq., and R. Carl Counts, C.P.A., for the petitioner. J. Nelson Anderson, Esq., for the respondent.

The petitioner, a dealer in new and used cars, claimed depreciation on certain cars and capital gains with respect to certain ‘company cars‘ which it had sold. Held, on the facts the cars in controversy were used in the petitioner's trade or business and as such are entitled to depreciation under section 23(l) and to treatment under section 117(j) of the Internal Revenue Code.

This proceeding involves a determination of deficiencies in Federal income tax for the taxable year ended September 30, 1949, and the taxable period October 1, 1949, to December 31, 1949, in the respective amounts of $1,106.67 and $15.37.

The questions presented are as follows:

(1) Whether the gain on certain ‘company cars‘ sold by the petitioner from October 1, 1948, to December 31, 1949, was long term capital gain under section 117(j) of the Internal Revenue Code.

(2) Whether certain ‘company cars‘ held by petitioner during the period from October 1, 1948, to December 31, 1949, were property held for the production of income or used in the trade or business of the petitioner and subject to allowance for depreciation under section 23(l) of the Internal Revenue Code.

There is no issue with respect to the amount of depreciation claimed or the amount of the gain achieved on the sale of the ‘company cars.‘

FINDINGS OF FACT.

The facts stipulated by the parties are found accordingly.

The petitioner is a corporation organized under the laws of the State of Tennessee. Its principal place of business is Kingsport, Tennessee. Petitioner kept its books and filed its returns on an accrual basis. Until September 30, 1949, its accounting period was the fiscal year ended September 30. Commencing October 1, 1949, petitioner, in accordance with permission granted by the respondent, changed its accounting period to a calendar year. Pursuant to this change it filed a return for the period October 1, 1949, to December 31, 1949. Its income tax returns for the periods here involved were filed with the collector of internal revenue at Nashville, Tennessee.

Petitioner operated under a franchise from General Motors Corporation for the sale of Chevrolet and Cadillac automobiles and Chevrolet trucks. It operated a used car lot, a used car reconditioning department, a parts department, a body shop, a repair shop, and a service station.

The sources of petitioner's income and the gross profit of each were as follows:

+------------------------------------------------------------------------+ ¦ ¦Fiscal year ¦Three ¦ +-------------------------------------------+--------------+-------------¦ ¦ ¦ended ¦months' ¦ +-------------------------------------------+--------------+-------------¦ ¦ ¦Sept. 30, 1949¦period ended ¦ +-------------------------------------------+--------------+-------------¦ ¦ ¦ ¦Dec. 31, 1949¦ +-------------------------------------------+--------------+-------------¦ ¦Sale of new cars and trucks ¦$193,952.82 ¦$36,981.78 ¦ +-------------------------------------------+--------------+-------------¦ ¦Sale of used cars and trucks ¦28,983.82 ¦6,989.75 ¦ +-------------------------------------------+--------------+-------------¦ ¦Operations of repair and service department¦22,414.23 ¦6,292.52 ¦ +-------------------------------------------+--------------+-------------¦ ¦Sale of repair parts and accessories ¦58,240.45 ¦15,505.84 ¦ +-------------------------------------------+--------------+-------------¦ ¦Total gross profit ¦$303.591.32 ¦$65,769.89 ¦ +------------------------------------------------------------------------+

Petitioner served a trade area which was roughly 12 miles in all directions from Kingsport, Tennessee. This area has a population of approximately 55,000. All business and policy decisions of the petitioner were made by J. L. Latimer and R. F. Looney, the managers. The petitioner employed between 53 and 58 persons during the period here in question.

During the period here involved the petitioner sold new and used cars and trucks as follows:

+----------------------------------------------------+ ¦Year ended Sept. 30, 1949 ¦Units ¦Total of sales ¦ +---------------------------+-------+----------------¦ ¦New cars and trucks ¦468 ¦$811,909.53 ¦ +---------------------------+-------+----------------¦ ¦Used cars and trucks ¦319 ¦233,955.39 ¦ +---------------------------+-------+----------------¦ ¦Total ¦787 ¦$1,045,864.92 ¦ +---------------------------+-------+----------------¦ ¦ ¦ ¦ ¦ +----------------------------------------------------+

Three months ended Dec. 31, 1949 Units Total of sales New cars and trucks 94 $158,100.08 Used cars and trucks 108 62,794.51 Total 202 $220,894.59

The 562 new cars and trucks sold by petitioner were received from the Chevrolet Division of General Motors under the General Motors Acceptance Corporation's ‘floor plan.‘ A flat nominal charge was made by G.M.A.C. for each car handled by it and, in addition, interest was paid by the petitioner on all cars held without remittance of the purchase price for longer than five days after acquisition. General Motors Acceptance Corporation was secured by trust receipts which it had a power of attorney to sign on the petitioner's behalf. Under the ‘floor plan‘ petitioner was required to keep the cars and trucks new. Actually the cars were serviced and delivered to customers immediately upon or within a few days after receipt. New cars were not driven at all by petitioner with the exception of driving necessary for the servicing and delivery of these cars to customers.

The 427 used cars and trucks sold by the petitioner during this period were obtained by purchase or as a result of trade-in. Upon receipt the used cars and trucks were reconditioned and placed on the used car lot for sale. Used cars were not registered in petitioner's name and when they were driven on company business, dealer's license tags were used.

As required by its franchise, petitioner followed the accounting system prescribed by the Chevrolet Division of General Motors, which system was designed by and for the benefit of General Motors. The system has been in effect for many years without major changes. Under this system there is an Account No. 231— ‘New Cars Available for Sale‘; an Account No. 230— ‘Company Cars‘; an Account No. 285— ‘Service Cars‘; and an Account No. 345— ‘Depreciation of Service Cars.‘ All cars and trucks obtained from General Motors as a matter of original entry are charged into Account No. 231 on the purchase journal. This system requires that all purchases be entered in one place. The cars in issue were placed in company use immediately and never appeared in Account No. 231 in the general ledger because an entry was made on the journal taking them out of Account No. 231 and charging them to Account No. 230 before the postings to the general ledger accounts were made. Petitioner regarded Account No. 230 as a fixed asset account.

A schedule of the company cars in use by petitioner during the period from October 1, 1948, until December 31, 1949, follows:

+---------------------------------------------------------+ ¦ ¦Date ¦Date placed¦Date of ¦ ¦ +--------------+---------+-----------+----------+---------¦ ¦Description ¦purchased¦in company ¦payment to¦Date sold¦ +--------------+---------+-----------+----------+---------¦ ¦ ¦ ¦use ¦G.M.A.C. ¦ ¦ +--------------+---------+-----------+----------+---------¦ ¦1948 Chevrolet¦2-14-48 ¦2-16-48 ¦2-18-48 ¦2- 4-49 ¦ +--------------+---------+-----------+----------+---------¦ ¦1948 Chevrolet¦3-26-48 ¦3-30-48 ¦3-26-48 ¦12-31-48 ¦ +--------------+---------+-----------+----------+---------¦ ¦1948 Chevrolet¦4-12-48 ¦4-17-48 ¦4-17-48 ¦12-31-48 ¦ +--------------+---------+-----------+----------+---------¦ ¦1948 Chevrolet¦6- 1-48 ¦6- 9-48 ¦6- 7-47 ¦3-12-49 ¦ +--------------+---------+-----------+----------+---------¦ ¦1948 Chevrolet¦8-14-48 ¦8-17-48 ¦8-21-48 ¦5-21-49 ¦ +--------------+---------+-----------+----------+---------¦ ¦1948 Chevrolet¦8-28-48 ¦8-31-48 ¦8-31-48 ¦8-12-49 ¦ +--------------+---------+-----------+----------+---------¦ ¦1948 Chevrolet¦8- 5-48 ¦8-17-48 ¦8-17-48 ¦7- 9-49 ¦ +--------------+---------+-----------+----------+---------¦ ¦1948 Chevrolet¦10- 7-48 ¦10- 8-48 ¦10- 9-48 ¦5- 3-49 ¦ +--------------+---------+-----------+----------+---------¦ ¦1949 Chevrolet¦1-27-49 ¦1-31-49 ¦1-31-49 ¦12-28-49 ¦ +--------------+---------+-----------+----------+---------¦ ¦1949 Chevrolet¦1-31-49 ¦1-31-49 ¦1-31-49 ¦11-23-49 ¦ +--------------+---------+-----------+----------+---------¦ ¦1949 Chevrolet¦3-12-49 ¦3-15-49 ¦3-19-49 ¦ ¦ +--------------+---------+-----------+----------+---------¦ ¦1949 Chevrolet¦4-29-49 ¦4-30-49 ¦4-30-49 ¦ ¦ +--------------+---------+-----------+----------+---------¦ ¦1949 Chevrolet¦4- 4-49 ¦4- 8-49 ¦4- 4-49 ¦ ¦ +--------------+---------+-----------+----------+---------¦ ¦1949 Chevrolet¦5- 9-49 ¦5- 9-49 ¦5-14-49 ¦ ¦ +--------------+---------+-----------+----------+---------¦ ¦1949 Chevrolet¦7- 8-49 ¦7- 8-49 ¦7- 9-49 ¦ ¦ +--------------+---------+-----------+----------+---------¦ ¦1949 Chevrolet¦8-18-49 ¦8-31-49 ¦9-12-49 ¦ ¦ +--------------+---------+-----------+----------+---------¦ ¦1941 Chevrolet¦8-31-49 ¦8-31-49 ¦8-31-49 ¦ ¦ +---------------------------------------------------------+

The decision to place cars in company use was made by the managers. As soon as a car was placed in company use it was covered with insurance for the exclusive benefit of the petitioner. License plates were procured for it in the petitioner's name and General Motors Acceptance Corporation was paid in full for the automobile. After these cars were paid for, neither G.M.A.C. nor Chevrolet Division of General Motors had any restrictions whatsoever on the use of the automobile. The decision to place the cars in company use was based on necessity and availability as determined by the petitioner's managers.

The record discloses that the ‘company cars‘ here in issue were used by the petitioner for the following purposes:

(1) To permit the managers and company representatives to travel for business purposes to cities such as Johnson City, Bristol, Louisville and Atlanta:

(2) To facilitate collection of delinquent accounts;

(3) To pick up and tow cars into the plant for repair and service and to deliver the same to customers much in the same manner as motorcycles are frequently used in larger cities;

(4) For loan to customers urgently needing transportation when their cars were under repair or servicing;

(5) To fill customers needs where there was a gap in delivery of a new car due to factory delay;

(6) To transport salesmen who were buying and selling used cars and trucks, and to furnish transportation to salesmen employed in maintaining good will;

(7) For business errands, e.g., picking up mail, making bank deposits, etc;

(8) For participation in various civic functions sponsored by organizations such as the American Legion, the Shriners, Moose, etc.;

(9) For travel in locating and purchasing used cars at auctions in distant areas;

(10) To participate in the American Automobile Association public school driver training program.

At the beginning of the school year in 1948 the petitioner associated itself with a driver training program sponsored by the American Automobile Association and the National Safety Council. The petitioner furnished a four-door Chevrolet sedan. The A.A.A. furnished dual controls necessary to train new drivers. The National Safety Council furnished certain literature and paid insurance on the automobile. The police of Kingsport, Tennessee, provided the instructors. The Kingsport high school authorities approved the program and made it a part of the curriculum, allocating time for the students to participate and giving the students a one-half high school credit upon completion of the program. Of the 17 cars in issue in this proceeding, two were used in the driver training program. During such use petitioner had no control over these two automobiles whatsoever. The city of Kingsport paid the operating expense of the cars, purchased the gas and oil from petitioner and gave petitioner the service and repair business of the automobiles. The two cars used in the driver training program carried the words ‘Driver Training Program,‘ the crests of the National Safety Council and the American Automobile Association, and the words underneath ‘Courtesy Latimer-Looney Chevrolet, Inc.‘ The decision to participate in the driver training program was made by the petitioner's managers. The basis for the decision was the long range good will produced in participation in the civic program.

Seventeen cars are at issue, the first of which was placed in company service on February 14, 1948. The number of cars in company use on the respective dates was as follows:

+-----------------------------+ ¦Date ¦Company cars ¦ +-------------+---------------¦ ¦Oct. 1, 1948 ¦7 ¦ +-------------+---------------¦ ¦Jan. 1, 1949 ¦6 ¦ +-------------+---------------¦ ¦April 1, 1949¦7 ¦ +-------------+---------------¦ ¦July 1, 1949 ¦7 ¦ +-------------+---------------¦ ¦Oct. 1, 1949 ¦9 ¦ +-------------+---------------¦ ¦Dec. 31, 1949¦7 ¦ +-----------------------------+

At all times during this period one of the company cars was assigned to the A.A.A. driver training program, leaving for the petitioner's use for the major portion of this time six cars in company service.

The decision to sell the company cars was made by the petitioner's managers. They were sold primarily on the basis of usage. All of them were sold somewhere between the 8,000 and 12,000 miles' level of usage. All were held for more than six months and some for more than one year. They were sold at this usage period because after this period of usage operating costs increased and the tires, appearance of the automobiles, batteries, and other functioning parts were still in good condition and there was little reconditioning or repair cost involved before sale. Petitioner deemed it advisable to have current model automobiles in use but was unable to do so because of the demand for new cars. Announcement of the new 1948 model occurred in December 1947 and the announcement of the new 1949 model occurred in January 1949.

Two of the cars in company use were sold to Latimer and Looney at cost, in accordance with the normal practice in the automotive trade for managers and owners to purchase cars for their personal use at cost.

In its return for the fiscal year ended September 30, 1949, petitioner deducted $2,540.71 as depreciation on seventeen company cars. In its return for the 3-month period ended December 31, 1949, petitioner deducted $673.63 as depreciation on nine company cars. These cars were used in the petitioner's trade or business. During the fiscal year ended September 30, 1949, petitioner sold eight company cars and reported the gain in the amount of $5,054.28 as long term capital gain in its income tax return. During the 3-month period ended December 31, 1949, the petitioner sold two company cars and reported the gain in the amount of $637.26 as long term capital gain in its tax return. These cars were used in petitioner's trade or business, were not properly includible in petitioner's inventory, and were not held primarily for sale in the ordinary course of its trade or business.

OPINION.

Hill, Judge:

The question for our determination is whether the seventeen Chevrolet cars held by the petitioner were property used in its trade or business of a character defined in section 117(j) of the Internal Revenue Code, which is subject to the amounts for depreciation provided in section 23(l), or whether as maintained by the respondent they fall within the exceptions contained in section 117(j) as either (a) property of a kind which would be properly includible in the inventory of the taxpayer if on hand at the close of the taxable year, or (b) property held by the taxpayer primarily for sale to customers in the ordinary course of its trade or business.

Property of the kind sold by a taxpayer in his normal trade or business has been considered entitled to section 117(j) benefits when used in the trade or business of the taxpayer in the following cases: securities, Carl Marks & Co., 12 T.C. 1196; livestock, United States v. Bennett, 186 F.2d 407; housing, Nelson A. Farry, 13 T.C. 8; slot machines, A. Benetti Novelty Co., 13 T.C. 1072. These cases point out that it is not the nature of the property itself which is determinative of this case but rather the purpose for which the property is held.

Sixteen of the seventeen cars here in controversy were purchased new from the Chevrolet Division of General Motors under the so called floor plan of financing provided by G.M.A.C., as were all new Chevrolet cars acquired by the petitioner. The cars in issue were entered on the petitioner's books according to the General Motors system of accounting in Account No. 231— ‘New Cars Available for Sale.‘ All cars and trucks obtained from General Motors are as a matter of original entry charged into this account on the purchase journal. The system requires this. However, since the cars were placed in company use immediately after acquisition, they never appeared in Account No. 231 in the general ledger of the petitioner's books. An entry was made on the journal taking them out of Account No. 231 and charging them to Account No. 230— ‘Company Cars‘ before the postings to the general ledger accounts were made. Shortly after the acquisition the petitioner paid cash in full for the cars, insured them for its exclusive benefit, and purchased Tennessee license tags for the cars. Thereafter, they were used by the petitioner in its trade or business for the purposes outlined in our findings of fact. Once the petitioner had purchased the cars for its use and paid for them, the record shows that neither General Motors nor General Motors Acceptance Corporation, through which the petitioner secured its financing, placed any restrictions upon the petitioner's use of the automobiles. They were the petitioner's property and, as the respondent admits upon brief, the petitioner had a free hand as to how they should be used.

Respondent points to the fact that these automobiles were acquired new, that petitioner's business was the sale of new cars, that the petitioner maintained a new car inventory and held cars for sale to customers in the ordinary course of its business, and draws the conclusion that the petitioner's intention was to hold the cars here in controversy as ‘demonstrators‘ for a period of temporary use and then sell them. From this, respondent reasons that the cars in controversy, including the 1941 model Chevrolet which he admits was not purchased new, never lost their inventory character and remained, even after the 8,000 or 12,000 miles of business use to which they were put by the petitioner, cars properly includible in the inventory and held for sale to customers in the ordinary course of the business.

The cars here were sold by the petitioner on the basis of usage when the cars had been used between 8,000 and 12,000 operative miles. The petitioner's managers had them sold for the reasons, as they testified, that after this period of use operation and renovation costs increased and that it was more profitable in their business judgment to dispose of the cars before further usage.

The respondent points to the fact that these cars were sold in the year after they ceased to be current models and argues that this points to an intention of the petitioner to hold the cars for such a temporary use so as not to affect the primary purpose for which they were purchased, that is, sale to customers in the ordinary course of the business. However, the evidence supports the petitioner. We are not in a position to substitute our business judgment for that of the petitioner's managers, men who are apparently well versed in the subject of automobile repairs and sales.

On the basis of the evidence as a whole, we conclude that the cars here in issue were held primarily for use in the petitioner's trade or business and, hence, are entitled to capital gains treatment under the provisions of section 117(j) of the Code and depreciation under section 23(l).

Decision will be entered for the petitioner.