Before MARIS, KALODNER and HASTIE, Circuit Judges.
Were motor vehicles owned by the taxpayer held "primarily for sale to customers in the ordinary course of his trade or business" within the meaning of Section 117(a) and (j) of the Internal Revenue Code of 1939, 26 U.S.C.A. § 117(a, j)?*fn1
That is the single question presented by this petition for review of the decision of the Tax Court*fn2 which answered it affirmatively, thereby making gains on the sale of the vehicles taxable as ordinary income rather than "capital gains".
The facts may be summarized as follows:
Philber Equipment Corporation ("taxpayer") is a Pennsylvania corporation with its principal place of business in Pottstown, Pennsylvania. The Commissioner determined a deficiency in income tax and excess profits tax for the taxpayer's fiscal year ended June 30, 1951, in the amount of $17,716.55. Gains from taxpayer's sales made during the fiscal year ended June 30, 1952, are involved for the purpose of determining the amount of unused excess profits credit for that year available as a carry-back to the fiscal year 1951.
Taxpayer's original Articles of Incorporation provided that its purpose, among other things, was to "buy, sell, lease and exchange new and used vehicles". On March 26, 1951, the Articles were amended to change taxpayer's name from "Philber Equipment Manufacturing Co." to "Philber Equipment Corporation", and to delete from the statement of its corporate purpose any reference to buying, selling and exchanging motor vehicles.
Taxpayer was engaged in the business of furnishing trucks, tractors and trailers to the public on a lease basis, principally to fleet operators who would rent from three to fifty-five units. The leases, during the fiscal years 1951 and 1952, were all for a one-year term although a number of units were retained by the lessees for a few months longer than one year, pending their replacement with new vehicles under a new lease. The leases provided for the return of each unit to the taxpayer at the end of the rental period, or even earlier after certain usage. No right was given the lessee to purchase or acquire any interest in the leased equipment.
Taxpayer maintained no inventory or stock of equipment. It purchased each piece of equipment only as it had need for a particular unit to fill the requirements of an existing lease. During its fiscal years 1951 and 1952 the average number of units owned by taxpayer was one hundred seventy-five. Its gross rental income was $295,889.39 for the fiscal year 1951, and $267,754.53 for the fiscal year 1952. Except for $4,000 all of the rental income for the years involved was received from nine customers.
During the taxable years, existing conditions made it difficult or impossible to re-lease most of the equipment. Taxpayer knew that when equipment was purchased, it would probably be able to rent the equipment for a period substantially less than its useful life, and sale of the equipment would follow expiration of a lease.
Taxpayer did not have a sales force, a showroom or other selling facilities, and it held no franchise from any manufacturer, nor was it licensed under the Pennsylvania Motor Vehicle Sales Finance Act, 69 P.S. § 601 et seq. The vehicles previously rented were sold by taxpayer through its agent, Berman Sales Company ("Berman"). Berman, a large scale dealer in trucks, tractors and trailers, is a partnership, the interests of which are held by the same persons who hold the capital stock of taxpayer and in the same proportions as their stock holdings. There was an informal but consistently followed arrangement whereby Berman sold the trucks, tractors and trailers of taxpayer in the normal course of its business. Upon selling the property, Berman would deduct the selling cost and remit the balance to taxpayer. No commission or other benefit was received by Berman, except that whenever a vehicle was received as a trade-in, Berman would include the vehicle at its wholesale value rather than at its trade-in value in computing the price received and the amount payable to taxpayer.If the trade-in was later sold at the retail price, Berman would then realize a profit.
Taxpayer sold forty of its vehicles through Berman during the fiscal year 1951. The net gain to taxpayer was $16,323.53.For the fiscal year 1952, forty-five vehicles were sold resulting in a net gain to taxpayer of $33,247.31. Each unit sold had been held by taxpayer for a period in excess of six months and was subject to an allowance for depreciation.
As earlier stated, the Tax Court made the factual finding that the vehicles sold constituted "* * * property held primarily for sale to customers in the ordinary course of petitioner's trade or business, and the gain from the sales thereof is taxable as ordinary income."
With respect to that finding it must be noted it was in the nature of an ultimate finding of fact and since such finding is but a legal inference from other facts it is subject to review free of the restraining impact of the so-called "clearly erroneous" rule applicable to ordinary findings of fact by the trial court, as we recently held in Curtis Co. v. Commissioner, 3 ...