Source: http://openjurist.org/636/f2d/11/magnolia-surf-inc-v-commissioner-of-internal-revenue
Timestamp: 2017-08-18 21:21:36
Document Index: 757956627

Matched Legal Cases: ['§ 50', '§ 38', '§ 46', '§ 101', '§ 50', '§ 2', '§ 1', '§ 48', '§ 312']

636 F2d 11 Magnolia Surf Inc v. Commissioner of Internal Revenue | OpenJurist
636 F. 2d 11 - Magnolia Surf Inc v. Commissioner of Internal Revenue
636 F2d 11 Magnolia Surf Inc v. Commissioner of Internal Revenue
636 F.2d 11
81-1 USTC P 9130
MAGNOLIA SURF, INC., Petitioner, Appellant,
No. 80-1137.
The taxpayer, Magnolia Surf, Inc. ("Magnolia Surf"), appeals from a decision of the United States Tax Court holding that certain personal property of a restaurant business it acquired on April 1, 1971, pursuant to a purchase and sale agreement entered into on February 24, 1971, was not eligible for the investment tax credit established by section 38 for property described by sections 46 through 50 of the Internal Revenue Code of 1954, as those provisions were in effect in 1971.1 For the relevant period, 26 U.S.C. § 50(a)(2)(B) allowed a credit for otherwise qualified investment property that was "acquired by the taxpayer ... after March 31, 1971, and before August 16, 1971, pursuant to an order which the taxpayer establishes was placed after March 31, 1971." The issue presented is whether the taxpayer acquired the restaurant property pursuant to an "order" placed after March 31, 1971, as the term is used in section 50(a)(2)(B). As we agree with the Tax Court that the property was ordered before March 31, 1971, we affirm.
Since its adoption in 1961, section 38(a) of the Internal Revenue Code of 1954, 26 U.S.C. § 38(a), has allowed an investment credit against income taxes for a portion of the cost of purchasing qualified property. Whether a property is eligible, and if so, the amount of the credit allowed, is determined pursuant to sections 46 through 50 of the Code. 26 U.S.C. §§ 46-50. In 1969 Congress terminated the credit, for what was to be a relatively brief period, by enacting section 703(a) of the Tax Reform Act of 1969, Pub.L. 91-172, 83 Stat. 487. Section 703(a) added section 49 to the Internal Revenue Code, which made the investment credit unavailable for property built or acquired after April 18, 1969.
Because of the condition of the national economy, Congress reinstated the investment credit in 1971 by adding section 50 to the Code. Revenue Act of 1971, Pub.L. 92-178, § 101(a), 85 Stat. 498 (1971). Section 50 provided:
The parties agree that Magnolia Surf acquired the restaurant property on April 1, 1971. Thus, if the property is to qualify for the investment credit, the taxpayer must establish that it was obtained pursuant to an order placed after March 31, 1971. 26 U.S.C. § 50(a)(2)(B).
Three different statements of the meaning of "order" have been proposed. First, the taxpayer urges that an "order" as the term is used in section 50(a)(2)(B) is to be distinguished from a "contingent order," and that in the present case nothing more than a "contingent order" had been made before April 1, 1971 because closing and delivery of the bill of sale was subject to the satisfaction of certain conditions discussed in Part IV, infra. Second, in the instant case, the Tax Court held that in section 50(a)(2)(B), Congress intended to use "order" as it is commonly understood in commercial practice, i. e., as an offer to purchase goods. 72 T.C. 495, 505. See U.C.C. § 2-206(1) (b) ("an order or other offer to buy goods ..."). The Commissioner has adopted the same position with respect to section 50. Rev.Rul. 72-573, 1972-2 C.B. 12 ("For purposes of this section, a taxpayer's offer to purchase goods ... constitutes an order"). Third, it may be argued that "order" as used in section 50(a)(2)(B) should be defined in the same manner as that adopted by the Treasury for section 48(a)(7)(B)(ii), and upheld by the Second Circuit in Maid of the Mist Corp. v. Commissioner, 594 F.2d 919 (1979):
Treas.Reg. § 1.48-1(o)(2)(i) (1972).
The first announcement that the Administration was considering the reinstatement of a tax credit to stimulate investment was made on April 1, 1971. See 1 House Hearings Before the Committee on Ways and Means on the Tax Proposals Contained in the President's New Economic Policy, 92d Cong., 1st sess. 105 (comments of Chairman Mills and Secretary Connolly) (hereinafter cited as House Hearings). After consultation with the ranking members of the Congressional tax-writing committees, the Secretary of the Treasury issued public assurances that the proposed investment credit would be available for property ordered after April 1, 1971. H.R.Rep.No.92-553, 92d Cong., 1st sess. 5 (hereinafter House Report ), reprinted in (1971) U.S.Code Cong. & Ad.News, pp. 1825, 1829. The Chairman of the House Ways and Means Committee made similar public statements. 1 House Hearings, supra at 105. These assurances were "given to avoid further deferment of investments which were already at an unduly low level." House Report, supra at 5, (1971) U.S.Code Cong. & Ad.News, p. 1829.
During the hearings on the Administration's proposed investment credit, the Chairman of the Ways and Means Committee and the Secretary of the Treasury expressed a desire that the Committee's bill should contain a provision fulfilling their commitment to make the credit apply to qualified property purchased after the proposal was publicly announced. Their concerns resulted in section 50(a)(2)(B), which extended the credit to qualified property acquired "pursuant to an order ... placed after March 31, 1971." According to the House Report, the provision was enacted "... to avoid discrimination against those who took action on or after that date to acquire eligible assets on the basis of assurances as to the availability of the credit made by the Secretary of the Treasury ...." House Report at 5, (1971) U.S.Code Cong. & Ad.News, p. 1829 (emphasis supplied).
In Maid of the Mist Corp. v. Commissioner, supra, the Second Circuit was called upon to consider the meaning of "order" in section 48(a)(7)(B)(ii) of the Internal Revenue Code, 26 U.S.C. § 48(a)(7)(B)(ii), a provision closely related to section 50(a)(2)(B), and also enacted as part of the Revenue Act of 1971. Section 48(a)(7)(A) provides that otherwise qualified property is ineligible for the investment credit if it is completed outside the United States or if less than 50 percent of its basis is attributable to value added within the United States. Section 48(a)(7)(B)(ii) excepts from section 48(a) (7)(A) all property
The Second Circuit reviewed the legislative history of the Revenue Act of 1971 and, in particular, of section 48(a)(7)(B)(ii), and upheld the definition of "order" contained in the regulation. In part, the court relied on a House Ways and Means Committee Report accompanying Pub.L. 89-800, 80 Stat. 1508, which suspended the investment tax credit then in effect for property acquired pursuant to an order placed between October 10, 1966 and January 1, 1968. The Committee Report defined "order" in a manner substantially identical to the Treasury Regulation:
In addition, the court noted that, like section 50(a)(2)(B), section 48(a)(7) (B)(ii) was the product of a Congressional motivation to protect "taxpayers who ordered property ... after March 31, 1971, in reliance on the Secretary of the Treasury's statements," without knowledge of the limits on the scope of the credit that Congress eventually enacted. Maid of the Mist, supra at 922, n.3, quoting S.Rep.No.92-437, 92d Cong., 1st sess. 26, reprinted in (1971) U.S.Code Cong. & Ad.News, p. 1933.
Sections 49 and 50 were repealed by Pub.L. 95-600, § 312(c), 92 Stat. 2826 (1978)