Court Opinion

ID: 4472901
Source: CourtListenerOpinion
Date Created: 2020-01-14 19:34:59.649234+00
Date Added: 2024-06-11T14:53:39.239122
License: Public Domain

Disney, J., dissenting: I can not agree with the majority that the monthly amounts paid by the petitioner were not deductible as rentals. In my view, the fact that there were options to purchase at the end of the rental period involved is given inordinate weight. The question is, What was the primary purpose of the agreement? Gilken Corporation, 10 T. C. 445; Indian Creek Good & Coke Co., 23 B. T. A. 950; Hirsch Improvement Co. v. Commissioner, 143 Fed. (2d) 912. I think the primary purpose was rental, not passage of title to the property. It should be noticed that we have here a question of deduction in 1940, the year the contracts were initiated, and that in two of the three leases the terms of the leases expired without exercise of the options, though they were exercised later. In the Atwood agreement it was not until the third rental period, i. e., after two extensions, that the option was exercised, while in the Crompton & Knowles contract exercise was in the first extension. Is the mere possibility of such exercise of option during the initial lease periods to determine this question, though, in fact, the lease periods had expired (in the two cases) ? Note that nothing in the contracts gave a right to purchase the property during extended periods of rental, but the exercise was to be at the end of the original period. Thus, we see that in the two cases the petitioner lost its right to the option at the end of the primary term. To hold, nevertheless, that such option gave equitable right in the property seems to me to lack logic. In Rotorite Corporation v. Commissioner, 117 Fed. (2d) 245, the Circuit Court reversed because it considered that “no one could doubt but that Sunbeam’s 1935 payments were made on the expectation that it would soon make its election and thus give to all of its payments purchase money status.” Surely the same can not be said here, where the exercise of option was, in fact, never (in two cases) availed of during the primary lease, but, in fact, the right thereto was forfeited. In McEwen v. Totten, 164 Fed. 837, property was, early in 1906, rented for about eight months at $100 a month, purchaseable for $2,100 on January 1, 1907. The payments of $100 a month continued for several months in 1907. The court considered this as indication that the contract did not pass title. Moreover, this is not a case where the monthly rentals were to be applied on purchase, with no additional payment or only a nominal one, as in cases ruled on. In Alexander W. Smith, Jr., Executor, 20 B. T. A. 27, $10 was payable in addition to the periodic payments, and in Helser Machine & Marine Works, Inc., 39 B. T. A. 644, title was to pass when the periodic payments were all made. Here a very substantial amount, perhaps all the property was then worth, was to be paid under the option. Also, there was here no valuation of the property in the original contract, such as the setting of the $26,650 total value in Holeproof Hosiery Co., 11 B. T. A. 547. I note too that in the Atwood agreement the lessee was responsible for damages, and that if the lessee is declared insolvent, the lessor may take possession. The terms and conditions of the Crompton & Knowles agreement are said to be substantially the same, and the Draper agreement is referred to as similar to that with Crompton & Knowles. In my view, such provisions for collection of damages and possession of the property on insolvency are contrary to ideas of passage of title. If the lessor can take the property against a trustee in bankruptcy, can title for the present purpose be considered passed? I think not. In Gotthold v. Crompton & Knowles Loom Works, 4 Fed. (2d) 50, there was lease of looms with agreement that if rent was paid lessor was to sell at a nominal stipulated sum. It was held that the lessor was entitled, upon lessee’s bankruptcy, to return of looms, or payment therefor. Collier on Bankruptcy, 3d Ed., p. 1222, says on the subject: 1505. Property leased with privilege of purchase. — The question frequently arises whether title passes to the purchaser under a contract whereby the purchaser agrees to pay a stipulated amount as rental for the article sold, such amount to be applied upon the purchase price. It is generally held that If the agreement provides for the surrender of the property at the expiration of a designated term, or the purchase of such article at such time, it does not operate as a conditional sale but is a bailment and therefore the “lessor” may reclaim the article upon the bankruptcy of the lessee, prior to the exercise of the option to purchase. * * * See also Jacquard Knitting Machine Co. v. Vennell, 59 Fed. (2d) 496, holding that where there was agreement for rentals and for purchase, but the property was to be returned to owner in case of bankruptcy, there was bailment and future sale. I would, for the above reasons, allow the deduction of payments and I, therefore, respectfully dissent.