Court Opinion

ID: 9454810
Source: CourtListenerOpinion
Date Created: 2023-08-04 18:59:52.005398+00
Date Added: 2024-06-11T17:34:19.259264
License: Public Domain

ORDER DENYING PETITION FOR REHEARING
We have considered the petition for rehearing and conclude that it raises no material new issue. These comments are made due to Service’s contentions, among others, that the opinion was based on reference to an incorrect regulation and that it did not discuss a pertinent alternative theory.
It is argued that the expensing of the cost of the rental items was not made under § 1.162-3 of the Treasury Regulations on Income Tax dealing with the “Cost of Materials” as originally stated in the opinion. Instead, the taxpayer refers to the statement in the opinion of the Tax Court that: “Respondent has not questioned the propriety of expensing the rental items when purchased, or the fact that they were not inventoried. See sec. 446(a) and (c), I.R.C.1954; sec. 1.446-1 (c) (iv), Income Tax Regs.; sec. 471, I.R.C.1954; sec. 1.471-1, Income Tax Regs.” 48 T.C. at 823. § 1.162-3 was cited by the Government brief, but we find no record proof that it was the regulation relied on by Service. The regulations cited by the Tax Court have general provisions on inventories and for use of the cash method for expense accounts by an accrual method taxpayer (which Service was) and others which do apply. We therefore consider what effect the applicability of the regulations cited by the Tax Court may have.
We note that the Tax Court findings, 48 T.C. at 816-818, in substance re-stated the following stipulation of the parties:
“6. For Federal income tax purposes Service charged to its expense accounts when purchased the cost of the items used in conducting the aforesaid rental service business. At the end of each taxable year the expense accounts were credited with the costs of the ending inventory of items which had not been placed in service at the end of such taxable year. In the sale of the business to Buyer, hereinafter referred to in paragraph 8 hereof, the sum of $233,000 of the consideration paid was allocated for the items in use.”
We have considered the stipulation, the Tax Court findings to the same effect, the related facts and all the cited regulations. Accepting the proposition that Treasury Regulation § 1.162-3 was not the basis of the taxpayer’s expense charges, the result is the same. In any event the cost of the rental items was fully expensed at purchase and tax deductions therefor taken. The regulation permitting the deductions is not controlling. Therefore, as stated in the opinion, we conclude that under tax benefit principles the proceeds received for the rental items should properly be treated as recoupment of the prior deductions and as taxable income.
It is also contended that an alternative theory of the taxpayer was not considered. The argument is that if the rental items are not treated as property under § 337(b), then they are entitled to treatment as stock in trade or other property includible in inventory under § 337 (b) (2). It is said that since the items were sold to one person in one transaction the taxpayer is still entitled to nonrecognition of the gain under § 337(a).
The theory does not strengthen Service’s position. We dealt with the contention that the rental items come literally within the general meaning of property in § 337. As the opinion stated, we conclude that the fact that a transaction involves the disposition of property within the meaning of § 337 does not compel treatment of the proceeds from it as gain from a transfer of the property. The same reasoning applies if the property is treated as within the meaning of § 337 (b) (2). Where the cost of the property was fully expensed and deducted for tax purposes, tax benefit principles reasonably call for treatment of the proceeds as recoupment of the prior charges and ordinary income. By § 337 Congress *1290showed no intention to discard such principles.
The opinion is corrected by substituted pages 2, 3 and 8 to omit reference to Treasury Regulation § 1.162-3. We also omit a statement, which followed one made in the Tax Court opinion, that the parties agreed that the rental items were not stock in trade, et cetera. This is done to show that the taxpayer has asserted the alternative theory under § 337(b) (2), discussed above.
We conclude that neither the grounds discussed above nor others urged warrant a rehearing or altering the decision. The petition for rehearing is denied.