Friday, December 6, 2013

Starr’s Estate v. Commissioner case brief

Starr’s Estate v. Commissioner case brief summary
274 F.2d 294 (1959)

Taxpayer appealed decision of the United States Tax Court, sustaining determination of Commissioner of Internal Revenue disallowing deduction of annual payments as trade or business rental expense under Internal Revenue Code § 23(a), 26 U.S.C.S. § 23(a) (amended 1942).

A fire sprinkler system was installed at taxpayer's plant under a "Lease Form of Contract" (contract) for five years with annual rental payments of $ 1,240, but for nominal rental payments of $ 32 in each of the following five years. The whole contract was silent as to the status of the system beginning with the eleventh year. Taxpayers deducted the payments as rental expense in carrying on a trade or business under Internal Revenue Code § 23(a), 26 U.S.C.S. § 23 (a) (amended 1942). The trial court held the five payments were capital expenditures, not fully deductible rental; depreciation was allowed for each year.


  • The court held that for tax purposes form could be disregarded for substance, and where the foreordained practical effect of rent was to produce title eventually, the rental agreement could be treated as a sale, even where the contract did not by its terms ever pass title to the "lessee." 
  • Since the total rent paid was equivalent to a normal purchase price plus interest, the court reversed and remanded to consider allowance of an amortized interest deduction, in addition to allowance for depreciation.

The court concurred with the trial court's recharacterization of annual rental payments as capital expenditures to purchase property for the business, but reversed and remanded for consideration of allowance of amortized interest deduction to taxpayer.

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