Sartori v. Commissioner, 66 T. C. 680; 1976 U. S. Tax Ct. LEXIS 79 (1976)

A binding contract must be in effect by the statutory cutoff date to qualify property for the investment tax credit as pre-termination property.

Summary

In Sartori v. Commissioner, the Tax Court ruled that a dragline purchased by Willowbrook Mining Co. , a subchapter S corporation, did not qualify for the investment tax credit because it was not acquired pursuant to a contract binding on the taxpayer as of April 18, 1969. The court found that while negotiations had occurred and verbal commitments were made before this date, no enforceable contract existed until after the statutory cutoff. The ruling hinged on the interpretation of binding contracts under Ohio law and the legislative intent behind the investment credit provisions, emphasizing the need for a contract that is both definite and enforceable by the specified date.

Facts

In October 1968, Willowbrook Mining Co. began negotiations with Marion Power Shovel Co. for a custom dragline for its strip-mining operations. By February 18, 1969, Marion indicated it could build the dragline to Willowbrook’s specifications, and Willowbrook verbally committed to purchase it. However, no specific price was set, and subsequent proposals in May and December 1969 were necessary before a written contract was signed in February or March 1970. The dragline was delivered in December 1970. Willowbrook’s shareholders claimed an investment credit for 1970, which the IRS challenged.

Procedural History

The IRS determined deficiencies in the shareholders’ 1970 federal income taxes, disallowing the investment credit claimed. The shareholders petitioned the U. S. Tax Court, which consolidated the cases due to their similarity. The Tax Court ruled in favor of the Commissioner, holding that the dragline did not qualify as pre-termination property under IRC section 49(b)(1).

Issue(s)

1. Whether the dragline purchased by Willowbrook Mining Co. qualified as pre-termination property under IRC section 49(b)(1), entitling the shareholders to the investment credit claimed in 1970?

Holding

1. No, because the dragline was not acquired pursuant to a contract which, as of April 18, 1969, and at all times thereafter, was binding upon Willowbrook Mining Co.

Court’s Reasoning

The Tax Court applied Ohio law to determine if a binding contract existed by April 18, 1969, as required by IRC section 49(b)(1). The court found that the oral agreement made on February 18, 1969, lacked the necessary definitiveness and enforceability to qualify as a binding contract. The absence of a specific price and the subsequent rejection of a proposed model in May 1969 suggested that no enforceable obligation existed by the statutory cutoff date. The court also noted that the later written contract required formal acceptance, indicating no prior binding commitment. The legislative history of section 49(b)(1) reinforced that a contract must be definite and enforceable to qualify property as pre-termination property. The court rejected the applicability of the Uniform Commercial Code and promissory estoppel doctrines, concluding that Willowbrook was not bound by a contract until after April 18, 1969.

Practical Implications

This decision underscores the importance of having a binding and enforceable contract in place by the statutory deadline for eligibility for investment tax credits. Practitioners must ensure that contracts for property acquisition are clear, definite, and legally binding before the relevant cutoff date. The ruling affects how businesses structure their purchase agreements, especially for custom or specially manufactured goods, and highlights the need for careful documentation and legal review of preliminary agreements. Subsequent cases have similarly interpreted the binding contract requirement strictly, emphasizing the necessity for a contract that is both definite and enforceable under state law.