T.C. Memo. 1998-229
UNITED STATES TAX COURT
EL CHARRO TV RENTAL, INC., DIANA L. PETERS,
TAX MATTERS PERSON, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 25467-92. Filed June 29, 1998.
John R. Gerdes and Timothy P. O'Sullivan, for petitioner.
Edith F. Moates, for respondent.
MEMORANDUM OPINION
GERBER, Judge: Respondent, on August 12, 1996, filed a
motion for entry of decision, seeking to cause petitioner to
comply with respondent's understanding of the parties’
stipulation to be bound by the outcome of the same issues for
earlier years. This case was calendared for trial at Oklahoma
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City, Oklahoma, and was tried on June 1, 1994. At the conclusion
of the trial, the parties agreed to defer the setting of post-
trial briefing dates in order to await the outcome of the earlier
case1 already under consideration by another division of this
Court. The parties in this case stipulated to a substantial
portion of the facts and proffered only a limited amount of
testimony. The parties believed that they could agree to be
bound by the outcome of El Charro I, but presented their evidence
in the event that factual distinctions were found in that case.
The earlier case involves three cases that had been consolidated
for trial. El Charro TV Rental, Inc. (El Charro), is one of the
participating entities involved in the earlier consolidated
cases. Petitioner’s 2 taxable years prior to those before the
Court in this case are the subject of El Charro I. It was
thought that an opinion in El Charro I could obviate the need for
briefing and an opinion in this case.
Following an opinion in El Charro I, the parties contacted
the Court and advised that an agreement had been reached to
settle all issues in this case subject to the outcome of
petitioner's appeal of El Charro I. On June 15, 1995, the
1
For purposes of this opinion, the earlier case is referred
to as "El Charro I". ABC Rentals of San Antonio, Inc. v.
Commissioner, T.C. Memo. 1994-601, affd. without published
opinion sub nom. El Charro TV Rental, Inc. v. Commissioner, 79
F.3d 1145 (5th Cir. 1996), and revd. and remanded 97 F.3d 392
(10th Cir. 1996).
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parties’ stipulation of settlement was filed. In the
stipulation, the parties agreed that the same issues were present
in El Charro I and that a “Notice of Appeal was filed with [the
Tax Court by the petitioner in this case] appealing * * * [El
Charro I] to the 5th Circuit.”
The operative paragraphs of the parties’ stipulation are as
follows:
5. If the Circuit Court determines the income
forecast method of depreciation is not a proper method
for depreciating the rental units inventory of the
taxpayer in * * * [El Charro I] the parties agree that
the above adjustments shall be resolved as if the
petitioner in this case were the same as the taxpayer
in * * * [El Charro I]. In that event, a decision
shall be submitted in this case when the decision in
* * * [El Charro I] becomes final under I.R.C. § 7481.
6. If the Circuit Court does not determine the
income forecast method of depreciation is an improper
method for depreciating the rental inventory of the
taxpayer in * * * [El Charro I], there remains in
dispute in this case the application of the income
forecast method to the petitioner’s rental units
inventory. In that event, no new evidence will be
introduced by the parties and the issue will require
briefing by the parties.
During the time the appellate case was pending before the
Court of Appeals for the Fifth Circuit, the parties in this case
submitted status reports. Eventually, they advised that on
February 14, 1996, the Court of Appeals for the Fifth Circuit,
without published opinion, affirmed this Court's opinion in El
Charro I. On May 1, 1996, the Court of Appeals for the Fifth
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Circuit denied a request for a rehearing en banc in El Charro I.2
After the time for filing a petition for certiorari had expired,
respondent moved for entry of decision. In response to that
motion, petitioner contended that the affirmed opinion in El
Charro I failed to address the legal issue presented in this case
and El Charro I.
We were persuaded to delay ruling on respondent’s motion
because the same issues concerning the other participants in the
earlier consolidated cases had been appealed to the Court of
Appeals for the Tenth Circuit by the participants other than
petitioner. The Court of Appeals, on April 14, 1998, issued its
opinion, reversing and remanding the opinion issued by this Court
as it affected the two controlling case participants other than
petitioner herein. At this juncture, alternative possibilities
for resolution have been exhausted, and it is not appropriate to
delay further action on respondent's motion.
Discussion
The operative language of the agreement between petitioner
and respondent limits the resolution of the adjustments in this
case to the same result obtained by petitioner as a litigant in
El Charro I if it was decided that the income forecast method was
2
El Charro TV Rental, Inc. v. Commissioner, 79 F.3d 1145
(5th Cir. 1996), rehearing denied 85 F.3d 627 (5th Cir. 1996),
affg. without published opinion ABC Rentals of San Antonio, Inc.
v. Commissioner, T.C. Memo. 1994-601.
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not the proper method for depreciating a rental units inventory.
Further, the controlling result was limited to the final outcome
of the appeal to the Fifth Circuit. If the income forecast
method had been found to be permissible, it would have then been
necessary to consider the underlying facts in this case to
determine whether petitioner qualifies.
The Court of Appeals for the Fifth Circuit affirmed this
Court’s decision without published opinion. Petitioner here
argues that the Court of Appeals' failure to issue a published
opinion does not comply with paragraph five of the parties’
stipulation or agreement, which comes into play “If the Circuit
Court determines the income forecast method of depreciation is
not a proper method for depreciating the rental units”. It is
petitioner's position that the Court of Appeals’ affirmance
without published opinion is not a determination by the Court of
Appeals. This argument is without merit. By affirming this
Court's decision, the Court of Appeals has made the requisite
determination.
Accordingly, this Court’s opinion in El Charro I is
dispositive. Our review of ABC Rentals of San Antonio, Inc. v.
Commissioner, T.C. Memo. 1994-601, affd. without published
opinion sub nom. El Charro TV Rental, Inc. v. Commissioner, 79
F.3d 1145 (5th Cir. 1996), and revd. and remanded 97 F.3d 392
(10th Cir. 1996), reveals that this Court did consider and decide
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whether, as a matter of law, the income forecast method could be
used in connection with consumer durables leased under rent-to-
own contracts.
In El Charro I, respondent had determined that the income
forecast method could not be used with the particular assets in
question.3 In ABC Rentals of San Antonio, Inc. v. Commissioner,
supra, the Court saw the question to be addressed as: “whether
the consumer durables leased under rent-to-own contracts are
properties properly depreciable under the income forecast
method.” Focusing its attention on section 168(f)(1),4 the Court
held:
that petitioners have failed to demonstrate that the
consumer durables leased in their rent-to-own business
constitute property properly depreciated under the
income forecast method of depreciation. It is clear
that the consumer durables in this case are not
property similar in character to the assets which have
been allowed to use the income forecast method of
depreciation.
The Court’s underlying rationale for its holding included the
following:
3
In this case, the parties presented three issues,
including the issue decided in El Charro I. The other two issues
involved whether El Charro made a valid election to use the
income forecast method under sec. 168(f)(1) and whether use of
the income forecast method clearly reflects its income. The
question decided in El Charro I, however, preempts and obviates
any need to consider the “other two issues.”
4
Section references are to the Internal Revenue Code in
effect for the period under consideration.
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The underlying theory of the income forecast
method is that the useful life of certain assets of an
artistic or creative character does not depend on
physical wear or tear or the mere passage of time, but
rather the vagaries of public taste. Consequently, an
estimate is made of the total income expected to be
derived from such an asset throughout its projected
lifetime in the business. The depreciation for a given
year is then allocated based on the net income actually
earned in that year. In this case, however, the
consumer durables were leased for fixed terms, and the
income stream produced by these assets was relatively
steady, unlike that of the television films * * *.
Petitioner, in support of her position, offered the
following quote from this Court’s El Charro I opinion:
Where a taxpayer makes an election pursuant to
section 168(f)(1), the Commissioner determines that the
elected method is improper, the taxpayer bears the
burden of proof with respect to the issue that the
useful life of the property is properly measured under
the unit-of-production method or any other method not
expressed in terms of years (including the income
forecast method). In view of the even flow of income
earned by these assets, and because the useful life of
these assets is accurately measured by the passage of
time and ordinary wear and tear, we hold the income
forecast method of depreciation is not appropriate or
applicable in this case as it produces a distortion of
income and does not further the integrity of periodic
income statements by making a meaningful allocation of
the cost entailed in the use of the asset to the
periods to which it contributes. We, therefore, hold
that petitioners have not met their burden of proof
with respect to the depreciation deductions claimed
during the taxable years in issue. * * *
Focusing on the above-quoted portion of this Court’s
Memorandum Opinion, petitioner argues that factual distinctions
exist between the methodology used in El Charro I and in this
case. In that regard, petitioner points out that a different
calculation method was used for rental units in the years
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currently before the Court than was used for the years involved
in the factual pattern for El Charro I. Petitioner further
contends that the El Charro I opinion is binding for rental units
placed in service during 1987 and 1988, but that it is not
binding for the 1989 and 1990 years now before the Court.
Petitioner also contends that she met her burden of proof
referred to in the El Charro I opinion as to the accurate use of
the floating method to measure useful life of rental units.
We disagree with petitioner’s interpretation of this Court’s
above-quoted opinion. The holding in that case is that the
income forecast method may not be used for the type of asset used
in El Charro's business. In the paragraph relied upon by
petitioner, the Court is explaining that, in addition to the
rental property’s not being legally appropriate for use of the
income forecast method, as a factual matter, the calculation
method used for those years to compute the amount of depreciation
did not comport with the principles underlying the income
forecast methodology. In addition, the parties’ stipulation
agreement would permit consideration of whether petitioner
factually qualified for use of the income forecast method only if
it were decided that such method was available for use with
respect to the rental assets.
The Court of Appeals for the Tenth Circuit describes the
issue in the earlier consolidated cases as “a legal issue
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regarding application and interpretation of § 168(f)(1).” ABC
Rentals of San Antonio, Inc. v. Commissioner, __ F.3d __ (10th
Cir., Apr. 14, 1998) (slip op. at 6). In addition, that Court of
Appeals also noted that, even if the underlying facts had not
been stipulated, “this case still would present a mixed question
of law and fact in which the legal issues predominate.” Id. In
ABC Rentals of San Antonio, Inc. v. Commissioner, supra, the
Court of Appeals for the Tenth Circuit decided that section
168(f)(1) did not preclude use of the income forecast method, and
the case was remanded to this Court for a decision as to whether
a proper election was made under section 168(f)(1) and whether
the income forecast method was properly applied to produce
reasonable depreciation allowances. Id. (slip op. at 23).5
On occasion, this Court relies on a test case process for
resolving issues that affect more than one taxpayer. See Rybak
v. Commissioner, 91 T.C. 524 (1988); Clayden v. Commissioner, 90
5
The earlier consolidated cases were appealed to different
appellate venues (the Courts of Appeals for the Fifth and Tenth
Circuits). Petitioner, as Tax Matters Person of El Charro,
appealed to the Fifth Circuit, and the other two cases were
appealed to the Tenth Circuit. Although the El Charro I opinion
was affirmed without published opinion by the Fifth Circuit, on
Sept. 27, 1996, the Court of Appeals for the Tenth Circuit
reversed and remanded the ABC Rentals of San Antonio case. See
ABC Rentals of San Antonio, Inc. v. Commissioner, 97 F.3d 392
(10th Cir. 1996). A rehearing was sought, and, on Apr. 14, 1998,
the Court of Appeals for the Tenth Circuit granted the rehearing
petition and vacated and revised its original opinion. The
revised opinion reversed the decision in the case of ABC Rentals
of San Antonio and remanded for further proceedings.
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T.C. 656 (1988); Anderson v. Commissioner, 83 T.C. 898 (1984),
affd. without published opinion 846 F.2d 76 (10th Cir. 1988);
Sennett v. Commissioner, 69 T.C. 694 (1978). To some extent, the
test case process depends upon the parties’ agreement to be bound
by the outcome in the test case.
A settlement stipulation, including a stipulation to be
bound, is “in all essential characteristics a mutual contract"
that is "entitled to all of the sanctity of any other contract.”
Saigh v. Commissioner, 26 T.C. 171, 177 (1956); see Fisher v.
Commissioner, T.C. Memo. 1994-434; Estate of Satin v.
Commissioner, T.C. Memo. 1994-435. In this regard, general
principles of contract law are applied in construing such
agreements. Robbins Tire & Rubber Co. v. Commissioner, 52 T.C.
420, 435-436 (1969); Fisher v. Commissioner, supra; Estate of
Satin v. Commissioner, supra. Generally, we look within the
“four corners” of the agreement to ascertain the intent of the
parties. Rink v. Commissioner, 100 T.C. 319, 325 (1993), affd.
47 F.3d 168 (6th Cir. 1995). Where an agreement is ambiguous,
the Court may look to extrinsic evidence to determine the
parties’ intentions. Woods v. Commissioner, 92 T.C. 776 (1989).
As discussed above, the El Charro I opinion of the Tax
Court holds that, under section 168(f)(1), El Charro was not
entitled to use the income forecast method for the type of
property in service. The parties agreed to be bound in this case
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by the holding in El Charro I as determined by the Court of
Appeals for the Fifth Circuit. By affirming the Tax Court’s
decision, the Court of Appeals has confirmed (determined) that
the income forecast method for depreciation is not a proper
method for depreciating the rental units inventory. There is no
ambiguity in the parties’ agreement or the El Charro I opinion.
El Charro is in a paradoxical situation because it may
experience a result different from the taxpayers whose cases were
appealed to the Court of Appeals for the Tenth Circuit and
because it may have had the right to appeal to the Court of
Appeals for the Tenth Circuit. El Charro was incorporated in
Texas and alleged that its principal place of business is in
Kansas. El Charro’s lot was chosen by reaching an agreement with
respondent to be bound by the outcome of the appeal to the Fifth
Circuit. That choice cannot now be retracted because a more
favorable result might occur for El Charro. In order to maintain
the finality of parties’ agreements to resolve cases, it is
necessary to enforce the parties’ agreement here.
To reflect the foregoing,
Respondent's motion for entry
of decision will be granted, and
decision will be entered in accord
with the parties’ agreement.