Continental Can Company Inc. v. United States
422 F.2d 405 (1970)

  • Continental produced machinery to make cans. For decades they only leased their machinery to canning companies, they wouldn't sell it.
    • As a result of an anti-trust action, Continental was ordered by a court to sell canning machinery to their customers.
  • Continental began selling machinery that had previously been leased. When they filed their taxed, they claimed the profits from the sales as a capital gain. The IRS disagreed.
    • The IRS argued that under what is now 1221(a)(1), the definition of a capital asset does not include "property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business."
    • Continental argued that they had not been in the business of selling machinery, they were in the business of leasing them. Continental argued that the anti-trust ruling forced them to end their leasing business and they were liquidating their assets. Therefore, the sales should be counted as capital gains.
      • See Curtis Company v. Commissioner (232 F.2d 167 (1956)).
  • The Trial Court found for IRS.
    • The Trial Court noted that in Curtis, the company was liquidating all of their assets because they were ending their business entirely.
    • The Court found that in this case, Continental wasn't ending their trade or business, but transforming into a new trade or business. The machinery that had previously been leased is the inaugural inventory for this new trade or business. Therefore it is not a capital asset and is not subject to the capital gains tax rate.