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
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
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.