## Facts

- Latimer-Looney Chevrolet, Inc., a Tennessee automobile dealership, sold new and used vehicles and operated service-related departments.
- The dealership acquired new cars under floor-plan financing, generally treating those vehicles as inventory held for sale.
- A subset of new cars was designated as “company cars” based on managerial need and availability.
- Once designated, each company car was fully paid for with corporate funds, insured for the corporation’s benefit, registered in the corporation’s name, and used without manufacturer/finance restrictions.
- The company cars were used regularly for business functions, including management and sales travel, service-related tasks, towing and delivery, employee transportation, business errands, and local civic activities connected to the business.
- The dealership retained company cars while they were economical and typically sold them after accumulating about 8,000–12,000 miles and after being held for more than one year.
- For 1949, the corporation claimed depreciation on 26 company cars and reported long-term capital gain from the sale of 10 company cars.
- The Commissioner determined deficiencies, asserting the company cars were inventory held primarily for sale to customers; accordingly, the Commissioner treated sale gains as ordinary income and denied depreciation.
- The dispute concerned only the characterization of the cars and resulting tax treatment, not the amounts of gain or depreciation.

## Issues

1. Whether gain from the sale of the dealership’s “company cars” qualified as long-term capital gain under § 117(j) of the Internal Revenue Code of 1939, rather than ordinary income from inventory.
2. Whether the “company cars” were property used in the dealership’s trade or business (or held for income production) and therefore depreciable under § 23(l) of the Internal Revenue Code of 1939.

## Decision

- The Tax Court held the cars at issue were used in the petitioner’s trade or business.
- The court allowed depreciation deductions for the company cars under § 23(l).
- The court held gains on the sale of the company cars qualified for § 117(j) treatment, rather than being ordinary income from property held primarily for sale to customers.
- The Commissioner’s contrary inventory characterization was rejected for these vehicles.

## Legal Principles

- Whether a dealer-owned vehicle is inventory or business-use property is a factual inquiry focused on the asset’s actual use and purpose during the relevant period.
- Property removed from dealer inventory and devoted to regular business use may be depreciable under § 23(l) even if the taxpayer’s business ordinarily sells the same type of property.
- For § 117(j) treatment, depreciable property used in the trade or business and held for the required period is eligible unless it is stock in trade or property held primarily for sale to customers in the ordinary course of business.
- A later sale of business-use property does not retroactively convert the property into inventory if, during the holding period, it was primarily used in the business rather than held primarily for sale.

## Conclusion

The Tax Court concluded that the dealership’s “company cars,” after being fully paid for and placed in unrestricted, ongoing business service, were depreciable business assets and not inventory; therefore, depreciation was allowed and gains on their later sale received § 117(j) treatment rather than ordinary income treatment.


Latimer-Looney Chevrolet, Inc. v. Commissioner, 19 T.C. 120 (1952)