## Facts

- Paccar, Inc. manufactured and distributed trucks and related parts through multiple divisions, including Paccar Parts, Dart, and Wagner.
- In 1976 and 1977, three Paccar divisions entered written agreements with Sajac Company, Inc., an unrelated corporation, for the “disposition” of certain parts described as “selective excess, inactive or unusable” items, priced at prevailing scrap-metal rates.
- The agreements stated that title and risk of loss passed to Sajac and disclaimed any agency or bailment relationship, with Paccar paying shipping to Sajac’s warehouse.
- Paccar retained a right, for at least four years after delivery, to repurchase any portion of the transferred parts; Sajac agreed to notify Paccar of any other disposition during that period.
- Repurchase pricing was favorable to Paccar: the repurchase cost was capped at 90% of Paccar’s last acquisition cost (adjusted for inflation), with additional discounts if repurchases exceeded specified levels.
- Paccar repurchased, on average, about 25% of the parts transferred to Sajac during the years at issue and thereafter.
- For accounting and tax purposes, both parties treated transfers as sales and later repurchases as purchases/sales.
- Paccar claimed deductions for “inventory losses” measured by the difference between its inventory basis and the scrap price paid by Sajac, despite its retained repurchase rights and continuing need to access replacement parts.

## Issues

1. Whether Paccar’s transfers of parts to Sajac were bona fide sales or, in substance, arrangements that left Paccar with significant benefits and burdens of ownership.
2. Whether the transfers constituted closed and completed transactions producing realized, deductible inventory losses for federal income tax purposes.

## Decision

- The Ninth Circuit affirmed the Tax Court’s decision sustaining the Commissioner’s deficiencies for tax years 1975–1977.
- The court held that Paccar could not deduct inventory losses from the Sajac transfers because the transactions, viewed in substance, did not constitute bona fide sales resulting in realized losses.
- The court accepted the Tax Court’s factual findings and found no clear error in the conclusion that Paccar retained substantial rights inconsistent with a sale.

## Legal Principles

- Federal income tax consequences depend on the substance of a transaction, not solely its contractual form or labels.
- A deductible inventory loss generally requires a closed and completed transaction (such as a bona fide sale) in which the taxpayer actually relinquishes the material benefits and burdens of ownership.
- Broad, long-term repurchase rights at favorable prices, coupled with the taxpayer’s continuing business need for the property and significant actual repurchases, can show that an apparent sale functions as retained control or warehousing rather than a true disposition.
- Appellate review defers to the Tax Court’s supported factual determinations; findings will be upheld absent clear error.

## Conclusion

Because Paccar’s “scrap” transfers to Sajac preserved extensive repurchase rights and ongoing access to the parts and were followed by substantial repurchases, the transactions lacked the substance of bona fide sales, so the claimed inventory-loss deductions were properly disallowed.


Paccar, Inc. v. Comm’r, 849 F.2d 393 (9th Cir. 1988)