Fall River Gas Appliance Company v. Commissioner

Fall River Gas Company was the exclusive distributor of natural gas in Fall River, Massachusetts. Fall River Gas Appliance Company (the appliance company) (plaintiff) was a subsidiary of Fall River Gas Company that leased and installed gas appliances. The appliance company would install gas appliances or conversion kits, and it leased the appliances for an initial one-year period. Customers could request the removal of the conversion kits at will. When appliance leases ended, the appliance company would remove the appliances or conversion kits. The appliance company paid for the installations and received money from customers through rental payments and the consumption of gas. The appliance company classified its installation costs as business expenses. The United States Tax Court held that the expenditures were capital expenditures, not business expenses, because the appliance company received a benefit—the rental fees and gas purchases—from the installation of the appliances for longer than a year. The appliance company appealed, arguing that due to the impermanent nature of the appliances, a customer could stop using gas at any point after an installation. Therefore, the appliance company was not assured that customers would maintain their appliance rentals and gas consumption for periods long enough to classify the installation costs as capital expenditures.