International Shoe Machine Corp. v. United States

International Shoe Machine Corporation (International) (plaintiff) primarily leased shoe-machinery equipment. In fact, from 1964 to 1966, sales of the leased machinery made up just seven percent, two percent, and two percent of International’s gross revenues, respectively. International later indicated that not only was leasing preferable, but also International never developed any sales force or solicited purchases. When asked to sell machines, International set the prices high to make their purchase unattractive and sometimes even attempted to dissuade customers from purchasing the machines. Nevertheless, some machines were sold. The United States (defendant), via the commissioner of internal revenue, took the position that the income from those sales was income gained from property held by International primarily for sale to its customers in the ordinary course of International’s business. Accordingly, the government found the gains to be ordinary income rather than capital gains. International filed suit, arguing several different points. Firstly, International suggested that prior caselaw, holding that the word “primarily” was intended to mean of first importance or principally—and that the primary purpose of holding the shoe machines was lease rather than sale. Secondarily, International argued that the income was not generated in its ordinary course of business and that these sales were akin to liquidation sales. The government disputed all points, and the trial court ruled in the government’s favor. International appealed.