Kitchin v. Commissioner

Jack Kitchin (plaintiff) and his wife, Wilma Kitchin (plaintiff), were owners of Kitchin Equipment Company of Virginia, Inc. Kitchin Equipment often entered into transactions that were lease-option contracts for the use of machinery over short spans of time, generally not longer than 24 months. Historically, the Internal Revenue Service allowed taxpayers to postpone declaring income under lease-option contracts until the contracts ended, at which time the purchasers would either utilize their options or would decline the options; if declined, the lessors would then keep the option payments as option income. That said, the historical precedent was based on cases involving land purchase options. Those contracts generally were postponing ultimate decisions, with the option payments usually constituting only tiny pieces of the full prices of the properties (or modest penalties for not purchasing the properties). The commissioner of Internal Revenue (defendant) argued that the transactions with Kitchin were not true options because the rent paid as option payments was often most or all of the actual consideration for purchase; the lessee was then utilizing the machinery, which had effectively changed hands. The Kitchins ultimately filed suit in the United State Tax Court, which ruled that the payments were rental income realized in the years when paid and not option income to be realized at the end of the contracts. The Kitchins appealed that ruling.