Paccar, Inc. v. Commissioner

Paccar, Inc. (plaintiff) produced and sold rail cars, mining vehicles, trucks, and truck parts. Paccar entered into an agreement with Sajac Company, Inc. (Sajac), a company that advertised itself as a long-term warehouse where manufacturers could store inventory for tax- and space-saving purposes. The agreement between Paccar and Sajac explained that Sajac would purchase scrap material from Paccar, and in return Paccar would have an exclusive right to repurchase the scrap material from Sajac for four years. The companies treated all transfers from Paccar to Sajac as, respectively, sales and purchases for tax and accounting purposes. Repurchases from Sajac to Paccar were treated, respectively, as sales and purchases. Through internal memoranda, it was clear that executives at Paccar wanted their dealings with Sajac to look like bona fide sales, in which Paccar gave up all control of its inventory to Sajac. Paccar classified its sales to Sajac as inventory losses. The Commissioner of Internal Revenue (the Commissioner) (defendant) assessed tax deficiencies against Paccar. The Commissioner reasoned that Paccar had failed to fully transfer its equipment to Sajac due to the exclusive right to repurchase that Sajac had granted Paccar. As a result, Paccar improperly deducted inventory losses. The United States Tax Court upheld the Commissioner’s decision. Paccar appealed.