Before ESCHBACH, Circuit Judge, PELL, Senior Circuit Judge, and GORDON, Senior District Judge.*fn*
PELL, Senior Circuit Judge.
Comdisco, Inc., a Delaware corporation with its principal place of business in Illinois, appeals from the judgment entered by the district court dismissing its action for refund based upon the Government's refusal to grant investment tax credits. On appeal, this court must determine whether plaintiff is entitled to the credits, which depends upon whether the district court held correctly, under the applicable statutes and regulations, that plaintiff was neither the "lessee" nor the "original user" of the disputed property.
I. THE STATUTORY FRAMEWORK
A. The Investment Tax Credit.
In 1962, Congress added to the Internal Revenue Code provisions establishing an investment tax credit for investments in certain depreciable property. Congress eliminated the credit in 1969 but then re-enacted the legislation, insubstantially the same form, as part of the Revenue Act of 1971. Section 38(a) of the Code, 26 U.S.C. § 38(a), provides: "There shall be allowed, as a credit against the tax imposed, the amount determined under" sections 46 through 48 of the Code. The Code refers to property coming within the parameters of the investment tax credit provisions as "section 38 property." Section 46(a) establishes the formula to determine the amount of a credit to which a taxpayer is entitled, section 46(b) provides for the carryback and carryover of unused credits, and section 46(c) defines those investments that qualify for the credit. In this case, neither party questions the amount of the credit claimed, the use of the carryback and carryover provisions, or the qualifying characteristics of the investments.
Rather, the dispute centers around section 48, which governs the use of the investment tax credit with respect to leased property. Section 48(b) allows taxpayers to treat certain leased property as "new section 38 property" as long as the parties lease the property within three months after it is placed in service. Section 48(d)(1) allows the parties to a lease of such new section 38 property to treat the lessee as having acquired the property so that the lessee then may claim the investment tax credit. Section 48(d)(3) also allows a lessee, to whom a lessor has assigned the right to use an investment tax credit, to assign the credit to any subsequent sublessee, subject to the three-month restriction of section 48(b),.
The Treasury Department has promulgated a number of regulations pursuant to section 48. Regulation 1.48-1(c), for example, defines tangible personal property, the only property for which a taxpayer may claim a credit, to include "all property (other than structural components) which is contained in or attached to a building," including office equipment. 26 C.F.R. § 1.48-1(c) (1984). Under the regulations, the entitlement of a lessee to the use of an investment tax credit turns upon whether the lessee is an "original user" of the property: "[T]he election is not available if the lessee is not the original user of the property." 26 C.F.R. § 1.48-4(a)(iii). The regulations provide that "original use" means the first use to which the property is put, whether or not such use corresponds to the use of such property by the taxpayer." 26 C.F.R. § 1.48-2(b)(7). Furthermore,
The determination of whether the lessee qualifies as the original user of leased property shall be made . . . as if the lessee actually purchased the property. Thus, the lessee would not be considered the original user of the property if it had been previously used by the lessor or another person. . . . However, the lessee would be considered the original user if he is the first person to use the property for its intended function. Thus, the fact that the lessor may have, for example, tested, stored, or attempted to lease the property to other persons will not preclude the lessee from being considered the original user.
The legislative history surrounding passage of the investment tax credit reveals the hope of Congress that the credit would stimulate economic growth by providing a substantial incentive to undertake capital investment projects. Thus, the Report of the House of Representatives stated: "It is believed that the investment credit . . . will provide a strong and lasting stimulus to a high rate of economic growth and will provide an incentive to invest comparable to those available elsewhere in the rapidly growing industrial nations of the free world." H.Rep. No. 1477, 87th Cong., 2d Sess., 1962-63 Cum.Bull. 405, 412. The same report also discussed the rationale of this section 48(d) election for leased property, which is "desirable since, as a result of this provision, it is possible for the lessor to pass the benefit of the investment credit on to the party actually generating the demand for the investment." Id., 1962-63 Cum.Bull. at 418.
The Senate Report reflected similar concerns about both the lease provision, S.Rep. No. 1881, 87th Cong., 2d Sess., U.S.Code Cong. & Admin.News 1962, p. 3297, 1962-63 Cum. Bull. 707, 725, and the tax credit in general:
This investment credit, coupled with the depreciation guidelines recently liberalized by the administration, by stimulating capital formation, will provide growth in the economy consistent with the principles of a free economy. This investment credit, by encouraging the modernization and expanded use of capital equipment, will improve our competitive position abroad and thus aid in meeting the balance-of-payments problem. Moreover, the capital formation induced by this credit will both aid in providing the longrun growth needed by our domestic economy and be of major assistance in our immediate problem of economic recovery.
Id., U.S.Code Cong. & Admin.News 1962, p. 3304, 1962-63 Cum.Bull. at 707-08. Furthermore, the Senate Report stated that "[t]he objective of the investment credit is to encourage modernization and expansion of the nation's productive facilities and thereby improve the economic potential of the country, with a resultant increase in job opportunities and betterment in our competitive position in the world economy." Id., U.S. Code Cong. & Admin-News 1962, p. 3314, 1962-63 Cum.Bull. at 717. The Report also noted that, to insure the intended impact of the tax credit legislation, "[t]angible personal property is not intended to be defined narrowly." Id., U.S.Code Cong. & Admin.News 1962, p. 3318, 1962-63 Cum.Bull. at 722.
Finally, with respect to the 1971 re-enactment of the investment tax credit, the Senate again noted the broad incentive effect that it intended the credit legislation to have. The Senate ...