Newlin Machinery Corp. v. Commissioner of Internal Revenue

Newlin Machinery Corp. (Newlin) (plaintiff) sold heavy machinery and equipment to political subdivisions of certain states. In some instances, the political subdivisions agreed to pay for machinery in installments with interest (lease agreements). The lease agreements were not always documented, though Newlin claimed that it had a business policy of charging 6 percent interest on all lease agreements. Newlin claimed that about $8,000 and $5,000 of its income for the tax years ending 1952 and 1953, respectively, was tax-exempt interest received from political subdivisions. The federal tax commissioner (defendant) disputed the claim in part, and Newlin filed an action in tax court. The commissioner showed that amounts of about $3,400 and $2,600 of claimed tax-exempt interest for the years 1952 and 1953, respectively (first group) were not evidenced by any document showing that they were in fact “interest” received from a political subdivision. The commissioner further showed that amounts of about $2,800 and $1,000 of claimed tax-exempt interest for the years 1952 and 1953, respectively (second group) were evidenced by purchase orders by Kansas political subdivisions providing for interest. The commissioner argued, however, that the Kansas political subdivisions unlawfully incurred the second group of amounts in violation of its budget or local law and thus the debt was not a lawful obligation from which a tax exemption could be claimed. There was no concrete evidence showing that the Kansas political subdivisions had exceeded their budgets or cash on hand in purchasing machinery on an installment-payment plan.