QUEALY, J., dissenting: I must respectfully dissent from the opinion of the majority. The opinion of the majority is bottomed upon a concession supposedly made by the respondent in his brief that the transaction in question, which was cast in the form of a statutory merger under section 368(a)(1)(A), also constituted "a mere change in identity, form, or place of organization” within the meaning of section 368(a)(1)(F). This is a question of law. I cannot accept statements made by the respondent in his brief for purposes of argument as a basis for decision on matters of law where such statements are in conflict with prior decisions of this Court.

In 1966, the petitioner planned and executed an upstream merger of its subsidiary into itself which qualified as a liquidation under section 332.1 Petitioner so reported the merger on its 1966 consolidated corporate return.

As a result of losses sustained in 1967 and 1968, however, petitioner subsequently found it advantageous to treat the transaction as a reorganization under section 368(a)(1)(F) since this section, unlike section 332, was exempt from the carryback limitations of section 381(b). Consequently, in 1969, petitioner amended its 1966 corporate return to reflect its new position.

Prior to the merger, petitioner and its subsidiary were separate and distinct taxable entities, albeit that the former was a holding company. For the reasons so thoroughly delineated by the Court in Estate of Bernard H. Stauffer, 48 T.C. 277 (1967), revd. 403 F. 2d 611 (C.A. 9, 1968), it is my view that Congress never intended section 368(a)(1)(F) to encompass the merger of two separate taxable entities. See also Associated Machine, 48 T.C. 318 (1967), revd. 403 F. 2d 622 (C.A. 9, 1968). Since an appeal in this case would lie in the Second Circuit, we are not bound by the cases to the contrary. E.g., Davant v. Commissioner, 366 F. 2d 874, 879 (C.A. 5, 1966). I would reaffirm this Court's position in Estate of Bernard H. Stauffer, supra.

Contrary to the opinion of the majority, I interpret section 381(b) to be merely a limitation upon section 381(a). Indeed, the flush language of section 381(a) clearly states that the general rules set out in subsection (a) are "subject to the conditions and

1 Prior to effecting the merger, petitioner solicited and received a private ruling from respondent stating that the proposed transaction qualified as a liquidation under sec. 332.

limitations specified in subsections (b) and (c)." Assuming arguendo that the merger falls within the descriptive language of section 368(a)(1)(F), we are faced with the additional requirement of section 381(a)(2) that the transaction must be one to which section 361 applies. It was the inability of an upstream merger, such as the one we have here, to meet the nonrecognition requirements of section 112(b)(3) and (4) of the Revenue Act of 1934, the latter being the predecessor to section 361, that prompted Congress to enact section 332 in the Revenue Act of 1935. See Hearings on H.R. 8974 before the Senate Committee on Finance, 74th Cong., 1st Sess., pp. 171, 302 (1935). STERRETT and WILES, JJ., agree with this dissent.

THE LTV CORPORATION, 1 PETITIONER V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 4080-71. Filed October 21, 1974.

Petitioner contracted to lease an IBM computer from Boothe
Leasing Corp. The computer was on petitioner's premises on or
before Dec. 31, 1961. Pursuant to the purchase agreement
between Boothe and IBM, the computer was to be installed by
IBM on petitioner's premises. Installation of the computer was
completed after Dec. 31, 1961. Held, petitioner is entitled to an
investment credit under secs. 38 and 48(b)(2), I.R.C. 1954. Held,
further, the contract between petitioner and Boothe was in
substance as well as form a lease entitling petitioner to rental
deductions under sec. 162(a)(3), I.R.C. 1954.

Neil J. O'Brien and Jimmy L. Heisz, for the petitioner.
John W. Dierker, for the respondent.

STERRETT, Judge: The respondent determined deficiencies in petitioner's Federal income tax for the calendar years 1962, 1963, and 1964 as follows:

1 By motion of the petitioner, to which the respondent had no objection, the pleadings were amended to reflect the name change of Ling-Temco-Vought, Inc. to The LTV Corporation.

Of the many issues raised by respondent during his audit of petitioner's tax returns all but three had been settled by the trial date. An additional issue has since been conceded by the respondent in its entirety, leaving two issues to be decided by the Court.

The first issue relates to the applicability of the investment credit provided for by section 38, I.R.C. 1954,2 to one International Business Machines Corp. 7090 Data Processing System installed in petitioner's computer center facilities at Arlington, Tex. The second issue requires us to determine whether the transaction by which petitioner acquired the above data processing system is to be characterized for tax purposes as a lease entitling petitioner to a deduction under section 162(a)(3) for rent paid, or as a conditional sale requiring petitioner to capitalize the cost of the data processing system and deduct appropriate amounts for depreciation and interest under sections 167 and 163, respectively.

FINDINGS OF FACT

Some of the facts are stipulated and are so found. The stipulation of facts, together with the exhibits attached thereto, are incorporated by this reference.

The LTV Corp. (hereinafter petitioner) was incorporated under the laws of the State of Delaware on November 20, 1958. Since incorporation petitioner's name has been changed several times, the last one occurring May 5, 1972. Petitioner's principal office is located in Dallas, Tex. For the years 1962, 1963, and 1964 petitioner filed consolidated Federal income tax returns with the District Director of Internal Revenue in Dallas, Tex.

Prior to July 1960 petitioner was engaged principally in the business of developing and producing electronic products and electro-mechanical, acoustical, air conditioning, and refrigeration equipment. With the acquisitions of Temco Aircraft Corp. in July 1960 and Chance Vought Corp. in August 1961 petitioner directly or through one or more subsidiaries, became engaged in the design, development, and production of missiles, military aircraft, military aircraft assemblies, and electronic and other components thereof.

2 All Code references are to the Internal Revenue Code of 1954 as amended.

This venture into the production of military equipment necessarily involved petitioner in many Government contracts. On certain types of contracts petitioner would be entitled to recover its costs. To recover these costs petitioner submitted invoices and public vouchers to Government auditors for review as provided in the contractual agreement. In addition to the direct charges, overhead costs were submitted and received and charged to overhead pools, which were allocated to specific contracts.

On October 23, 1961, petitioner entered into an agreement entitled "Equipment Lease Agreement" (hereinafter Boothe lease) with Boothe Leasing Corp. (hereinafter Boothe) to lease one International Business Machines Corp. 7090 Data Processing System (hereinafter computer).3 Relevant provisions of the Boothe lease include the following terms:

1. The lease of and rent for the computer was to commence on the day specified in the equipment lease schedule.

2. As additional rental, lessee was to pay all license fees, assessments, or taxes imposed by any governmental authority upon the computer, whether such license fees or taxes were billed to the lessor or lessee.

3. Lessee at its sole expense was required to maintain at all times during the term of the agreement the computer in good operating order and repair.

4. Lessor assigned to lessee for the term of the agreement any applicable factory warranty, express or implied, issued on or applicable to the leased property, and authorized the lessee to obtain the customary service furnished by the manufacturer at lessee's expense.

5. Lessee was to maintain, at its own expense, insurance on the leased property for its actual value, but in no event for less than the stipulated loss value specified in the equipment lease schedule, naming the lessor and lessee as the insureds.

6. Lessee assumed all risks of loss, theft, or destruction of, and damage to the leased property.

The terms "lease," "lessee," "lessor," and "rent," as used in the findings of fact, are not intended to indicate the character of the transactions in question, but instead are used solely for purposes of clarity and convenience.

7. Nothing contained in the lease was to give or convey to lessee any right, title, or interest in any of the leased property except as a lessee.

The equipment lease schedule (hereinafter schedule) referred to in the Boothe lease established additional relevant provisions of the agreement. The term of the lease was to be 60 months commencing January 23, 1962, with a renewal option of indefinite duration, and no deposit was required. The rental payment schedule was included and called for semiannual payments as follows:

If petitioner took up the renewal option, annual payments of $116,471.32 would be due.

The stipulated loss value schedule was also included and showed the minimum value for the computer to decrease from its original cost of $2,911,783 to its estimated market value at the end of the 5-year lease term of $291,178.30. The relationship of the stipulated loss value to the remaining rent due and the estimated market value of the computer after 5 years is as follows:

Year 5‒‒ 267,884

Estimated

Attached to the schedule is a description of the computer. It shows that the computer is to consist of 24 separate components.

As an addition to the Boothe lease, Boothe granted to the petitioner the option to purchase the computer at the expiration of the lease term. The purchase price was set at 10 per cent of the original cost which amounts to $291,178.30. These terms were set out in a letter dated January 23, 1962, from Boothe to petitioner. The price was quoted to Boothe by the International