Business Machines Corp. (hereinafter IBM) as the amount for which they would sell the computer at that time.

To fulfill its requirements to petitioner, Boothe entered into an agreement of sale with IBM to purchase the computer. Pursuant to this agreement, the computer was to be installed and placed in good working order on petitioner's premises by IBM. Relevant provisions of the agreement may be summarized as follows:

1. Terms: Invoice rendered at time of shipment. Payment to be made in full upon the later of the date of installation or 30 days after the date of invoice.

2. Title: Title to each machine was to remain vested in IBM until the full purchase price was paid. IBM assumed the risk of loss or damage to the machine up to the time it was installed, except for loss or damage resulting from negligence of the purchaser.

3. Installation: Machines purchased under the agreement were to be installed and placed in good working order by IBM without additional charge. The date on which IBM notified the purchaser in writing that a machine had been placed in good working order and was ready for use was to be considered the date of installation of such machine for all purposes of the agreement.

4. Warranty: IBM was required to keep the machines in good working order for 90 days from date of installation.

The computer was shipped on December 13, 1961, from Poughkeepsie, N.Y., for delivery to petitioner's computer center at Arlington, Tex. Upon delivery, a few days later, the installation work was commenced by IBM personnel. The work was performed by a crew of five to eight people. Of this group three to four were assigned specially for the installation work, the remainder were assigned to service and maintain the computer on a permanent basis. The specially assigned group did not leave petitioner's computer facilities until the middle of January 1962. However, despite the notification of installation requirement in the agreement of sale, no such notice was sent by IBM to either petitioner or Boothe, nor was any notice of acceptance of the computer sent by petitioner to IBM.

Boothe did not accept or pay for the computer until it was assured by IBM that it was completely installed and in good

working order. These requirements were satisfied between January 17, 1962, and January 23, 1962. Pursuant to Boothe's policy to place the computer on a rental basis immediately following installation, the lease term commenced January 23, 1962. Boothe paid for the computer by check on January 29, 1962.

The use of the computer was essential to petitioner's operations, especially its Government contract work. It was also important that the petitioner have the latest equipment to successfully compete in the bidding for Government contracts. Petitioner anticipated complete use of the computer, since it could be used for scientific and financial operations, and petitioner's acquisition of the computer was based on this anticipation.

After analyzing the expected use of the computer, petitioner decided that it would be cheaper to deal with Boothe rather than IBM. The Boothe lease required petitioner to pay a fixed rental whereas IBM's rental was based on usage. IBM's basic rental was for an 8-hour shift, with additional rent due for additional use. Since petitioner expected a utilization rate beyond the breakeven point, Boothe's terms were pursued.

On petitioner's consolidated income tax return for 1962, the cost of the leased computer was claimed as an investment in property eligible for the investment credit provided for in section 38. An appropriate election was filed with petitioner's 1962 consolidated income tax return to treat petitioner, the lessee, as the purchaser of the property pursuant to section 48(d) as it then existed. Respondent in his deficiency notice disallowed this claim as follows:

It is determined that claimed 1962 investment credit of $208,825 applicable to the $2,911,783 cost of an IBM 7090 Computer System is disallowed because the property was acquired and placed in service before 1962.

Respondent does not now contest the validity of the election treating petitioner as the purchaser of the property, nor that the computer is property eligible for the investment credit.

On its financial statements, petitioner accounted for the acquisition of the computer as a lease deducting the payments to Boothe as rental. These payments were allowed by the Government auditors as proper expenses with respect to the Government contracts. For tax purposes, petitioner also treated the acquisition

as a lease deducting the payments as rental. Respondent in his deficiency notice disallowed this treatment as follows:

It is determined that the contractual acquisition in 1961 of an IBM 7090 computer under an alleged lease arrangement was in substance and in fact a conditional purchase of depreciable property; that claimed deductions for rental expense are disallowed; ***

Accordingly, respondent recast the transaction by disallowing the claimed rental expense and allowing appropriate amounts for depreciation and interest. Petitioner does not now contest the figures that respondent used if his legal position is sustained by this Court.

OPINION

This case involves two questions that have arisen from the petitioner's acquisition of the computer. The first issue is whether the petitioner is entitled to the investment credit provided for in section 38 resulting from the acquisition of the computer. The second issue is whether the transaction by which petitioner acquired the computer should be characterized for tax purposes as a lease, allowing petitioner to deduct the payments to Boothe as rental under section 162(a)(3), or as a conditional sale, requiring petitioner to capitalize the cost of the computer and deduct appropriate amounts for depreciation and interest under sections 167 and 163, respectively.

Issue 1. Investment Credit

Due to concessions by the respondent this issue is a narrow one and turns upon whether the computer constitutes "new section 38 property" within the meaning of the following provisions of section 48(b):

(b) NEW SECTION 38 PROPERTY.-For purposes of this subpart, the term "new section 38 property" means section 38 property

(1) the construction, reconstruction, or erection of which is completed by the taxpayer after December 31, 1961, or

(2) acquired after December 31, 1961, if the original use of such property commences with the taxpayer and commences after such date.

In applying section 46(c)(1)(A) in the case of property described in paragraph (1), there shall be taken into account only that portion of the basis which is properly attributable to construction, reconstruction, or erection after December 31, 1961.

In October 1961 petitioner entered into a lease with Boothe, the relevant terms of which have been summarized in the findings of fact. To fulfill this agreement, Boothe made an agreement with IBM to purchase the computer. The relevant provisions of this agreement have also been set out in the findings of fact. Pursuant to this agreement, the computer was to be installed and placed in good working order on petitioner's premises by IBM. The computer was delivered and the installation work began in the middle of December 1961. The installation requirements were not satisfied until the third week of January 1962 when the lease commenced and Boothe paid for the computer.

Respondent argues that the computer does not qualify as "new section 38 property" since it was acquired before December 31, 1961. He cites sec. 1.48-2(b)(6), Income Tax Regs., which provides that "Property shall be deemed to be acquired when reduced to physical possession, or control," and asks us to give these words their "everyday straight forward English meaning." In Madison Newspapers, Inc., 47 T.C. 630, 635 (1967), we said the following with respect to this language in respondent's regulations:

This regulation, however, is directed for the most part, as is respondent's argument herein, on the when of possession or control and fails to deal with the nature of the property subject to these powers. Undoubtedly petitioner herein did have "possession or control" of something on or before December 31, 1961, but the critical question requiring resolution is possession or control of what. We hold that the what in this case is an installed and operating computer; one that is available for use by the petitioner for the purpose for which it was purchased. We believe this to be the property with respect to which "physical possession or control" should be determined. Such an interpretation accords the words a commonsense meaning.

Respondent disagrees with our holding in Madison Newspapers, Inc. but also seeks to distinguish it on the grounds that we placed great weight on the taxpayer's rights to installation service, and in this case IBM's installation obligation was to Boothe and not petitioner. However, pursuant to the agreement between Boothe and IBM, the computer was to be installed and placed in good working order on petitioner's premises by IBM. The Boothe lease made it clear that Boothe was not the manufacturer of the computer, and that Boothe

authorized petitioner to obtain the customary service furnished by IBM. Neither Boothe nor the petitioner had the necessary expertise to install this highly complex piece of equipment, nor was it likely that anyone other than IBM could properly install the computer. Consequently we believe that it was the clear understanding of all the parties involved that IBM's installation obligation to install and place the computer in good working order without additional charge-would accrue to petitioner's benefit. In so doing, we find J. E. Barron Plastics, Inc. v. Commissioner, 397 F. 2d 250 (C.A. 6, 1968), affirming 47 T.C. 638 (1967), to be distinguishable.

Having established the "what" of section 38 property, we now must analyze the facts as presented to determine when it was installed. There is no question that the computer arrived and the installation work began in the middle of December 1961. However, from that point on the record becomes unclear.

Respondent relies heavily on the testimony of George Nanson, an IBM field engineer, who was responsible for the installation of the system. Nanson indicated the work was well along by Christmas, but he could not recall when the job was completed. Nanson did indicate that the entire job took about 9 to 10 days which would mean a completion date before yearend.

However, IBM's procedures indicate that the field engineer does not inform the customer of his progress. He makes progress reports to the IBM marketing representative who is responsible for determining for IBM when a machine is installed. This determination is based on negotiations with the customer. Gene E. Washington served as the marketing representative for IBM for this account. Washington testified that he was in daily contact with petitioner and that he considered the computer to be installed by the middle of January. Washington also accounted for the lack of the written notice of installation. Since he was in daily contact with the customer the formal written notice became superfluous.

This testimony is in line with the January 23, 1962, commencement of the Boothe lease, and the January 29, 1962, payment by Boothe for the computer. Under the terms of the agreement of sale, if the computer had been installed by yearend the purchase price would have been due by January 13, 1962. If Boothe had paid for the computer at that time, the Boothe lease would have started the next day. Since we believe neither Boothe