nor IBM to be charitable institutions, we find the timing of the above events to be strong evidence that the computer was not installed until January 1962. Furthermore, Washington's estimation also agrees with the final departure of the IBM installation crew in the middle of January 1962. This finding also tends to discredit respondent's reliance on an internal IBM document (hereinafter I.A.C.). The I.A.C. records for IBM the installation, alteration, or cancellation of service. The I.A.C. shows that the various components of the computer were installed on December 28, 1961. Glen M. Countryman, a current IBM employee, testified with respect to the document's authenticity; however he was not personally involved with the installation of the computer. His testimony merely related to his interpretation of the I.A.C. Paul W. Williams, Jr., also testified with respect to the I.A.C. He was the IBM branch manager in 1961 and the individual responsible for the I.A.C. Williams testified that the date on the I.A.C. could have been completed by one of his staff. He also indicated that the installation date on the I.A.C. would trigger the crediting of the salesman's commission and quota points, both important figures for a salesman to have before yearend. Consequently the salesman's view of installation could be decidedly different from that of the other people involved. Williams also doubted Nanson's testimony that the computer was installed in 9 to 10 days. For a machine of this size, he would have been happy if the installation had been completed in 3 weeks. IBM felt its installation obligation was not completed until there was a mutual agreement between IBM and the customer that the machine was operational and ready to perform the functions for which it was intended. We also believe that this is a proper standard to guide us in the resolution of this difficult question. After a careful consideration of this record, we find this final step did not occur until well into January 1962. Consequently, we hold that the computer qualifies as "new section 38 property" since it was acquired after December 31, Petitioner strenuously objects to the introduction of this document. Although Williams' signature is on the I.A.C., he did not sign it. The I.A.C. was prepared Oct. 30, 1961, and the signature is dated Dec. 8, 1961, both of which are before the shipment date. There is no indication, however, that the document had been deliberately falsified, and it is obviously part of IBM's business records and was so identified. 1961, within the meaning of section 48(b).5 The record also includes additional testimony describing the condition and appearance of the installation area at yearend. Based upon the above finding, we believe that discussion of this testimony would be of little value. Issue 2. Sale or Lease Due to concessions by the petitioner our task is solely to characterize the form of the transaction by which petitioner acquired the computer. Petitioner argues that under the factual pattern of this case and those of Lockhart Leasing Co., 54 T.C. 301 (1970), affd. 446 F. 2d 269 (C.A. 10, 1971), and Northwest Acceptance Corp., 58 T.C. 836 (1972), affd. 500 F. 2d 1222 (C.A. 9, 1974), this transaction too should be characterized as lease. As such petitioner claims it is entitled to deduct the payments to Boothe as rental under section 162(a)(3).6 Respondent's position is that the factual pattern presented indicates that the substance of the transaction is a conditional sale. Accordingly, respondent disallowed the rental deduction and required petitioner to capitalize the purchase price and allowed appropriate deductions for depreciation and interest under sections 167 and 163, respectively. We agree with the petitioner. There have been numerous cases which have considered whether an agreement which was in form a lease was in substance a sale for tax purposes. In making this determination we have been concerned with the economic substance of the transaction and not the form in which it was cast. This procedure is continued in the case at bar. To support his position, respondent makes a fourfold argument. His first argument cites the terms of the Boothe lease which placed the burdens of ownership on the petitioner. The Boothe lease did require petitioner, at its own expense, to repair, insure, • There is no indication of, nor does respondent allege deliberate delay in the installation of the computer. See Madison Newspapers, Inc., 47 T.C. 630, 637 (1967), which indicates that as of January 1962 such delay would have been unnecessary. SEC. 162. TRADE OR BUSINESS EXPENSES. (a) IN GENERAL.-There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business, including (3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or business, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. and pay all taxes arising out of ownership. However, in this respect the leases as described in Lockhart Leasing Co., supra at 302-306, and Northwest Acceptance Corp., supra at 838-839, which gave rise to valid leasing arrangements, are strikingly similar. Respondent argues that Boothe protected itself from risk of loss by requiring petitioner to insure the computer for an amount at least equal to the outstanding rent plus the amount necessary to exercise the option. As detailed in the findings of fact it is not until the fourth year of the lease term that Boothe is so protected. In addition, the Boothe lease itself made a specific provision that no title passed to the petitioner, and there is no indication in the record that IBM would buy back the computer from Boothe if petitioner defaulted. Respondent's second argument is that the existence of an option to purchase the property at the end of the lease term indicates a conditional sale. Respondent has cited cases in which the option price was either nominal or when added to the other payments approximated the original selling price of the property. See D. M. Haggard, 24 T.C. 1124 (1955), affd. 241 F. 2d 288 (C.A. 9, 1956); Quartzite Stone Co., 30 T.C. 511 (1958), affirmed on other grounds 273 F. 2d 738 (C.A. 10, 1959); Judson Mills, 11 T.C. 25 (1948). In this case the option price, 10 percent of the original purchase price-$291,178.30, was established after Boothe learned from IBM that this was the price for which IBM would sell the computer after 5 years. Furthermore, the option agreement does not allow any part of the payments by petitioner to Boothe to offset this price. On these facts we find the option price to be comparable with the computer's estimated fair market value at the end of the lease term. Consequently, the existence of the option does not indicate a conditional sale, and respondent's support for this argument is irrelevant. Respondent's third argument is that the sum of the rental payments and option price approximates the cost of the computer under a deferred payment plan. We find this to be unsubstantiated by the facts. In addition respondent asks us to compare the rentals paid in the first 2-2 years of the lease term ($2,678,840) with the original purchase price ($2,911,783). We find these figures to be incomparable without considering an interest factor. Respondent's final argument is that the rental payments materially exceeded the current fair rental value of the computer, especially the first half of the lease term. For support, respondent cites M & W Gear Co., 54 T.C. 385 (1970), affd. 446 F. 2d 841 (1971). In that case this Court found that the "rent" paid was more than twice the fair rental value. M & W Gear Co., supra at 394. In this case petitioner investigated the rental terms of IBM and Boothe and found Boothe's to be lower. In addition these payments were not challenged by Government auditors when the contract costs were reviewed. In this area we also consider relevant the type of property involved. During the period in issue new developments in computer technology were rapid. Obsolescence could be virtually an overnight event. We believe this accounts for the higher frontend rental payments. On these facts we find the rental payments to be comparable with the fair rental value of the computer. Based on this we also find that the payments were for the use of the computer and that petitioner was not building up any equity. Petitioner relies heavily on the recent decisions of this Court in Lockhart Leasing Co., supra, and Northwest Acceptance Corp., supra. While these cases both dealt with the lessor and the interpretation of many leases, we agree that the factual circumstances are very similar. Since these cases characterized the lessor's transactions as leases, we find them as added support for treating the lessee in the same manner. After careful consideration of the economic substance of this transaction we hold that petitioner entered into a lease agreement with Boothe to acquire the use of the computer, and therefore petitioner is entitled to deduct the payments to Boothe as rentals within the terms of section 162(a)(3). Decision will be entered under Rule 155. * HARRY AND GERALDINE GORDON, PETITIONERS V. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT Docket No. 2830-71. Filed October 31, 1974. Petitioner was a partner with his son-in-law in a legal Nevada gambling establishment. A raid pursuant to a search warrant disclosed "skimming" activities, i.e., unrecorded bets on which * Supplemental Opinion appears at 63 T.C. 501 (1975). neither Federal wagering nor income taxes were paid. Income tax Bruce I. Hochman and Harvey D. Tack, for the petitioners. HALL, Judge: Respondent determined a $177,472.60 deficiency plus an $88,736.30 fraud penalty under section 6653(b)1 in petitioners' 1967 Federal income tax return. At the call of the calendar petitioners filed a "Motion to Suppress, Strike Affirmative Allegations in Respondent's Answer and for an Order that the Burden of Going Forward is on Respondent." The parties agreed to proceed with the trial, and that on brief any evidence developed during the trial could be used in considering the motion. The issues presented are: (1) Whether the statutory assessment herein is based upon evidence which should have been suppressed because one or more of petitioner husband's constitutional rights were violated when his gambling records were seized. (2) Whether the respondent's method of determining additional partnership income of $273,782 was without foundation in fact, arbitrary, capricious, and excessive so as to shift the burden of proof to the respondent. 1 All section references are to the Internal Revenue Code of 1954, as in effect during the year in issue. |