MEMORANDUM OPINION
The Commissioner determined deficiencies in the income taxes of Alan Glickman and Renee C. Glickman, husband and wife, as follows:
| Year | Deficiency |
| 1983 | $ 39,286 |
| 1984 | 38,300 |
He also determined deficiencies in the income taxes of Mitchell Sussman and Lynne Sussman, husband and wife, as follows:
| Year | Deficiency |
| 1983 | $ 26,832 |
| 1984 | 39,977 |
At the time the joint petition herein was filed, the Glickmans resided in Pennsylvania, and the Sussmans in New Jersey. The case was submitted on the basis of a stipulation of facts and exhibits pursuant to our
At issue is whether each pair of petitioners is entitled to an investment tax credit (ITC) with respect to six intercity buses that the*18 husbands (referred to sometimes hereinafter as Sussman or Mitchell, and Glickman or Alan, respectively) purchased on April 18, 1983, and which they leased on May 1, 1983, to a family corporation, Starr Transit Co., Inc. (Starr Transit). The year 1984 is involved only by reason of carryovers.
Starr Transit is a New Jersey corporation incorporated in 1948 for the purpose of engaging in the business of transporting persons and goods by motor carrier. Sussman and Glickman appear to have dominated the management of its business during the period here involved. Sussman is Starr Transit's president, and Glickman its vice president, secretary, and treasurer. On May 1, 1983, Sussman and Glickman were two of its three directors. The third director was Shirley Sussman-Klein (Shirley). Shirley was the widow of Gilbert G. Sussman (Gilbert), who died in 1969. Shirley and Gilbert were the parents of petitioner Mitchell Sussman. Gilbert was also the father of petitioner Renee Glickman by a marriage prior to his marriage to Shirley, who adopted Renee as her daughter. Mitchell Sussman, Alan Glickman, and Shirley continued to serve as the directors of Starr Transit as of the time the stipulation*19 herein was entered into in November 1990.
On May 1, 1983, Starr Transit had only one class of stock issued and outstanding. Shirley owned 36.14 percent of the stock. The remaining 63.86 percent was held by a family trust created by Gilbert's will. On May 1, 1983, Shirley was acting as the sole trustee. Pursuant to the terms of Gilbert's will, Shirley is the life beneficiary of the trust. As simplified to the extent relevant herein, the remainder is divided into three equal parts, two of them for Mitchell and Renee, and the third for Ellen Croen, the sister of Mitchell and the half-sister of Renee.
On or before January 2, 1980, the board of directors of Starr Transit determined that it should take steps to acquire additional buses for use in its business, and that there was a need to retain cash for the eventual funding of such acquisitions. Also at that time, Starr Transit began to consider leasing buses from third parties rather than purchasing additional buses for its fleet, and obtained proposed lease terms from such third parties. However, the record does not show whether it thereafter (or even prior thereto) leased any buses from any third parties.
On May 1, 1983, Sussman*20 and Glickman 2 leased the six buses involved herein to Starr Transit for a stated term of 53 months, one month less than half of their useful life of 108 months or 9 years. They had purchased these buses on April 18, 1983, for $ 860,670.90. They paid only $ 11,000 of the purchase price in cash, and financed the remaining $ 849,670.90 with a note in that amount to a bank, secured solely by a security interest in the buses without guaranty or other security given by Starr Transit or anyone else.
Beginning in 1980, and prior to leasing the six buses here at issue on May 1, 1983, Sussman and*21 Glickman had leased 14 other buses to Starr Transit. In 1980, they thus leased three buses, one each by Sussman and Glickman individually, and the third by both acting together. During 1981 Sussman and Glickman, acting either individually or jointly, leased five buses to Starr Transit. During 1982 they leased six additional buses to Starr Transit, four of them in January and February, and two in April.
The leases of all 14 of the buses entered into during the period 1980-1982 had stated terms of 47 months, except the last lease, which had a stated term of 53 months.
Upon expiration of the stated terms of all of the leases, (apart from those involving two of the buses leased in 1980), 3Starr Transit continued to lease on a month-to-month basis all of the other 18 buses -- the six involved herein and 12 of those leased in prior years. The six buses leased in 1983, which are here in issue, were still being used by Starr Transit on a month-to-month basis when the stipulation of facts herein was entered into by the parties in November 1990. The monthly rental for these six buses remained the same following the end of the stated lease term on September 30, 1987. In the case *22 of 13 of the 14 buses leased earlier, the extended month-to-month periods ranged from about 16 months to 45 months. 4 After Starr Transit ceased using the buses on a month-to-month basis, they were sold to various parties, none of whom was related to Starr Transit or to any of the petitioners. The record does not show that Starr Transit leased any buses from anyone other than Sussman and Glickman. Nor does it show that Sussman and Glickman leased any buses to anyone other than Starr Transit except upon the premature termination of two of the 1980 leases and in one instance upon the termination of Starr Transit's month-to-month tenancy that followed the expiration of the fixed term of its lease of that bus. Upon termination of Starr Transit's month-to-month tenancy in respect of each of the remaining 11 buses, Sussman and Glickman promptly sold each bus.
*23 On their tax returns for 1983, petitioners claimed investment tax credits with respect to the six buses they had purchased on April 18, 1983, and leased to Starr Transit on May 1 of that year. The Commissioner determined that petitioners were not entitled to any of these investment tax credits, because "it has not been established that the requirements of
(3) Noncorporate lessors. -- A credit shall be allowed by
(A) the property subject to the lease has been manufactured or produced by the lessor, or
(B) the term of the lease (taking into account options to renew) is less than 50 percent of the useful life of the property, and for the period consisting of the first 12 months after the date on which the property is transferred to the lessee the sum of the deductions with respect to such property which are allowable to the lessor solely by reason of
The Commissioner contends that
The requirements of
The Commissioner and petitioners agree that the useful life of the six buses leased in 1983 *26 is nine years (108 months), that the stated, fixed term of the lease pertaining to those buses was for 53 months, and that the lease did not contain any provision relating to any option to renew. Since one-half of the 108-month useful life is 54 months, the parties have stipulated that "the stated, fixed term of the Lease is * * * less than half of the useful life of the Buses." If that's all there were to this case, petitioners would plainly be entitled to prevail. However, as will appear shortly,
We are faced at the outset with the same burden of proof and burden of going forward issue that was presented and dealt with in
It is hornbook law that the burden of proof is on the taxpayer, as shown in the oft-cited case of
(b) Burden of Proof: The fact of submission of a case, under paragraph (a) of this Rule, does not alter the burden of proof, or the requirements otherwise applicable with respect to adducing proof, or the effect of failure of proof. [Fn. ref. omitted.]
In evaluating all the facts and circumstances to be considered*29 to determine whether a lease is to be treated in substance as operative for an indefinite term rather than being limited to a fixed term stated in the lease, there has developed among the decided cases the so-called "realistically contemplated" test. In short, the burden is on the taxpayer to establish that the parties to the lease realistically contemplated that the property would not continue to be leased for a period equal to or greater than one-half its useful life. Thus, it was held in
The "realistically contemplated" (or "realistic contemplation") test*30 has been approved and applied in a number of cases regardless of whether "the taxpayer relies upon the stated fixed term in a lease or whether he seeks to show that a lease without a fixed term was really contemplated to last only for a limited period that is in compliance with the statutory requirement."
*31 In our consideration of whether the 1983 lease here in controversy was in fact intended to be indefinite notwithstanding its stated term, we apply the substance versus form principle as articulated in the "realistically contemplated" test. In so doing, we find it helpful to consider the record in the light of the eight factors or types of facts and circumstances which in the past have aided us in determining whether a lease term was indefinite, and which were listed in
(1) An established practice on the part of the lessor of buying equipment for lease in order to meet the special needs of the lessee [Citations omitted.] (2) the lessor has control of the lessee [Citations omitted.] (3) the lessor leased only to the controlled lessee [Citations omitted.] (4) the lessee leased only from the lessor [Citations omitted.] (5) the leases were renewed either automatically or without renegotiation [Citations omitted.] (6) the equipment was sold once the lessee no longer needed it [Citation omitted.] (7) the purpose of the leasing arrangement was tax avoidance [Citations omitted.] and (8) the leasing was a*32 "financing arrangement." [Citation omitted.]
We now consider each of these factors as applied to the present case.1. During the 4-year period 1980-1983, Sussman and Glickman leased 20 buses to Starr Transit, all obviously to meet the needs of the lessee. However, there is no explicit evidence in the record one way or the other whether they purchased all of those buses for that purpose. Moreover, there is no evidence or even any indication that Starr Transit obtained any buses during this period either by lease or purchase from any other source.
2. We are satisfied that Sussman and Glickman had control of the lessee. To be sure, such control did not rest upon stock ownership. However, the lessee is a family corporation, and they were its president, vice president, secretary, and treasurer. They were also two of its three member board of directors; the third was the mother. She also owned about one-third of the stock and was the sole trustee of a family trust that owned the remaining stock. She was the life beneficiary of the trust, and the three remaindermen were Sussman, his sister petitioner Renee Glickman, and another sister. Although it is quite true that the*33 mother, through her ownership of about one-third of the stock and power over the remaining stock as trustee, could technically control the corporation, there is nothing whatever in the record to suggest that Sussman and Glickman were not in truth and in fact actually in control of its affairs. It is actual control, not record ownership of stock, that is significant. Cf.
3. As already noted, petitioners Sussman and Glickman leased 20 buses to Starr Transit over the 4-year period ending with the tax year 1983. The record shows that they leased only three buses to any lessee other than to Starr Transit, but even those three had first been leased to Starr Transit, and were thereafter leased or sold to an unrelated party after Starr Transit*34 had ceased using them.
4. Again, we refer to the 20 buses leased to Starr Transit. The record is devoid of any suggestion that it leased from anyone other than Sussman and Glickman.
5. Apart from the leases of two buses leased in 1980, the leases on the remaining 18 buses were renewed on a month-to-month basis either automatically or, as far as appears in the record, without renegotiation.
6. All of the buses that Starr Transit ceased using were sold immediately thereafter except for the three buses described above in our comment on the third factor, which were thereafter leased to another party prior to eventual sale.
7. There is much to indicate that the purpose of the 53-month term lease was tax avoidance. In the first place, it requires no imagination to discern that the unusual 53-month period is but one month short of 50 percent of the 9-year useful life of the buses. Why such an odd number as 53, other than its usefulness in an attempt to nail down the tempting investment tax credit? That it was nothing more than a transparent tax avoidance device is confirmed by the month-to-month retention of the buses at the same rental upon the expiration of the 53-month term. *35 6
8. The leasing per se was not a "financing arrangement", although we note that the purchase price of the buses was $ 860,670.90, and that Sussman and Glickman paid only $ 11,000 in cash and financed*36 the remaining $ 7 849,670.90 with a note to a bank that was secured solely by a security interest in the buses.
We emphasize again that the burden of proof was upon petitioners, not upon the Government, and after considering the entire record we are fully satisfied that petitioners have not carried their burden of proof. In the circumstances, we find as a fact that the parties to the 1983 lease of the six buses in issue realistically contemplated that the buses were to be under lease to Starr Transit for an indefinite period.
Petitioners have relied extensively upon
Decision will be entered for respondent.
Footnotes
1. All Rule references are to the Tax Court Rules of Practice and Procedure. All section references are to the Internal Revenue Code as amended and in effect for the taxable year at issue.↩
2. Sussman and Glickman sometimes used the trade names, "Starr Associates I" and "Starr Associates II", respectively, when they leased buses to Starr Transit. Since these trade names do not appear to be of any consequence here, all activities entered into by Sussman and Glickman will be referred to herein simply as having been conducted by them as individuals rather than by the fictitious entities suggested by the trade names.↩
3. As to the two buses leased in 1980 referred to above, the leases were terminated on or before April 9, 1983, before the expiration of their respective terms, and those buses were then leased to an unrelated party for terms of 16 months each. Upon expiration of the 16-month terms, such leases were renewed on a month-to-month basis, and the buses were ultimately sold to that lessee. ↩
4. The remaining bus continued to be held by Starr Transit on a month-to-month basis for 2 months.↩
5. As we noted in
Borchers v. Commissioner, 95 T.C. 82">95 T.C. 82 , 95 n.6 (1990), affd.943 F.2d 22">943 F.2d 22 (8th Cir. 1991), the court inMcNamara v. Commissioner, 827 F.2d 168 (7th Cir. 1987) , vacating and remandingT.C. Memo. 1986-300 , is the only court that has rejected the "realistically contemplated" test, and substituted therefor a test requiring the Government to show that the arrangement was a "sham". However, McNamara has been in turn explicitly rejected byConnor v. Commissioner, 847 F.2d 985">847 F.2d 985 , 989 (1st Cir. 1988), affg.T.C. Memo 1987-223">T.C. Memo. 1987-223 , andSchiff v. United States, 942 F.2d 348">942 F.2d 348 , 353 (6th Cir. 1991), and the "realistically contemplated" test has been followed in an impressive number of cases. Moreover, as the Sixth Circuit pointed out, the McNamara rule is "inappropriate because it shifts the burden of proof to the government, * * * ignoring the thrust ofRule 142(a), Tax Court Rules of Practice and Procedure * * * (taxpayer bears burden of proof in protesting deficiency assessed by Commissioner)".Schiff v. United States, supra↩ at 352 .6. Except for the last lease in 1982, all of the pre-1983 leases were for terms of 47 months, an odd or unusual period of time for a lease. However, simple arithmetic discloses that a 47-month term is just one month short of 48 months, a period that is precisely 50 percent of 8 years (or 96 months). This strongly suggests that the buses covered by those earlier leases were then thought to have a useful life of 8 years. We have no issue before us relating to the pre-1983 years, and do not undertake to pass upon them, except to note that they may indicate a pattern of crafting leases just one month short of the desired 50 percent of the then-estimated useful life followed by a month-to-month tenancy upon expiration of the fixed term. However, we have not relied upon this consideration in reaching our decision herein.↩