11 T.C. 25">*25 The Commissioner determined a deficiency of $ 3,383.73 in petitioner's income tax for the taxable year ended March 31, 1940, by disallowing a deduction of $ 30,786.78 claimed by it as rentals paid for use of machinery.

Petitioner assigns as error: (a) The disallowance by the Commissioner of such amounts claimed by it to have been paid as rentals on machinery, and (b), in the alternative, avers that, if the instruments upon which the alleged rental payments were made "are to be reformed into conditional bills of sale," then petitioner should be permitted to deduct such portion of the payments made thereunder as "would represent interest."

11 T.C. 25">*26 Another issue, involving the deductibility of South Carolina State income tax claimed by petitioner in its amended petition, has been conceded by respondent in petitioner's favor.

FINDINGS OF FACT.

1948 U.S. Tax Ct. LEXIS 129">*131 Petitioner is a corporation, with its principal office at Greenville, South Carolina. The Federal income tax return for the period involved was filed by it with the collector of internal revenue for the district of South Carolina.

Petitioner, during the fiscal year, and long prior thereto and since, was a manufacturer of cotton and rayon textile products, principally the latter.

In 1925 Judson Mills was very profitable and was regarded as one of the best in the United States, but by 1938 it had become unprofitable, having lost $ 565,000 in 1937 and $ 380,000 in 1938. In December 1938 Alan B. Sibley was elected treasurer and made the general manager in complete charge of the mill's operation. He found the machinery and equipment were incapable of producing the type of goods which commanded the highest price and the greatest profit, and thereupon he took steps to modernize the machinery and equipment.

To this end he entered into negotiations with three manufacturers: The Atwood Machine Co., Crompton & Knowles Loom Works, and the Draper Corporation, from whom petitioner procured new machinery. This machinery was delivered and installed in its mill during the taxable year ended March1948 U.S. Tax Ct. LEXIS 129">*132 31, 1940, under agreements whereby the manufacturer, designated lessor, purported to lease the equipment for stipulated monthly payments, termed rentals, to petitioner, designated lessee. Prior to making these agreements, however, petitioner and the manufacturers reached a precise understanding as to how the recurrent payments should be computed and the factors entering into the totals payable, and this understanding was set forth in correspondence between them.

The terms of the first agreement, made on June 30, 1939, with the Atwood Machine Co., reflect the figures submitted by the manufacturer in a letter of June 15, 1939. In this letter aggregate payments of $ 25,958.64 were required for the first two years, of $ 25,958.52 for the next three years, and of $ 6,198.87 on exercise of the option -- all computed to include "accumulated interest at 5% at end of 5 year term $ 5,948.87." An attached schedule shows the amount of interest for each month of the first two years, diminishing as the amount of principal diminishes. The agreement itself is in substance as follows:

The Atwood Agreement: Is for a period of five years, commencing on the first day of June 1939, and expiring on 1948 U.S. Tax Ct. LEXIS 129">*133 May 31, 1944. 11 T.C. 25">*27 Lessor at its own expense is to install the machinery in the plant of the lessee prior to July 31, 1939. Lessee agrees:

1. That it will pay the Lessor at Stonington, Connecticut, as rent for the leased property the sum of $ 1,081.61 on the 1st day of June, 1939, and the sum of $ 1,081.61 on the 1st day of each and every month thereafter, up to and including the 1st day of May, 1941, and the sum of $ 721.07 on the first day of each and every month thereafter up to and including the 1st day of May, 1944.

Lessee further agrees with reference to its possession of the machinery to "safely keep and carefully use" same, to keep it insured at lessee's expense, to pay all taxes on same and keep same at lessee's plant and not remove therefrom without consent of lessor; to make all necessary repairs and maintain same in good order and condition at lessee's expense, "procuring from the lessor, at the lessor's usual selling prices, all parts for repairing the same, and insert such parts at the lessee's own cost and charge; and the lessee shall be responsible for any damage to said machines and machinery while in its possession"; to return machinery at "expiration of lease" 1948 U.S. Tax Ct. LEXIS 129">*134 in good condition, reasonable wear and tear excepted, and pay lessor for replacement of broken or missing parts. If lessee abandons property, is declared insolvent, fails to pay rent within ten days after due, or fails to pay taxes, insurance, etc., lessor "at its option may terminate lease" and take possession of machinery.

3. Failure to pay any such rental instalment for more than ten (10) days after written notice has been sent to the Lessee by the Lessor that the same has become due and payable shall cause all the remaining instalments of rent to become due and payable immediately.

4. That at the termination of this lease on May 31, 1944, but not sooner, the Lessee, it not being then in arrears for rent, taxes, parts or insurance, or in default as to any of its agreements herein contained, shall have the right and option to purchase from the Lessor the machines and machinery hereinbefore described, together with any additions or improvements which may be added thereto by the Lessee, for the sum of $ 6,198.87.

5. In the event the Lessee exercises the option to purchase, provided for in the preceding paragraph hereof, then and in that event the Lessor shall execute and deliver 1948 U.S. Tax Ct. LEXIS 129">*135 to the Lessee a bill of sale for said machines and machinery, conveying an unencumbered title to the same to the Lessee, and thereupon this lease and the liability of the Lessee for further rents shall be terminated.

6. If at the termination of this lease the Lessee does not wish to exercise its option to purchase as hereinbefore provided for, it shall, if it be not then in arrears for rent, taxes, parts, insurance, or in default as to any of its agreements hereinbefore contained, have the option to renew this lease for a period of one (1) year and from year to year thereafter on the same terms and conditions as above stated except that the rent to be paid by it to Lessor shall be $ 2,400.00 per annum, payable in equal monthly instalments.

The terms of the second agreement, made on July 3, 1939, with Crompton & Knowles Loom Works, reflect figures submitted by the manufacturer in a letter of July 18, 1939, which purports to show how 11 T.C. 25">*28 the manufacturer's comptroller "computed the figures used in the contract." This computation sets forth periodic payments aggregating $ 111,300.25, described as principal; $ 13,786.15 termed interest at 6 per cent (a total of $ 125,086.40); and 1948 U.S. Tax Ct. LEXIS 129">*136 $ 10,118.20, "amount allocated as option purchase price," which must be increased by $ 2,731.91, representing 6 per cent interest for 4 1/2 years, or "If option price extended over 6 months period -- add int. $ 177.07." The agreement itself is in substance as follows:

Crompton & Knowles Agreement: Begins October 2, 1939, (date of delivery of machinery) and to continue for a period of "four and one-half (4 1/2) years unless previously terminated or extended."

1. The Lessee shall pay as rent for the said machinery, during the original term of the lease, the sum of One Hundred Twenty Five Thousand Eighty Six Dollars ($ 125,086.00). This sum shall be paid in consecutive monthly installments, commencing with an installment payable on October 2, 1939. Each installment so payable shall equal one-twelfth of the total amount payable during each twelve-month period, beginning with the twelve-month period commencing October 2, 1939, and one-sixth of the total amount payable for any six months period; the total amounts payable during each of said periods being:

1948 U.S. Tax Ct. LEXIS 129">*137 * * * *

4. The said machinery shall, at all times during the said term or for such time as it may be extended, remain and be the sole and exclusive property of the Lessor, and the Lessee shall have no right of property or equity therein, but only the right to use the same in the manner and upon the conditions herein set forth. * * *

* * * *

VI. The Lessee, having complied with all the terms, convenants and conditions hereof, shall have the option at the expiration of the fifth period or the four and one-half years term (as above provided in paragraph III (1)) to purchase the machinery subject to this agreement (including therein any parts repaired or replaced as herein provided) by the 1948 U.S. Tax Ct. LEXIS 129">*138 payment to the Lessor of the sum of Twelve Thousand Eight Hundred Fifty Dollars ($ 12,850.00), having 11 T.C. 25">*29 previously given at least sixty days notice in writing to Lessor of its intention to exercise said option at said expiration; provided, however, that if said option shall not be so exercised, the term of this lease shall be extended from month to month until this agreement is cancelled and terminated by either Lessor or Lessee by notice in writing of at least one month by the party desiring to cancel addressed to the other and for the term of such additional months Lessee shall pay rent in advance in equal monthly installments of Two Thousand One Hundred Seventy One Dollars ($ 2,171.00) per month.

The terms and conditions in the remainder of the instrument, while differing somewhat in phraseology from the Atwood agreement, are substantially the same, except that in the Crompton & Knowles agreement lessee rather than lessor was to pay transportation and installation costs of machinery.

The terms of the third agreement, made on December 11, 1939, with the Draper Corporation, are explained in the manfacturer's letter of November 17, 1939, as requiring monthly "rental payments":

1948 U.S. Tax Ct. LEXIS 129">*139 * * * arrived at by computing 15% of the principal amount of the value of the looms [less a $ 50 allowance] * * * representing one year's rental payment, to which has been added interest at the rate of 5% per annum * * *.

Should the option payment be not exercised, you will note that the monthly rental fee for the following twelve (12) months, including interest item on the amount of the option, would amount to $ 1,621.94 for each month.

In an attached schedule that portion of each monthly payment which represents principal and that which represents interest are precisely set forth. The agreement itself is in substance as follows:

Draper Agreement: "Shall commence upon the date machinery delivered to the Lessee (f. o. b. carrier, Hopedale, Massachusetts) * * * and shall continue for the period of seven (7) years from the first rental payment date."

1. The Lessee shall pay to the Lessor rental in the amounts and on the dates below provided:

(a) on the fifteenth day of each calendar month for thirty-six calendar months, beginning with March 15, 1940, the sum of Twenty-Seven Hundred1948 U.S. Tax Ct. LEXIS 129">*140 Thirteen and 00/100 dollars ($ 2713.00);

(b) on the fifteenth day of each calendar month for twenty-four calendar months next following the last rental date under (a), the sum of Two Thousand Thirty-four and 00/100 dollars ($ 2034.00);

(c) on the fifteenth day of each calendar month for twenty-four calendar months next following the last rental date under (b), the sum of Fifteen Hundred Ninety and 00/100 dollars ($ 1590.00);

* * * *

11 T.C. 25">*30 V. The Lessee, having complied with all the terms, covenants and conditions hereof, shall have the option, at the expiration of the term of this lease, to purchase the machinery (including any parts repaired or replaced as herein provided) by the payment to the Lessor of the sum of Eighteen Thousand, Nine Hundred Fifty & 00/100 dollars ($ 18,950.00), having previously given to the Lessor at least sixty (60) days' notice in writing, as provided in Section VI below, of its intention to exercise said option at said expiration date; provided, however, that if said option shall not be so exercised, the term of this lease shall be extended from month to month until this agreement is cancelled and terminated by either the Lessor or the Lessee, by notice1948 U.S. Tax Ct. LEXIS 129">*141 in writing of at least one month given by the party desiring to cancel addressed to the other, and during the period of such extension the Lessee shall, on the fifteenth day of each month, pay rent in advance in the sum of Sixteen Hundred Twenty-One and 94/100 dollars ($ 1621.94) per month.

The remainder of the Draper agreement was substantially the same as the Crompton & Knowles agreement, except that it did not contain, as did the Crompton & Knowles agreement, option of the lessor to declare all subsequent rental payments to become due and payable if default were made in the payment of any of same.

Petitioner ultimately exercised its option of purchase and acquired title to all of the machinery used by it under the three agreements, but, before doing so, it had secured an extension of the expiration date of the Atwood agreement for two one-year periods and of the Crompton & Knowles agreement for one one-year period by paying the sums required for such extensions. This machinery is still being used by petitioner and is in good condition. When it was acquired, it was necessary for the successful and profitable operation of petitioner's mill, because there had been many changes and1948 U.S. Tax Ct. LEXIS 129">*142 improvements in textile machinery. In 1938, when operating with the old machinery, petitioner produced 19,000,000 yards of cloth with 1,900 employees; in 1947 it was producing at the rate of 60,000,000 yards a year with 2,100 employees.

On its income tax return for the fiscal year ended March 31, 1940, petitioner deducted $ 30,786.78 as rentals of machinery, paid under the three agreements. The Commissioner disallowed the deduction, "since through these payments you acquired an equity in the property." Petitioner's payments under the three agreements were not rentals of machinery, but the purchase price thereof, and, to the extent of $ 6,106.55, they were interest paid on such purchase price. The Commissioner allowed no deduction on account of the payment of interest; he allowed an uncontested deduction for depreciation of the machinery at the rate of 6 2/3 per cent.

11 T.C. 25">*31 OPINION.

(1) Did the Commissioner err in disallowing the deduction of $ 30,786.78 claimed by petitioner as rentals paid for the use of machinery in its business?

The Commissioner's disallowance was based on the ground that the petitioner, through these payments, acquired an equity in the property. Section1948 U.S. Tax Ct. LEXIS 129">*143 23 (a) (1) (A) of the Internal Revenue Code, pertaining to deductions of expenses in a trade or business, authorizes deductions for rent in this language:

* * * and 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.

Under the evidence we think that petitioner, by the payments it made on the machinery under the terms of the three contracts, did acquire an equity in the property, and that respondent's contention should be sustained.

Holeproof Hosiery Co., 11 B. T. A. 547, relied upon by the respondent, is in point. While not identically alike, the facts are strikingly similar and the principle involved is the same. There also the taxpayer was engaged in manufacturing, and for use in its business it acquired machinery under "four lease agreements" wherein it was obligated to pay monthly installments for two and one-half years, aggregating $ 24,000, at which time it could pay $ 5,674 additional, or 23 per cent in addition to the sums theretofore paid, and become the owner1948 U.S. Tax Ct. LEXIS 129">*144 of the machinery.

Here, under the Atwood contract, petitioner was obligated to pay in five years, by monthly installments, the total sum of $ 51,915, whereupon it had the option of paying an additional sum of $ 6,198.87, or 12 per cent additional to the sums theretofore paid, and become the owner of the machinery. In the Crompton & Knowles agreement the monthly payments covered a period of four and one-half years, aggregating $ 125,000, when it had the option of paying an additional sum of $ 12,850, or 11 per cent additional, and become the owner, while in the Draper contract the term of payment was seven years, when the monthly payments would aggregate $ 184,644, and by paying $ 18,950, or 9 per cent additional, it could become the owner.

In Holeproof Hosiery Co., supra, the life of the machines was not shown by the evidence, but they were still in use 5 years after the taxable year. Here it appears that the life of the machines, except for obsolescence, was 12 years, according to testimony of petitioner's 11 T.C. 25">*32 manager, and was determined to be 16 years, and at the date of the hearing in this proceeding (more than 7 years after the taxable year) 1948 U.S. Tax Ct. LEXIS 129">*145 all machines were still in use, in good condition, and evidently giving good service, since at that time the mill, with 2,100 employees, was producing 60,000,000 yards of goods a year, compared with 19,000,000 yards produced by 1,900 employees prior to the installation of the machinery.

In the Holeproof case it was said:

* * * We do not know at what amount the machines could be rented on the open market, but we know that the total amounts to be paid under the lease agreements before the title to the machines was to pass to the petitioner exceeded but slightly the stated value of the machines, and it is inconceivable that the petitioner was not acquiring something of value, that is, a certain equity in the machines, with each payment made in accordance with the agreement. * * *

The same can be said of the facts in the instant case, and we accordingly hold that at the end of the taxable year involved "petitioner had a substantial equity in these machines," and under the quoted section of the code rental payments therefor are not deductible. In support of this holding see also Alexander W. Smith, Jr., Executor, 20 B. T. A. 27, and Helser Machine & Marine Works, Inc., 39 B. T. A. 644.1948 U.S. Tax Ct. LEXIS 129">*146

We can not agree with petitioner that this case is distinguishable from the Holeproof case because (a) the taxpayer there was required to pay rentals for a shorter period (two and one-half years); (b) the Holeproof contract contained no right to extend the lease for any period after the expiration of the two and one-half years, and (c) that the evidence here manifested more clearly an intention on the part of petitioner to lease or rent, rather than to buy. As to (a) and (b), these are details differing from the instant case, but they do not change or affect the essential facts or the underlying principle inherent in both cases. As to (c) it matters not whether the contract was in the form of a lease or a conditional sale, or what was the intention of the parties; if, under the terms of the contracts by which the payments were made, the petitioner acquired an equity in the machinery, which we so find, the payments would not be deductible, due to the limitation prescribed in the code.

Neither do we discern the applicability of Gilken Corporation, 10 T.C. 445, cited by petitioner. The question there was whether payments received were taxable income1948 U.S. Tax Ct. LEXIS 129">*147 as rent in the current year, or whether, under the option, they might be later applied as part of the purchase price, and become taxable then. Here the question is 11 T.C. 25">*33 not one of payments received, but of deductions claimed for rent paid which are not deductible because of the equity acquired.

The explanation or break-down of the consideration to be paid, contained in the letters from the manufacturing vendors and computations attached thereto, showing what part of the payments covered the price or value of the machines and what part covered interest, further strengthens our conviction that the petitioner was acquiring, not merely the right to use the machinery, but was either taking title to it, or, in any event, under the payments did acquire a substantial equity in its ownership. Under Helser Machine & Marine Works, supra, "a right to take title to the property" is of itself sufficient to defeat petitioner's contention. Undoubtedly such a right is here shown.

The respondent did not err in disallowing the deductions claimed for rent.

(2) In the alternative, petitioner contends that, if not entitled to deduction for rent, it is entitled to a1948 U.S. Tax Ct. LEXIS 129">*148 deduction for interest paid. Specifically, it asserts that "the payments accrued or paid by the petitioner during the taxable year on account of said machinery agreements include interest in the amount of $ 6,106.55," which is deductible from its gross income under section 23 (b) of the code.

The evidence sustains this contention. While the contracts were silent as to interest, the letters from the manufacturing vendors and attached computation of figures relating to each of the three contracts disclosed how the total consideration was arrived at in each and specified in dollars and cents what payments under each of the contracts were principal and what payments thereunder constituted interest. The sums payable as interest within the taxable year under the contracts are therein disclosed. These letters and computations were used in the negotiation of the contracts, and they formed the basis on which the respective manufacturing vendors agreed to deliver the equipment to petitioner and on which petitioner agreed to receive and pay for same, and based thereon the contracts were executed. The real consideration for each contract is shown therein.

The omission from the contracts 1948 U.S. Tax Ct. LEXIS 129">*149 of any stipulation concerning interest did not preclude petitioner from making this extraneous proof, nor does it prevent us from considering it.

As a general rule the recitals of a written instrument as to the consideration are not conclusive, and it is always competent to inquire into the consideration and show by parol or other extrinsic evidence what the real consideration was. [32 Corpus Juris Secundum, section 948, and authorities there cited of Federal 11 T.C. 25">*34 courts and from many state courts, including two from South Carolina, viz: Halsey v. Minnesota-South Carolina Land & Timber Co., 177 S.E. 29; Woodrow v. Frederick, 131 S.E. 598.]

The essential facts here are the same as those in Hudson-Duncan & Co., 36 B. T. A. 554, relied upon by petitioner. There, as here, the payments made were lump sum payments, based upon a written contract which did not apportion or allocate payments made thereunder between principal and interest. There, as here, in negotiating the written contract, it was shown by extrinsic evidence that the amount stated in the contract was not all principal, 1948 U.S. Tax Ct. LEXIS 129">*150 but was the aggregate of the two items of principal and interest. Satisfactory proof having been made that under the agreement of the parties to the contract a definite part of each payment was in fact interest, such amounts paid within the calendar year were held deductible from the taxpayer's gross income. The facts here warrant the same conclusion.

The fact that the contract in the Hudson-Duncan case contained a recital "that the total purchase price includes interest," while in the instant case the contracts are completely silent as to interest, does not require a different result. Recitals in a written contract as to consideration are not conclusive. The determination of the issue rests upon the evidence as a whole.

In Elliott Paint & Varnish Co., 44 B. T. A. 241, cited by respondent, the written contract stipulated that the payments in question were "without interest," and yet we held that parol evidence was admissible to show the true agreement of the parties as to whether interest was included, although it would tend to vary the terms of the written contract. However, it was there held that the evidence as a whole did not establish that1948 U.S. Tax Ct. LEXIS 129">*151 the actual agreement of the parties as to interest was different from that expressed in the written contract, and hence the claim for interest deduction was denied. The opinion analyzes the evidence and points out its insufficiency to establish outside the contract an agreement between the parties that interest was intended to be paid. Referring to the extrinsic evidence by which the taxpayer sought to make such proof, the opinion, after stating there was no evidence that the value of the property was $ 27,500 and that the seller had in fact rejected an offer of that amount in cash, said:

* * * The parties, in agreeing upon the purchase price of $ 40,000, as set forth in their written contract, used some kind of a rough calculation in which interest on $ 27,500, at some rate not shown in the record and for a period of years not shown in the record, was computed and added to $ 27,500 to arrive at a figure which was approximately, but not exactly, $ 40,000. The only actual 11 T.C. 25">*35 figures contained in the record pertaining to any such computation are on a piece of paper which the seller had in her hands and which had been furnished her by an adviser who was with her at the time 1948 U.S. Tax Ct. LEXIS 129">*152 the sale was made. * * *

Clearly the terms of a written contract could not have been impeached by such vague and uncertain evidence.

In the instant case, there is an absence of vagueness and uncertainty. The record here, as we have pointed out, shows that, as part of the consideration, a definite understanding and agreement was had between the parties to the contracts as to what portion of the payments constituted interest. The facts here are clearly distinguishable. Petitioner's claim for deduction of interest paid is allowed.

Decision will be entered under Rule 50.

Murdock, J., dissenting: The petitioner is not entitled to any deduction for interest. The machinery manufacturers computed imaginary interest in arriving at the amounts they would demand of the petitioner for the use of the machines, but the petitioner owed no debt, did not agree to pay interest and paid no interest.

Disney, J., dissenting: I can not agree with the majority that the monthly amounts paid by the petitioner were not deductible as rentals. In my view, the fact that there were options to purchase at the end of the rental period involved is given inordinate weight. The question1948 U.S. Tax Ct. LEXIS 129">*153 is, What was the primary purpose of the agreement? Gilken Corporation, 10 T.C. 445; Indian Creek Coal & Coke Co., 23 B. T. A. 950; Hirsch Improvement Co. v. Commissioner, 143 Fed. (2d) 912. I think the primary purpose was rental, not passage of title to the property. It should be noticed that we have here a question of deduction in 1940, the year the contracts were initiated, and that in two of the three leases the terms of the leases expired without exercise of the options, though they were exercised later. In the Atwood agreement it was not until the third rental period, i. e., after two extensions, that the option was exercised, while in the Crompton & Knowles contract exercise was in the first extension. Is the mere possibility of such exercise of option during the initial lease periods to determine this question, though, in fact, the lease periods had expired (in the two cases)? Note that nothing in the contracts gave a right to purchase the property during extended periods of rental, but the exercise was to be at the end of the original period. Thus, we see that in the two1948 U.S. Tax Ct. LEXIS 129">*154 11 T.C. 25">*36 cases the petitioner lost its right to the option at the end of the primary term. To hold, nevertheless, that such option gave equitable right in the property seems to me to lack logic. In Rotorite Corporation v. Commissioner, 117 Fed. (2d) 245, the Circuit Court reversed because it considered that "no one could doubt but that Sunbeam's 1935 payments were made on the expectation that it would soon make its election and thus give to all of its payments purchase money status." Surely the same can not be said here, where the exercise of option was, in fact, never (in two cases) availed of during the primary lease, but, in fact, the right thereto was forfeited. In McEwen v. Totten, 164 F. 837, property was, early in 1906, rented for about eight months at $ 100 a month, purchaseable for $ 2,100 on January 1, 1907. The payments of $ 100 a month continued for several months in 1907. The court considered this as indication that the contract did not pass title.

Moreover, this is not a case where the monthly rentals were to be applied on purchase, with no additional payment or only a nominal one, as in cases1948 U.S. Tax Ct. LEXIS 129">*155 ruled on. In Alexander W. Smith, Jr., Executor, 20 B. T. A. 27, $ 10 was payable in addition to the periodic payments, and in Helser Machine & Marine Works, Inc., 39 B. T. A. 644, title was to pass when the periodic payments were all made. Here a very substantial amount, perhaps all the property was then worth, was to be paid under the option. Also, there was here no valuation of the property in the original contract, such as the setting of the $ 26,650 total value in Holeproof Hosiery Co., 11 B. T. A. 547.

I note too that in the Atwood agreement the lessee was responsible for damages, and that if the lessee is declared insolvent, the lessor may take possession. The terms and conditions of the Crompton & Knowles agreement are said to be substantially the same, and the Draper agreement is referred to as similar to that with Crompton & Knowles. In my view, such provisions for collection of damages and possession of the property on insolvency are contrary to ideas of passage of title. If the lessor can take the property against a trustee in bankruptcy, can title for the present purpose 1948 U.S. Tax Ct. LEXIS 129">*156 be considered passed? I think not. In Gotthold v. Crompton & Knowles Loom Works, 4 Fed. (2d) 50, there was lease of looms with agreement that if rent was paid lessor was to sell at a nominal stipulated sum. It was held that the lessor was entitled, upon lessee's bankruptcy, to return of looms, or payment therefor. Collier on Bankruptcy, 3d Ed., p. 1222, says on the subject:

1505. Property leased with privilege of purchase. -- The question frequently arises whether title passes to the purchaser under a contract whereby the purchaser 11 T.C. 25">*37 agrees to pay a stipulated amount as rental for the article sold, such amount to be applied upon the purchase price. It is generally held that if the agreement provides for the surrender of the property at the expiration of a designated term, or the purchase of such article at such time, it does not operate as a conditional sale but is a bailment and therefore the "lessor" may reclaim the article upon the bankruptcy of the lessee, prior to the exercise of the option to purchase. * * *

See also Jacquard Knitting Machine Co. v. Vennell, 59 Fed. (2d) 496, holding that1948 U.S. Tax Ct. LEXIS 129">*157 where there was agreement for rentals and for purchase, but the property was to be returned to owner in case of bankruptcy, there was bailment and future sale.

I would, for the above reasons, allow the deduction of payments and I, therefore, respectfully dissent.