54 T.C. 301">*301 Respondent determined deficiencies in petitioner's income taxes for the fiscal years ended September 30, 1962, and September 30, 1964, in the amounts of $ 28,293.98 and $ 70,429, respectively.

One of the issues raised by the pleadings has been disposed of by agreement of the parties leaving for our decision whether petitioner is entitled for the years here in issue to an investment credit provided for under section 38, I.R.C. 1954, ¹ with respect to certain property which it acquired for the use of other persons1970 U.S. Tax Ct. LEXIS 210">*212 in accordance with the terms of agreements entitled "Equipment Lease Agreements."

FINDINGS OF FACT

Some of the facts have been stipulated and are found accordingly.

Lockhart Leasing Co. (hereinafter referred to as petitioner) is a corporation organized on October 18, 1961, under the laws of the State of Utah. Its principal place of business at the time of the filing of the petition in this case was in Salt Lake City, Utah. Petitioner filed its Federal corporate income tax returns for its fiscal years ended September 30, 1962, and September 30, 1964, with the district director of internal revenue at Salt Lake City, Utah.

All of petitioner's outstanding capital stock is owned by Lockhart Corp. which is also a corporation organized under the laws of the State of Utah. The principal business activity of Lockhart Corp. is the ownership of stock of other corporations all of which have the word "Lockhart" in their name. During the years here in issue Lockhart 1970 U.S. Tax Ct. LEXIS 210">*213 Corp. owned the stock of 15 other corporations, and 10 of these had names which included the word "loans."

During the years here in issue petitioner's business activities consisted of the purchase of personal property for use of other persons in 54 T.C. 301">*302 accordance with an agreement between petitioner and the other person entitled "Equipment Lease Agreement." Generally, the other person who wished to use the equipment would apply to petitioner for a lease of the equipment and arrangements with respect to the type of equipment to be leased would be made before petitioner would purchase the equipment which would become the subject of the lease. In many instances the person who was to use the equipment would contact the manufacturer or vendor and discuss with the manufacturer or vendor the type of equipment desired and the price of the equipment before making application to petitioner for leasing of the machinery or equipment. Petitioner did not maintain an inventory or stock of equipment for rental and maintained no facilities of its own for storage or repair of equipment. From time to time when petitioner had on hand equipment which had been returned at the end of the rental period1970 U.S. Tax Ct. LEXIS 210">*214 stated by the lease or prior thereto because of a termination of the lease prior to its term, such equipment would be stored in warehouse space rented by petitioner until it could be made the subject of another lease or sold. Petitioner provided a printed form to persons desiring to lease equipment from it entitled "Application for Leasing of Machinery and Equipment." This form carried a space for the name, address, and telephone number, type of business, and number of years in business of the applicant. Under the designation "Machinery and Equipment We Wish to Lease," it provided a space for the name of the manufacturer and a description of the items of equipment and cost of the equipment with the notation "(Attach Proposal, if available)." Under this same designation was a space for estimated delivery date, "Terms of Lease Desired     Years," and "We would like to make an initial rental of $     and Pay Balance in     Months." There was a designation on the application entitled "Financial Information," which provided for attachment of balance sheets and profit-and-loss statements for the 3 years prior to the lease and interim balance sheet and profit-and-loss statement1970 U.S. Tax Ct. LEXIS 210">*215 for the current year. Spaces were provided to list principal concerns from whom the applicant purchased and the applicant's banks.

During the fiscal year ended September 30, 1962, petitioner executed 32 equipment lease agreements with various persons, and during its fiscal year ended September 30, 1964, it executed 111 such leases. Twenty-nine of the leases executed in petitioner's fiscal year 1962 and all of the leases executed in its fiscal year 1964 were on a printed form which was entitled "Equipment Lease Agreement." On this form there were blank spaces for the lease number and for the name of the lessee. Blank spaces were also provided for the name of the State in 54 T.C. 301">*303 accordance with the laws of which the lease should be construed, the date of execution of the lease, the signature of the lessee, and the signature of the individual executing the lease on behalf of petitioner. Otherwise the agreement consisted of a standard printed form divided into 12 different paragraphs, a number of which contained 2 to 5 subparagraphs.

Paragraph I of the agreement provided that in consideration of the covenants contained in the provision, the lessor "agrees to lease to Lessee and1970 U.S. Tax Ct. LEXIS 210">*216 Lessee agrees to hire from Lessor such unit or units of equipment" described in the equipment-lease schedule to be attached to and become a part of the agreement and referred to in the agreement as "Unit."

Paragraph II provided for the "Term, Rent and Payment" and contained the provision that the period of the lease should be for the term specified in the schedule attached and that the amount of the rental should be as set forth in the schedule. This paragraph provided that as additional rental the lessee should pay all license fees, assessments and sales, use, property and other tax or taxes imposed by any State, Federal, or local government upon any unit, whether such license fees or taxes were billed to the lessor or lessee.

Paragraph III provided for a desposit upon delivery of each unit of equipment as specified in the schedule attached to the agreement.

Paragraph IV was entitled "Reports," and provided for notification by the lessee to the lessor of any accident with respect to the equipment or any improper functioning of the equipment and for notice to the lessor with respect to any tax lien which anyone might be attempting to attach to the equipment and with respect to the1970 U.S. Tax Ct. LEXIS 210">*217 movement of the equipment from one location to another. This paragraph also provided that upon request the lessee would deliver to the lessor its most recent financial report.

Paragraph V was entitled "Service," and provided that the lessee would pay for and provide all repairs including parts and supplies for the equipment and at its expense maintain the equipment in good operating order and repair and maintain on the equipment any insignia or identification furnished by the lessor and not remove such insignia or identification without the written consent of the lessor. This paragraph provided that the lessee would not, without the consent of the lessor, affix or install any accessories, equipment, or devices on any leased equipment and that the lessee "agrees (1) that each Unit is of a size, design, capacity and manufacture selected by Lessee, (2) that Lessee is satisfied that the same is suitable for its purposes." This paragraph provided that the lessor "is not a manufacturer" or dealer in property of the kind being leased and that lessor "does not hereby 54 T.C. 301">*304 make, any representation or warranty or covenant with respect to the merchantability, condition, quality, durability1970 U.S. Tax Ct. LEXIS 210">*218 or suitability of any" of the equipment in connection with or for the purposes and uses of the lessee and that the lessor "assigns to Lessee, for and during the term of this Agreement, any applicable factory warranty, express or implied, issued on or applicable to any" equipment.

Paragraph VI was entitled "Use and Operation," and carried the provision that the "Lessee will not use, operate, maintain or store" the equipment improperly, or carelessly or in violation of any regulatory laws or use the equipment other than in a manner contemplated by the manufacturer thereof or assign the lease agreement or sublease any unit without the consent of the lessor. This paragraph provided that the lessee assumed all risk and liability for the equipment and for the use and operation and storage thereof and for injuries or death of persons and damage to property arising from the use of the equipment, and that the lessee would hold the lessor harmless from all damages, losses, or claims arising from such use.

Paragraph VII was entitled "Insurance" and provided that the lessee would maintain at its expense insurance on the equipment as specified in the schedule attached to the agreement and in 1970 U.S. Tax Ct. LEXIS 210">*219 no event less than the "Stipulated Loss Value" specified in the schedule and would maintain public liability and property damage insurance with respect to the unit which would name both the lessor and lessee as insured.

Paragraph VIII was entitled "Damage to Equipment" and provided that the lessee assumed all risk of loss, theft, or destruction of or damage to the equipment. This paragraph provided that if the insurance did not cover in full damage to the equipment, the lessee would repair or replace the equipment and the proceeds of the insurance recovered would be applied to the cost of such repair or replacement. This paragraph also provided that should the amount of any insurance recovery received exceed the "stipulated loss value" the excess would be paid by the lessor to the lessee.

Paragraph IX was entitled "Return of Equipment" and provided that the lessee agreed, by the acceptance of the equipment, that such equipment was in good operating order, repair, condition, and appearance and at the expiration or sooner termination of the term pertaining thereto, it would return the equipment to the lessor free of all advertising or insignia placed thereon and in the same operating1970 U.S. Tax Ct. LEXIS 210">*220 order, repair, condition, and appearance as when received, excepting only for reasonable wear and damage by any cause covered by collectible insurance, and would pay for any repairs necessary to restore the equipment to its original condition except for such wear and tear. This paragraph provided that the lessee would return the equipment to the 54 T.C. 301">*305 lessor in the same city in which the lessee received the equipment or ship the same at the lessor's direction, freight collect.

Paragraph X was entitled "Default" and provided in part as follows:

X. DEFAULT: (a) Should Lessee default in the payment of any sum to be paid hereunder, or fail to perform at the time and in the manner herein specified any term or covenant in this Agreement or any Schedule or supplement hereto, and such default continue for ten (10) days after receipt by Lessee of written notice of such default, or should Lessee commit an act of bankruptcy or be the subject of any proceeding under the Bankruptcy Act or become insolvent (that is, unable to pay its debts as they fall due), or should any substantial part of Lessee's property be subject to any levy, seizure, assignment, application or sale for or by any creditor1970 U.S. Tax Ct. LEXIS 210">*221 or governmental agency, Lessor (1) may take possession of all of the equipment leased hereunder (damages occasioned by such taking of possession are hereby expressly waived by the Lessee), and thereupon Lessee's right to the possession thereof shall terminate, and Lessee shall remain and be liable for the payment of the "Total Rent" therefor, and all such rent shall become due and payable forthwith, * * *

(b) No right or remedy conferred upon or reserved to the Lessor by this Agreement shall be exclusive of any other right or remedy herein or by law provided; all rights and remedies of Lessor conferred upon Lessor by this Agreement or by law shall be cumulative and in addition to every other right and remedy available to Lessor.

Paragraph XI was entitled "Quiet Possession," and contained covenants that the lessor was the lawful owner of the equipment leased and that the lessee would upon the conditions contained in the lease have peaceable and quiet possession of the property.

Paragraph XII entitled "Miscellaneous," provided that "Nothing herein contained shall give or convey to Lessee any right, title or interest in and to any Unit leased hereunder except as a Lessee." This paragraph1970 U.S. Tax Ct. LEXIS 210">*222 further provided that the obligations of the lessor should be suspended to the extent it was hindered or prevented from complying therewith by labor disturbances (including strikes and lockouts), war, Acts of God, fires, storms, accidents, governmental regulations or interference, or any cause whatever beyond its control. This paragraph further provided that no obligation of the lessor should survive the term of the lease or sooner termination of the lease and should the lessor permit the use of the unit beyond the terms specified therefor, the obligation of the lessee should continue and such permissive use should not be construed as a renewal of the term thereof nor as a waiver of any right of continuation of any obligation of the lessor and that the lessor might take possession of any such unit at any time upon demand after 30 days' notice. This paragraph also contained the provision that if any portion of the lease was contrary to the laws of any State, it should not invalidate the remaining portion and contained a statement that the agreement "shall be construed in accordance with the laws of the state of    ."

54 T.C. 301">*306 The "Equipment Lease Schedule" which was referred1970 U.S. Tax Ct. LEXIS 210">*223 to in the equipment lease agreement and attached to each such agreement was on a printed form which carried spaces to designate the date of beginning of the lease, the term of the lease, the monthly rental installment, the rental due on execution of the lease, the day of the month for the monthly payments of the remaining installments, and the annual rental upon renewal of the lease. It contained the statement "Leasee [sic] may renew lease on a year to year basis upon expiration of original period." The schedule carried space for "description of equipment" with the designations "Make," "Model No.," and "Serial No." and spaces for the insertion of the place the property was to be located, insurance, deposit, and "Stipulated Loss Value" and "Special Conditions."

It was generally petitioner's practice to set an annual rental upon renewal of the lease equal to the monthly rental during the original period. Generally, when a lease was executed, petitioner would require an advance payment by the lessee for the first and last few months of the term of the lease. Ordinarily, the advance payment was approximately 10 percent of the total rental provided in the lease. With respect to all1970 U.S. Tax Ct. LEXIS 210">*224 of the leases entered into by petitioner during its fiscal years 1962 and 1964, the total amount to be paid by the lessee during the primary term of the lease was an amount in excess of the cost of the equipment to petitioner.

Seventeen of the leases entered into by petitioner during its fiscal year 1962 were for terms of 36 months or less and 2 were made with respect to equipment which petitioner purchased prior to January 1, 1962. Of the remaining 13 leases all but one were for a period of 60 months and that one was for a period of 72 months. One of these leases was with respect to equipment transferred to petitioner by the lessee and leased back to him by petitioner.

Of all 111 leases entered into by petitioner during its fiscal year 1964, 47 were for periods of 36 months or less. Some of these leases were of equipment transferred to petitioner by the lessees and leased back. Of the other 64 leases, 5 were for 48 months, 2 were for 72 months, and the remainder were for 60 months. Of these 64 leases, at least 4 were with respect to property which had been previously purchased and used by the lessee prior to purchase of the equipment by petitioner. With respect to leases which1970 U.S. Tax Ct. LEXIS 210">*225 involved furniture and carpets leased on a 60-month basis to Buds Duds, petitioner had made an agreement pursuant to section 48(d) to treat the lessee as having acquired the property. Ten of the 13 leases entered into in petitioner's fiscal year 1962 with respect to equipment which was leased for a term of 60 or more months and acquired by petitioner after January 1, 1962, provided an option to the lessee to purchase the equipment at the conclusion 54 T.C. 301">*307 of the term of the lease. In each instance the purchase price was 10 percent of the cost of the equipment to petitioner. The two leases entered into by petitioner for terms of 60 months with respect to equipment acquired prior to January 1, 1962, contained an option to the lessee to purchase at the end of the term of the lease for a price of 10 percent of the original cost and 10 of the 17 leases for 36 or less months entered into by petitioner in its fiscal year 1962 contained an option to the lessee to purchase the property at the end of the term of the lease. Of the 64 leases for periods of 48 or more months entered into by petitioner in its fiscal year 1964, 11 contained options to the lessee to purchase at the end of 1970 U.S. Tax Ct. LEXIS 210">*226 the original term of the lease and in all but two instances the option price was 10 percent of the original cost of the equipment. In the two instances where the option price was not 10 percent of the original cost of the equipment, it was slightly less than 10 percent in one instance and slightly more than 10 percent in the other.

Of the 47 leases entered into by petitioner during its fiscal year 1964 for periods of 36 or less months, 9 provided an option to the lessee to purchase at the end of the original term of the lease. Five of these were at an amount equal to 10 percent of the cost of the equipment and three of the other four were in amounts substantially in excess of 10 percent of the cost of the equipment, and one was in an amount slightly less than 10 percent of the cost of the equipment. In instances where the lease did not contain any provision giving the lessee the option to purchase the equipment at the termination of the original term of the lease, petitioner generally would negotiate with the lessee at the conclusion of the primary term of the lease with respect to a purchase price of the equipment if the lessee desired to purchase the equipment. The negotiated1970 U.S. Tax Ct. LEXIS 210">*227 price would be based on what the parties considered to be the value of the equipment in its then condition.

Most of the equipment leased by petitioner was machinery, office furniture, medical equipment, trailers, electronic and radio equipment, trucks, tractors, and other types of equipment which were readily returnable. However, in a few instances petitioner did lease equipment which was made specifically for the lessee and installed on the lessee's premises and would have little value other than as scrap if removed from those premises. During the years here in issue two instances of such equipment leased by petitioner were the lease of a door made for a building and of an electric sign to be annexed to the lessee's premises.

With respect to approximately 10 percent of the leases entered into by petitioner during the years here in issue petitioner obtained a guarantee of the lease either from the vendor of the equipment or from an individual associated with the lessee or by obtaining a 54 T.C. 301">*308 pledge of real or personal property as security for the rental payment. Petitioner had a printed form entitled "Guaranty," for use in instances where third parties guaranteed to petitioner1970 U.S. Tax Ct. LEXIS 210">*228 that the lessee would discharge his obligations under the lease. In one instance with respect to a lease of certain radio equipment, petitioner obtained an agreement from the vendor that the vendor would repurchase the equipment in the event that the lessee did not discharge its obligations under the lease for the full rental period. Generally the useful life to the lessee-user of the equipment which was the subject of the lease was in excess of the primary term of the lease. However, the useful life of the equipment, as equipment to be leased, was generally shorter than the useful life of such equipment to the user thereof. The term of the leases executed by petitioner with its lessees was generally determined on the basis of the type of the equipment and the use to which the lessee expected to put the equipment. Among the factors taken into consideration in determining the monthly rental were the cost of the equipment as compared to the term of the lease and the amount which petitioner estimated might be realized from the property at the end of the term.

Petitioner acquired its business from a variety of sources but banks and other financial institutions, vendors of equipment, 1970 U.S. Tax Ct. LEXIS 210">*229 and its present customers were its principal sources of new business.

During the years in issue petitioner's general ledger accounts contained a notation of the estimated salvage or residual value of the leased equipment and otherwise the general ledger contained no accounts setting up value of the equipment. Petitioner's accounting procedure set forth an entry, upon execution of the lease, of an amount under "Leases Receivable" which was the total rental payment for the primary term of the lease, an amount of equipment salvage or residual value which was generally 10 percent of the value of the property, an amount of cash to purchase the equipment which was the cost of the equipment to petitioner, and under a designation "Unearned Income," a sum which was the difference between the amount of the leases receivable and the equipment salvage or residual value, less the cash to purchase the equipment. As the rental payments were made, petitioner would allocate such payments. As each payment was received petitioner would enter it under cash and would also credit a prorata portion of each payment to unearned income and adjust its accounts entered upon the execution of the lease to reduce1970 U.S. Tax Ct. LEXIS 210">*230 the amount of leases receivable by an allocable portion of each payment and show the portion credited to an unearned income as current income. Although petitioner maintained no assets account for its rental equipment on its regular books of account except the estimated salvage or residual value of the 54 T.C. 301">*309 equipment, it did maintain card records showing the cost of the equipment and the depreciation claimed on each piece of equipment for income tax purposes.

Petitioner used its method of bookkeeping to facilitate the making of financial statements to the various banks and other financial institutions from which it borrowed money to finance its operations. Petitioner borrowed funds from a number of different banks and other financial institutions.

In preparing its Federal income tax returns, petitioner would claim depreciation on its equipment based on its card records and would take into income the amounts shown on its regular set of books as the cash received with respect to the leases as rental receipts. During the fiscal years here in issue petitioner filed State of Utah Sales and Use Tax Returns which reflected sales tax on the rental payments received by it during the1970 U.S. Tax Ct. LEXIS 210">*231 years under its leases and not on the basis of considering the lease agreements to constitute sales of equipment.

Petitioner on its Federal income tax returns for its fiscal years ended September 30, 1962, and September 30, 1964, claimed depreciation with respect to the equipment it leased and also claimed an investment credit with respect to its equipment in the amount of $ 2,690.86 for its fiscal year 1962 and $ 6,643 for its fiscal year 1964.

Respondent in his notices of deficiency disallowed the investment credit claimed by petitioner with the explanation that petitioner was not entitled to the investment credit because it did not have an "investment in new or used depreciable property." Respondent in his notice of deficiency did not disallow the deduction for depreciation on leased equipment claimed by petitioner. At the trial respondent stated that the reason for not disallowing the claimed depreciation deduction was that the depreciation deduction claimed by petitioner equaled the portion of its annual rental receipts which respondent considered to constitute a return of capital, treating the lease agreements to be in substance financing agreements and therefore the rental1970 U.S. Tax Ct. LEXIS 210">*232 receipts less depreciation as shown on petitioner's tax returns would approximately equal petitioner's current income under respondent's position that petitioner was in substance engaged in a financing operation for purchasers of equipment.

OPINION

Petitioner takes the primary position that it is entitled to the investment credit provided for in section 38²1970 U.S. Tax Ct. LEXIS 210">*233 since section 48(d) ³ of subpart 54 T.C. 301">*310 B, referred to in section 38(a), specifically provides that a lessor may elect, with respect to any new section 38 property, to treat the lessee as having acquired such property. Petitioner states that it is clear from the provisions of section 48(d) that the lessor is entitled to the investment credit provided by section 38 unless he has elected to treat the lessee as having acquired the property.

1970 U.S. Tax Ct. LEXIS 210">*234 Respondent answers this argument of petitioner's by pointing out that section 48(d) provides for a lessor to make the election to treat the lessee as having acquired the property only "with respect to any new section 38 property." Respondent points out that section 48(a) ⁴1970 U.S. Tax Ct. LEXIS 210">*236 defines section 38 property as tangible personal property with respect 54 T.C. 301">*311 to which depreciation, or amortization in lieu of depreciation, is allowable. It is respondent's position that since petitioner, in substance, operated only a financing operation, no depreciation was allowable to petitioner with respect to the property which it leased to its lessee. Respondent's primary position is that although the form used by petitioner was that of leasing the property owned by petitioner to various lessees, the substance of the transaction engaged in by petitioner was merely a financing operation. Respondent worded his contention in his brief as follows:

the factual issue to be decided by the Court is whether Lockhart was in the business of leasing equipment or whether in substance and in economic reality Lockhart was acting in the capacity of a financing institution and holding mere security interest in the1970 U.S. Tax Ct. LEXIS 210">*235 equipment.

Even though respondent in his brief states the issue to be whether petitioner's operation was in substance that of a financing institution holding a mere security interest, he does, in places in effect, argue that if the substance of the transaction is not a mere financing operation, then in many instances the substance of the transaction between petitioner and its various lessees resulted in a sale by petitioner of the property to the lessee. In fact, in the notices of deficiency respondent did not determine that petitioner was engaged in a financing operation but determined that the income reported by petitioner as rental income from leased equipment was in reality income from conditional sales of such equipment and since petitioner had not elected to report such income on the installment basis of accounting provided by section 453, it could not defer any of the income received from the conditional sales. ⁵

Petitioner makes no objection to respondent's contention that its operation was a mere financing operation even though his determination in the notices of deficiency was that the transactions entered into by petitioner were conditional sales, but contends that under the facts here present the transactions were in substance neither financing operations nor conditional sales, but were in substance as well as in form leases of equipment.

It might be pointed out that petitioner at the trial conceded that it was not entitled to the investment credit on any of the property which was subject to leases of less than 48 months since petitioner conceded the useful life to it as a lessor was in most instances substantially equal to the original term of the lease, and, therefore, under the provisions of section 48(a) any such property would not be section 38 property entitled to an investment credit because of the requirement in section 48(a) that section1970 U.S. Tax Ct. LEXIS 210">*237 38 property have a useful life of 54 T.C. 301">*312 4 years or more. Petitioner also conceded at the trial, with respect to certain specific leases, that the property was not section 38 property because such property had been used by the lessee of the property before the property was acquired by petitioner and was used by the lessee thereafter, and therefore did not meet the definition in section 48(c) ⁶ of used section 38 property.

Petitioner also conceded with respect to one1970 U.S. Tax Ct. LEXIS 210">*238 lease that it had passed on to the lessee the right to the investment credit in accordance with section 48(d). It is not clear from the record whether the investment credit as claimed by petitioner on its returns was computed by including the cost of any specific items which petitioner now concedes are not properly entitled to be included in the property subject to investment credit, but apparently there is no disagreement between the parties insofar as specific items are concerned although some adjustment to the amounts claimed by petitioner on its returns may be necessary because of petitioner's concessions.

We do not agree with petitioner's contention that section 48(d) grants to a taxpayer a right to an investment credit merely because he purchases property and in form makes a lease of the property to another. We agree with respondent that section 48(d) merely gives to a lessor the right to pass on to a lessee the investment credit with respect to property which otherwise the lessor would be entitled to consider as new section 38 property. ⁷ We also agree with respondent that section 48(a) is clear that section 38 property means tangible personal property with respect to which1970 U.S. Tax Ct. LEXIS 210">*239 depreciation is allowable to the taxpayer claiming the investment credit.

1970 U.S. Tax Ct. LEXIS 210">*240 Our issue is, therefore, whether under the facts here present, the property which petitioner leased to its various lessees was property with respect to which petitioner was entitled to claim depreciation. If in substance as well as in form, the transactions entered into by 54 T.C. 301">*313 petitioner with its various lessees were leases, the various items of property were tangible personal property with respect to which petitioner would be entitled to depreciation. We must determine whether, as a factual matter, petitioner was in substance as well as in form the lessor of the various items of property, or whether the substance of the transaction is a financing operation by petitioner or conditional sales by petitioner of the property to the various lessees. Our attention has not been called to, nor have we found, any cases in which this precise question has been considered with respect to determining a taxpayer's right to the investment credit with the exception of the case of Lockhart Leasing Co.v.United States, an unreported case (D. Utah 1969, 24 A.F.T.R.2d (RIA) 69-5794, 69-2U.S.T.C. par. 9705), which involved the fiscal year 1963 of1970 U.S. Tax Ct. LEXIS 210">*241 the petitioner in the instant case. In 192 F. Supp. 841">Lockhart Leasing Co. v. United States, supra, the District Court, on the basis of findings of fact and conclusions of law, but without an opinion, held that the property which was acquired by Lockhart Leasing Co. and used by its customers pursuant to the equipment-lease agreements served as a basis for the allowance of the investment credit provided for in section 38(a).

There have been numerous cases which have considered whether an agreement which was in form a lease was in substance a sale for the purposes of determining whether income should be reported by a taxpayer as rental receipts or income from the sale of property and of determining whether a taxpayer was entitled to deduct amounts paid as rent or was required to consider the amounts as a capital investment in property purchased and recover the investment through depreciation deductions with respect to the property. Both parties cite and discuss a number of these cases. Respondent relies primarily on Estate of Delano T. Starr, 30 T.C. 856">30 T.C. 856 (1958), reversed on other grounds 274 F.2d 294 (C.A. 9, 1959), and Mt. Mansfield Television, Inc. v. United States, 239 F. Supp. 539">239 F. Supp. 539 (D. Vt. 1964),1970 U.S. Tax Ct. LEXIS 210">*242 affirmed per curiam 342 F.2d 994 (C.A. 2, 1965), certiorari denied 382 U.S. 818">382 U.S. 818 (1965). Petitioner points to the factual differences in the cases cited by respondent and the present case and relies on such cases as Breece Veneer & Panel Co. v. Commissioner, 232 F.2d 319 (C.A. 7, 1965), reversing 22 T.C. 1386">22 T.C. 1386 (1954); Benton v. Commissioner, 197 F.2d 745 (C.A. 5, 1952), reversing a Memorandum Opinion of this Court; and Norman Baker Smith, 51 T.C. 429">51 T.C. 429 (1968). Respondent points to distinguishing factors in the cases cited by petitioner and the instant case.

None of the cases cited by the parties, nor any we have found, is on all fours factually with the instant case. All of the cases state that substance rather than form is controlling for the purpose of determining the tax effect of the transaction and that the intent of the parties must be determined not by how they framed the transaction but 54 T.C. 301">*314 rather by the practical effect of the agreements entered into by them. See Karl R. Martin, 44 T.C. 731">44 T.C. 731 (1965),1970 U.S. Tax Ct. LEXIS 210">*243 affirmed on this issue 379 F.2d 282 (C.A. 6, 1967). All the cases recognize that the form of the instrument involved is not controlling. However, in determining whether in fact an agreement is a lease or a sale, various cases are controlled by the factual situation there present.

In some cases great reliance has been placed on whether there was an option on the part of the taxpayer to purchase the property at the end of the lease period, particularly if the option to purchase was for a nominal sum. However, as pointed out in Kitchin v. Commissioner, 353 F.2d 13 (C.A. 4, 1965), affirming a Memorandum Opinion of this Court and withdrawing a prior opinion of that Court of Appeals which had reversed the Memorandum Opinion of this Court, the fact that there is an option to buy at the end of the lease period does not require the conclusion that the transaction is in fact a sale. In that case it was stressed that the periodic rental payments represented a fair return for the use of the equipment.

The factual situation in the instant case is a very close one. Although the leases are substantially all on the same form, the1970 U.S. Tax Ct. LEXIS 210">*244 amounts provided for rental payments and for the option to purchase at the end of the term, where such an option is given, give a reasonably clear indication, when considered in light of the other provisions, that the leases are in substance as well as in form, leases. Particularly is this so with respect to most of the items covered by these leases which are easily removable equipment such as were involved in Kitchin v. Commissioner, supra, and not an addendum to property such as were involved in 30 T.C. 856">Estate of Delano T. Starr, supra, and 239 F. Supp. 539">Mt. Mansfield Television, Inc. v. United States, supra. A few of the items more nearly approach the situation in the Starr and Mt. Mansfield cases. The lease, itself, made a specific provision that no title passed to the lessee. The record shows a fair number of instances where property was actually returned to petitioner. Although we do not consider the facts here strongly to support either view, and in certain instances were the particular leases analyzed as a separate matter, we might be inclined to conclude that the substance of the transaction1970 U.S. Tax Ct. LEXIS 210">*245 was a conditional sale, these items are minor as compared to the overall transactions which primarily give more the indication of leases.

In our view the evidence does not support respondent's contention that petitioner was engaged in a financing business. The evidence shows that petitioner purchased the property, and only in one instance had any agreement from the person from whom it purchased the property to take it back in case of difficulty with the lease. Were we to decide only respondent's stated contention that petitioner was in substance engaged in a financing business, we would find this case less difficult. 54 T.C. 301">*315 Petitioner made outright purchases of the property it leased and in most instances had no right to have the person from whom it purchased the property take it back or assist in the disposition of it under any circumstances. In less than 10 percent of the instances involved did petitioner have any guarantee with respect to performance by the lessee. The overall operation does not, in our view, in substance show a mere financing operation.

Our major difficulty is in determining whether in some instances at least, petitioner had not in substance made a sale1970 U.S. Tax Ct. LEXIS 210">*246 instead of a lease of the property. However, on the overall record, and particularly considering the relatively small number of leases where an option to purchase was given to the lessee as well as the fact that where no such option was given, if the lessee desired to purchase, the purchase price was negotiated on the value of the property at the time of the purchase, we have concluded that the agreements between petitioner and its customers were in substance as well as in form leases. See Estate of Clarence B. Eaton, 10 T.C. 869">10 T.C. 869, 10 T.C. 869">881-882 (1948), and cf. Truman Bowen, 12 T.C. 446">12 T.C. 446 (1949). See also Arkansas Bank & Trust Co. v. United States, 224 F. Supp. 171">224 F. Supp. 171 (W.D. Ark. 1963), and Gem Incorporated v. United States, 192 F. Supp. 841">192 F. Supp. 841 (N.D. Miss. 1961).

We therefore hold that petitioner is entitled to investment credit with respect to the property which it had under lease for a period of 4 years or more, except with respect to those properties which were acquired from lessees and leased back to the lessees and with respect to those properties where petitioner1970 U.S. Tax Ct. LEXIS 210">*247 had passed on to the lessee the investment credit.

Decision will be entered under Rule 50.