Petitioners take the position that the assumed facts show that they have literally complied with all of the foregoing provisions and that such literal compliance entitles them to the benefits which flow from section 168(f)(8), because subparagraph (C) thereof and the accompanying legislative history establish that literal compliance with the provisions of section 168(f)(8) is sufficient, irrespective of the presence or absence of business purpose, economic substance, profit objective, tax-avoidance motive, or other potentially adverse elements. Respondent, with one exception (see pp. 384-385 infra) does not dispute petitioners' assertion of formal compliance but argues that the transactions described above were, either in whole or in part, "shams" and that, as a consequence, such formal compliance is insufficient to permit petitioners to obtain the benefits1987 U.S. Tax Ct. LEXIS 17">*24 of section 168(f)(8).

Essentially, respondent's position has as its foundation the assertion that, irrespective of the validity of petitioners' claim that the elements of business purpose, economic substance, profit objective, or tax-avoidance motive are irrelevant in determining whether the lease between F & G and RRA meets the requirement of section 168(f)(8), such elements may be taken into account in determining whether 88 T.C. 376">*380 the transactions which surround the lease and to which the lease was directly related were "shams." In this context, the roles of, and arrangements between and among, PI, ECI, and F & G, entities which were part of the transactional pattern before RRA, as well as those of FMEC and PI which were part of the transactional pattern after RRA, become, according to respondent, highly relevant, as do the valuations of the equipment and the nature of the financial terms of said arrangements. As a consequence of the foregoing, respondent argues that various factual questions exist which can only be fleshed out by live testimony of witnesses, and particularly cross-examination. For the reasons hereinafter set forth, we agree with respondent.

On its face, subparagraph1987 U.S. Tax Ct. LEXIS 17">*25 (C) and the legislative history seem to support petitioners' position. The pertinent legislative history of the Economic Recovery Tax Act of 1981, Pub. L. 97-34, 95 Stat. 172 (hereinafter the 1981 Act), is reflected in the following explanation in the Conference Committee report (H. Rept. 97-215 (Conf.) (1981), 1981-2 C.B. 481, 492-493):

House bill. -- Under present IRS guidelines, a transaction is characterized as a lease if (1) the lessor's minimum at-risk investment in the property throughout the lease term is 20 percent of cost; (2) the lessor has a positive cash flow and a profit from the lease independent of tax benefits; (3) the lessee does not have a right to purchase the property at less than fair market value; (4) the lessee does not have an investment in the lease and does not lend any of the purchase costs of the owner, and (5) use of the property at the end of the lease term by a person other than the lessee must be commercially feasible.

The House bill creates a safe harbor that guarantees that a transaction will be characterized as a lease for purposes of allowing investment credits and cost recovery allowances to the nominal1987 U.S. Tax Ct. LEXIS 17">*26 lessor. * * *

* * * *

If a transaction meets the above requirements, the transaction will be treated as a lease and the parties of the transaction will be treated as lessor and lessee as stipulated in their agreement. The following factors will therefore not be taken into account in determining whether a transaction is a lease:

(1) whether the lessor or lessee must take the tax benefits into account in order to make a profit from the transaction;

(2) the fact that the lessee is the nominal owner of the property for state or local law purposes (e.g., has title to the property) and retains the 88 T.C. 376">*381 burdens, benefits, and incidents of ownership (such as payment of taxes and maintenance charges with respect to the property);

(3) whether or not a person other than the lessee may be able to use the property after the lease term;

(4) the fact that the property may (or must) be bought or sold at the end of the lease term at a fixed or determinable price that is more or less than its fair market value at that time;

(5) the fact that the lessee or related party has provided financing or has guaranteed financing for the transaction (other than for the lessor's minimum 10-percent investment); 1987 U.S. Tax Ct. LEXIS 17">*27 and

(6) the obligation of any person is subject to any contingency or offset agreement.

* * * *

Senate amendment. -- The Senate amendment is the same as the House bill. ³

Conference agreement. -- In general, the conference agreement follows the House bill and Senate amendment. However, several clarifications are made. * * * The conferees intend no change with respect to the factors that will not be considered in determining whether a transaction is a lease transaction under the safe harbor, even though the list of factors is not contained in the final language. * * *

1987 U.S. Tax Ct. LEXIS 17">*28 The General Explanation of the 1981 Act, dated December 31, 1981, and prepared by the Staff of the Joint Committee on Taxation contains the following:

The new provision is a significant change overriding several fundamental principles of tax law. Traditionally, the substance of a transaction rather than its form controls the tax consequences of a transaction. In 88 T.C. 376">*382 addition, a transaction generally will not be given effect for tax purposes unless it serves some business purpose aside from reducing taxes. Because the leasing provision was intended to be only a transferability provision, many of the transactions that will be characterized as a lease under the safe harbor will have no business purpose (other than to transfer tax benefits). When the substance of the transaction is examined, the transaction may not bear any resemblance to a lease. [Staff of Joint Comm. on Taxation, 97th Cong., 1st Sess., General Explanation of the Economic Recovery Act of 1981, at 104 (Comm. Print 1981).]

The legislative history of the Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324, which made substantial changes tightening the safe-harbor leasing provisions 1987 U.S. Tax Ct. LEXIS 17">*29 of the 1981 Act, confirms the statements and purposes of the 1981 Act, namely, that "ERTA [the 1981 Act] provided a new set of rules which represented a major departure from the prior law." Staff of Joint Comm. on Taxation, 97th Cong., 2d Sess., General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982, at 45 (Comm. Print 1982). See S. Rept. 97-494, at 134-137 (Vol. 1) (1982), H. Rept. 97-760 (Conf.) (1982), 1982-2 C.B. 600, 611.

As we read the applicable statutory provisions and their legislative history, section 168(f)(8) was passed as a companion provision to the liberalized depreciation (i.e., ACRS) and investment credit provisions found in the 1981 Act, which were adopted to provide capital investment incentives. We think it clear that Congress' purpose in adopting the safe-harbor rules was to spur new capital formation by providing a mechanism by which potential investors in property (e.g., owners-users), unable to utilize these newly created tax incentives, could transfer them to another taxpayer. See S. Rept. 97-144 (1981), 1981-2 C.B. 412, 432; Staff of Joint Comm. on Taxation, 1987 U.S. Tax Ct. LEXIS 17">*30 97th Cong., 1st Sess., General Explanation of the Economic Recovery Act of 1981, at 102-103 (Comm. Print 1981). Assuming without deciding that considerations of business purpose, economic substance, and profit objective independent of tax consequences are irrelevant to the application of section 168(f)(8) as such, there is not the slightest legislative indication that such elements should not be taken into account in determining whether the transactions of which the lease is but a part should be held to be "sham," with the result that the lease 88 T.C. 376">*383 itself may be held not to be entitled to the benefits of that section. The fact that section 168(f)(8) and its legislative history consistently reflect a singular focus -- e.g., "the agreement of lease," "the agreement shall be treated as a lease," "the lease transaction" -- clearly points in this direction. Petitioners ask us to adopt an approach which would guarantee a good apple against spoilage even if all the other apples in the barrel were rotten. This we cannot and will not do.

The key to our analysis is that we are not persuaded, on the basis of what appear to be the undisputed facts herein, that the lease can be isolated1987 U.S. Tax Ct. LEXIS 17">*31 as a matter of law from the totality of the transactions involved -- an essential prerequisite to granting petitioners' motion for summary judgment. It may be that, at trial, petitioners will be able to persuade us that the lease in fact should be so isolated and that their claim to the benefits of section 168(f)(8) is otherwise valid. They will, of course, also be able at trial to prove that, in their totality, the transactions involved herein were in fact founded on business purpose, economic substance, and profit objective with the consequence that they are entitled to the benefits of section 168(f)(8) in respect of the lease.

In view of the foregoing, we conclude that respondent is entitled to the opportunity at trial to contest petitioners' evidence that they are entitled to the safe-harbor benefits of section 168(f)(8) in the context of the issue as to whether the chain of transactions involved herein constituted a "sham." We think that, in this "sham" context, respondent should be entitled to explore the extent to which the various elements, which otherwise may be precluded by section 168(f)(8)(C) from consideration in a safe-harbor leasing arrangement, are present. This1987 U.S. Tax Ct. LEXIS 17">*32 exploration will include the valuation of the recyclers in relation to the amounts and the terms and conditions of payment. In this connection, we reject petitioners' contention on brief, in support of their motion for summary judgment, that the issue of valuation is a new issue not raised in the notice of deficiency with the result that the burden of proof in respect thereto should be on respondent. The notice of deficiency disallowed petitioners' losses from RRA because "you have failed to establish that you are entitled to any 88 T.C. 376">*384 portion of the loss claimed under any provision of the Internal Revenue Code." We think this basis for disallowance is broad enough to include the valuation issue -- an issue which is present in virtually all tax shelter cases. Cf. Spangler v. Commissioner, 32 T.C. 782">32 T.C. 782, 32 T.C. 782">793 (1959), affd. 278 F.2d 665">278 F.2d 665 (4th Cir. 1960).

We next deal with respondent's contention that petitioners have, in any event, not proved, as a matter of law, that they have satisfied the "minimum investment" of the lessor requirement of section 168(f)(8)(B)(ii), namely, that such investment "(I) at the time the property1987 U.S. Tax Ct. LEXIS 17">*33 is first placed in service under the lease, and (II) at all times during the term of the lease, is not less than 10 percent of the adjusted basis of such property." With respect to such "minimum investment," Temporary Income Tax Reg. section 5c.168(f)(8)-4(b), 46 Fed. Reg. 51908 (Oct. 23, 1981), provides, in pertinent part, that "The lessor must have sufficient net worth * * * to satisfy any personal liability incurred." ⁴ Therefore, based upon the facts set forth at the outset of this opinion, it appears that F & G was required to have maintained a positive net worth of at least $ 751,920, an ultimate figure with which petitioners appear not to 88 T.C. 376">*385 disagree. Both parties engage in an analysis based upon figures reflected in the corporate income tax return (Form 1120) of F & G for its fiscal year ended August 1982. We see no need to explore the details of such an analysis. We think they clearly reveal a disputed factual issue which cannot be resolved solely on the basis of the tax return but will require fleshing out through other written evidence and possibly oral testimony at trial.

1987 U.S. Tax Ct. LEXIS 17">*34 Finally, we note that, in the instant case, respondent supplemented the general allegation of "sham" by pointing to the serious questions which exist as to the nature of the transactions which preceded and followed the leasing transaction between F & G and RRA, including issues of valuation and speculative financing. Respondent's articulations were buttressed not only by affidavits but by the text of the RRA offering memorandum. ⁵ In this respect, the situation is quite different from that which existed in King v. Commissioner, 87 T.C. (1986), where we granted petitioners' motion for summary judgment because respondent failed to allege any facts to support his general allegations of "sham."

An order will be entered denying petitioner's motion.