Shields, Judge:
Respondent determined deficiencies in petitioner’s 1975 and 1976 Federal income taxes in the respective amounts of $40,575 and $64,171. After concessions by both parties,1 the remaining issues for decision are: (1) Whether petitioner’s commercial, open-end "leases” are qualified motor vehicle agreements within the meaning of section 210, Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324, 477; and (2) whether petitioner is entitled to an investment credit for vehicles it acquired for use by consumers pursuant to open-end "leases.”2
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation and exhibits attached thereto are incorporated herein by this reference.
Petitioner Leslie Leasing (the company) had its principal place of business at San Francisco, Calif., at the time it filed the petition in this case. Petitioner timely filed corporate income tax returns for 1975 and 1976 with the Internal Revenue Service Center at Fresno, Calif.
For 1975 and 1976, petitioner claimed an investment credit on items of property leased in the ordinary course of business under both closed-end and open-end leases, including carryovers from 1973, 1974, and 1975. In his notice of deficiency, respondent disallowed all of the investment credit claimed, including carryovers, on the ground that the leases in substance were conditional sales contracts. At trial, respondent conceded that petitioner’s closed-end leases executed in 1973 through 1976 were true leases. Following submission of briefs, respondent also conceded that petitioner’s open-end leases which qualified as motor vehicle agreements under the 1982 Revenue Act were not conditional sales.
Leslie Leasing was incorporated in 1949 and operated until 1976 as Leslie Finance & Leasing Co. In 1963, petitioner sold its finance contracts to a commercial credit company. During the years in issue, Leslie Leasing engaged in automobile, truck, and equipment leasing. Eighty-five percent of its business was generated by commercial lessees, the remaining 15 percent by consumer lessees. Although petitioner did not sell new vehicles, it sold used vehicles on the wholesale market. In addition to its automobile leasing activities, Leslie Leasing operated a daily rental fleet and leased equipment. More than half of its commercial business involved fleet accounts of 5 or more vehicles. In 1975 and 1976, the company had 2,500 vehicles on lease, which produced an annual gross rental income of $5 million. The company repossessed approximately 20 vehicles per year because lessees were delinquent in making rental payments or were bankrupt.
Petitioner employed closed-end and open-end leases in 1975 and 1976. Under the closed-end lease, petitioner determined a rental fee based, in part, on the number of miles the customer anticipated driving. At the end of the term, petitioner would charge the customer for any excess mileage or abnormal wear and tear. Under the open-end lease, petitioner based the final rental payment or credit on the vehicle’s market value at the end of the term.3 The anticipated value of the vehicle was identified in the contract as the residual value.
Petitioner secured recourse loans to finance the purchase of its vehicles through the Wells Fargo Bank and the Sumitomo Bank of California. During the years before the Court, the company owned outright about 10 percent of its vehicles and financed the remaining 90 percent. Petitioner repaid borrowed amounts over a fixed term, ordinarily 24 to 36 months. It made equal payments of principal each month plus interest on the unpaid balance, ending with a balloon payment. In the security agreements with its primary lenders, the company warranted that it was the lawful owner of the vehicles and that the vehicles were free of all liens, taxes, and encumbrances.
The security agreement between petitioner and the bank, and the lease agreement between petitioner and the customer, were two distinct documents. The banks did not look to lessees for payments on their loans to petitioner, even though the vehicle and lease agreement were pledged as security for a loan. However, the banks sometimes checked the credit of potential lessees and advised petitioner on occasion that they would not be willing to finance a vehicle leased to a particular individual. During the early months of a lease, petitioner experienced a negative cash flow because it paid more to the bank in principal and interest than it received from its lessee.
All of petitioner’s leased vehicles were titled in petitioner’s name. However, if a vehicle was given as security for a bank loan, then legal title was registered in the name of the bank. Petitioner generally borrowed money in the amount of the purchase price of the vehicle; in addition, to meet its cash flow requirements, petitioner frequently borrowed on the security of its wholly owned vehicles.4
The parties submitted into evidence a representative open-end lease called a Motor Vehicle Lease. Paragraph 14-D of the lease stated, "This is an agreement of lease only. Lessee has no title or interest in said cars, but is entitled to possession while he is not in default.”
The lease schedule of the "Motor Vehicle Lease” provided for the year, make, and model of the vehicle to be leased; the total rent, tax on rent, monthly rent, and monthly reserve; the term of the lease and insurance premiums if procured through, or provided by, the lessor.
Paragraph 5 of the lease schedule set forth the monetary terms of the agreement.5 Line 5(a), the capitalized cost figure, included the cost to petitioner of purchasing the vehicle plus a portion of the profit. Petitioner’s practice was to negotiate this dollar amount with the lessee, thus the profit margin varied from transaction to transaction. Line 5(b) specified the portion of the monthly rental payments allocated to a depreciation reserve. This amount reduced the capitalized cost and always equaled the capitalized cost less the accumulated monthly reserve as determined in line 5(d). Line 5(c) was the portion of the monthly payments not credited to the depreciation reserve. This amount was calculated by multiplying the cost of the vehicle by a factor which took into account the average cost to petitioner of borrowing money, overhead expense, and profit. Line 5(d) stated the residual value of the vehicle at the end of the lease term. This projection was based on the lessee’s anticipated use of the vehicle, including mileage, over the term. It represented the maximum amount for which the lessee would be liable to Leslie Leasing at the end of the term and was negotiated with the client.
The lease agreement provided that the capitalized cost was the agreed value of the car, and that the lessee’s reserve was the agreed monthly reserve for depreciation of the leased vehicle. It provided for a lease term of not less than 6 months from the date of delivery plus any extended term.
During the years in issue, the company made the manufacturer’s warranty available to lessees for repairs within the warranty period. Under the terms of the stipulated form lease, lessees were responsible for all operating and maintenance expenses.6
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Shields, Judge:
Respondent determined deficiencies in petitioner’s 1975 and 1976 Federal income taxes in the respective amounts of $40,575 and $64,171. After concessions by both parties,1 the remaining issues for decision are: (1) Whether petitioner’s commercial, open-end "leases” are qualified motor vehicle agreements within the meaning of section 210, Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324, 477; and (2) whether petitioner is entitled to an investment credit for vehicles it acquired for use by consumers pursuant to open-end "leases.”2
FINDINGS OF FACT
Some of the facts have been stipulated. The stipulation and exhibits attached thereto are incorporated herein by this reference.
Petitioner Leslie Leasing (the company) had its principal place of business at San Francisco, Calif., at the time it filed the petition in this case. Petitioner timely filed corporate income tax returns for 1975 and 1976 with the Internal Revenue Service Center at Fresno, Calif.
For 1975 and 1976, petitioner claimed an investment credit on items of property leased in the ordinary course of business under both closed-end and open-end leases, including carryovers from 1973, 1974, and 1975. In his notice of deficiency, respondent disallowed all of the investment credit claimed, including carryovers, on the ground that the leases in substance were conditional sales contracts. At trial, respondent conceded that petitioner’s closed-end leases executed in 1973 through 1976 were true leases. Following submission of briefs, respondent also conceded that petitioner’s open-end leases which qualified as motor vehicle agreements under the 1982 Revenue Act were not conditional sales.
Leslie Leasing was incorporated in 1949 and operated until 1976 as Leslie Finance & Leasing Co. In 1963, petitioner sold its finance contracts to a commercial credit company. During the years in issue, Leslie Leasing engaged in automobile, truck, and equipment leasing. Eighty-five percent of its business was generated by commercial lessees, the remaining 15 percent by consumer lessees. Although petitioner did not sell new vehicles, it sold used vehicles on the wholesale market. In addition to its automobile leasing activities, Leslie Leasing operated a daily rental fleet and leased equipment. More than half of its commercial business involved fleet accounts of 5 or more vehicles. In 1975 and 1976, the company had 2,500 vehicles on lease, which produced an annual gross rental income of $5 million. The company repossessed approximately 20 vehicles per year because lessees were delinquent in making rental payments or were bankrupt.
Petitioner employed closed-end and open-end leases in 1975 and 1976. Under the closed-end lease, petitioner determined a rental fee based, in part, on the number of miles the customer anticipated driving. At the end of the term, petitioner would charge the customer for any excess mileage or abnormal wear and tear. Under the open-end lease, petitioner based the final rental payment or credit on the vehicle’s market value at the end of the term.3 The anticipated value of the vehicle was identified in the contract as the residual value.
Petitioner secured recourse loans to finance the purchase of its vehicles through the Wells Fargo Bank and the Sumitomo Bank of California. During the years before the Court, the company owned outright about 10 percent of its vehicles and financed the remaining 90 percent. Petitioner repaid borrowed amounts over a fixed term, ordinarily 24 to 36 months. It made equal payments of principal each month plus interest on the unpaid balance, ending with a balloon payment. In the security agreements with its primary lenders, the company warranted that it was the lawful owner of the vehicles and that the vehicles were free of all liens, taxes, and encumbrances.
The security agreement between petitioner and the bank, and the lease agreement between petitioner and the customer, were two distinct documents. The banks did not look to lessees for payments on their loans to petitioner, even though the vehicle and lease agreement were pledged as security for a loan. However, the banks sometimes checked the credit of potential lessees and advised petitioner on occasion that they would not be willing to finance a vehicle leased to a particular individual. During the early months of a lease, petitioner experienced a negative cash flow because it paid more to the bank in principal and interest than it received from its lessee.
All of petitioner’s leased vehicles were titled in petitioner’s name. However, if a vehicle was given as security for a bank loan, then legal title was registered in the name of the bank. Petitioner generally borrowed money in the amount of the purchase price of the vehicle; in addition, to meet its cash flow requirements, petitioner frequently borrowed on the security of its wholly owned vehicles.4
The parties submitted into evidence a representative open-end lease called a Motor Vehicle Lease. Paragraph 14-D of the lease stated, "This is an agreement of lease only. Lessee has no title or interest in said cars, but is entitled to possession while he is not in default.”
The lease schedule of the "Motor Vehicle Lease” provided for the year, make, and model of the vehicle to be leased; the total rent, tax on rent, monthly rent, and monthly reserve; the term of the lease and insurance premiums if procured through, or provided by, the lessor.
Paragraph 5 of the lease schedule set forth the monetary terms of the agreement.5 Line 5(a), the capitalized cost figure, included the cost to petitioner of purchasing the vehicle plus a portion of the profit. Petitioner’s practice was to negotiate this dollar amount with the lessee, thus the profit margin varied from transaction to transaction. Line 5(b) specified the portion of the monthly rental payments allocated to a depreciation reserve. This amount reduced the capitalized cost and always equaled the capitalized cost less the accumulated monthly reserve as determined in line 5(d). Line 5(c) was the portion of the monthly payments not credited to the depreciation reserve. This amount was calculated by multiplying the cost of the vehicle by a factor which took into account the average cost to petitioner of borrowing money, overhead expense, and profit. Line 5(d) stated the residual value of the vehicle at the end of the lease term. This projection was based on the lessee’s anticipated use of the vehicle, including mileage, over the term. It represented the maximum amount for which the lessee would be liable to Leslie Leasing at the end of the term and was negotiated with the client.
The lease agreement provided that the capitalized cost was the agreed value of the car, and that the lessee’s reserve was the agreed monthly reserve for depreciation of the leased vehicle. It provided for a lease term of not less than 6 months from the date of delivery plus any extended term.
During the years in issue, the company made the manufacturer’s warranty available to lessees for repairs within the warranty period. Under the terms of the stipulated form lease, lessees were responsible for all operating and maintenance expenses.6 However, they could elect one of two types of maintenance riders under which, for an additional periodic charge, petitioner would pay the maintenance expenses of the leased vehicle.7 Approximately 15 percent of petitioner’s lease agreements included a maintenance rider. Although Leslie Leasing, itself, did not repair cars, it authorized purchase orders for the repair of leased vehicles against its accounts.
Paragraph 8 of the form lease also required lessees to pay sales and use taxes, excise taxes, personal property, and other ad valorem taxes.
Under the stipulated form lease, the lessees agreed to insure the vehicle for comprehensive, collision, public liability, and property damage. As owner of the vehicle, petitioner was named as additional insured. If a lessee allowed this insurance coverage to lapse, the company could purchase coverage in the lessee’s name and charge additional rent to pay the premiums. In addition, petitioner maintained two policies on its cars and trucks, a $500,000 contingent liability policy for bodily injury and property damage, and a $5 million liability umbrella policy. This coverage protected the company against the possibility of a lessee’s coverage lapsing. It covered only bodily injury and property damage to others but did not protect against damage to petitioner’s vehicles.
Paragraph 7 of the stipulated lease set forth terminal rental adjustment procedures.8 At the expiration of the lease term, petitioner would secure one or more wholesale bids. Petitioner, itself, might be one such bidder. If the high bid exceeded the residual value, the lessee would receive either a credit against the capitalized cost of his next leased vehicle or, occasionally, a cash refund. If less than the anticipated residual value, the lessee had 2 days to disapprove the bid. Failing such disapproval, the bid would be deemed the agreed depreciated value of the car, whether the car were sold immediately or not, and the lessee would be billed for the difference between the high bid and the residual value.
If the lessee disapproved the high bid, he had two stated options: he could resume the lease after paying any rental or other charges due; alternatively, he could secure cash bids for petitioner. As a third option, unannounced but apparently understood, he could purchase the vehicle by "paying off’ the residual value assigned to it plus sales fee and accrued rents.9 Rental adjustments in 1975 and 1976 were within 1 percent, plus or minus, of gross rental income, i.e., $50,000 or $50 per car on the average.
The investment credit was occasionally a subject of negotiation between petitioner and a lessee. In the few instances when it was passed through to customers, petitioner increased the lease fees.
In preparing this case, the parties selected 217 leases as a representative sample of the leasing transactions petitioner entered into in 1975 and 1976. One hundred eighty-five were open-end leases.10 The following table summarizes the disposition of those vehicles:11
DISPOSITION OF VEHICLES
Open-end
Disposition Number Percent
Sold wholesale . 52 28%
Sold to lessee . 1 62 34
Re-leased . 19 10
Still active . 17 9
Sold retail . 16 9
Rewritten . 10 5 '
Assumed by third party ... 5 3
Sold for insurance proceeds 2 1
Used as demonstrator . 1
Repossessed . 1 _1_
Totals . 185 2100
When a car was returned to petitioner, the company had several options. It was not obligated to sell the car to the highest wholesale bidder; often, petitioner held the car, repaired it, then offered it to wholesale buyers or assigned it to the daily rental fleet. If petitioner decided to release the car or put it into the rental fleet, petitioner, itself, would make a net wholesale bid on the vehicle.
On its 1975 and 1976 Federal income tax returns, petitioner claimed $46,323 and $55,003, respectively, in investment credit, including investment credit carryovers, on its open- and close-end leased vehicles. In his notice of deficiency, respondent disallowed the claimed investment credit in its entirety with the following explanation:
Investment Credit
Claimed investment credit, including investment credit carryovers claimed, is disallowed because the property does not qualify for the investment credit under section 38 of the Internal Revenue Code. The leases relating to the property on which investment credit is being disallowed are determined to be sales contracts.
OPINION
We are confronted with the question whether in calendar years 1975 and 1976 petitioner is entitled to the investment tax credit provided in section 38, I.R.C. 1954,12 for vehicles Leslie Leasing acquired for lease by its commercial and consumer customers. To be so entitled, petitioner must own the vehicles on which the credit is claimed. Petitioner has argued both at trial and on brief that it entered into bona fide leasing arrangements with its clients with respect to the vehicles. On the other hand, respondent argues that the vehicles were sold pursuant to conditional sales contracts notwithstanding that the transactions in form were cast as leases. For the reasons that follow, we hold for petitioner as to its commercial leases and for respondent as to the consumer leases.13
As a preliminary matter, we must decide whether the open-end leases petitioner negotiated for vehicles to be used in trade or business or for the production of income were qualified motor vehicle agreements within the meaning of section 210, Tax Equity and Fiscal Responsibility Act of 1982, Pub. L. 97-248, 96 Stat. 324, 447 (TEFRA). Respondent has conceded that the commercial leases herein that qualify under TEFRA are not conditional sales contracts. Second, we must decide whether petitioner’s consumer or non-business-use leases were conditional sales contracts or true leases.
Section 21014 of TEFRA prohibits the Internal Revenue Service from denying lease treatment to leased vehicles which are operated for business reasons on the ground that such leases contain terminal rental adjustment clauses. The provision applies on a retroactive basis to any open taxable year.15 A qualified motor vehicle agreement is one which was entered into before enactment of any law or Treasury regulation which provides that any agreement with a terminal rental adjustment clause is not a lease. The lessor must be personally liable for the repayment of amounts borrowed to finance the leased vehicles or have pledged property to secure repayment other than the property subject to the lease.
Discussing the reason for the provision, the Senate Finance Committee report states:
The committee bill will prevent the IRS from retroactively denying lease treatment for certain motor vehicle leases, including leases of trailers, by reason of the fact that those leases contain terminal rental adjustment clauses that require or permit the rental price to be adjusted upward or downward by reference to an amount realized by the lessor upon sale or other disposition of the property. The committee bill does not address the legal effect of these clauses and does not prevent the Treasury from issuing rules on a prospective basis addressing the legal effect of these clauses.
The provisions of the committee bill regarding terminal rental adjustment clauses apply only to operating leases in which the lessee uses the property for business, as opposed to personal purposes. For this purpose, a lease is an operating lease if the lessor acquires the property with cash or recourse indebtedness. Thus, the provision does not apply to leveraged leases financed with nonrecourse debt.
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The committee bill otherwise does not affect the general principles for determining lease treatment under pre-ERTA rules or the requirements of Revenue Procedure 75-21. Thus, as under present law, the lessee may not hold title to or have an equity interest in the property. To be entitled to depreciation deductions, the lessor must show a profit from the transaction independent of tax benefits. In addition, the lessor must retain other meaningful indicia of ownership to establish that the lessor is in substance the owner of the property.
S. Rept. 97-494 (Vol. 1) at 139 (1982). See also H. Rept. 97-760, at 488-489 (1982). This provision was proposed in the House of Representatives in reaction to an Internal Revenue Service technical advice memorandum issued by the National Office in December 1979, LTR 8019120. The Revenue Service took the position that the inclusion of a terminal rental adjustment clause in a motor vehicle lease caused the lease to be treated as a conditional sales contract, notwithstanding its longstanding audit position that recognized such clauses as true leases.16 The policy change was made without notice to the public or opportunity for public comment.
Turning to petitioner’s open-end lease agreements, we have found that 85 percent were for commercial use and that Leslie Leasing was liable for amounts borrowed to finance the acquisition of the underlying vehicles. Petitioner owned 10 percent of its vehicles outright and financed the remainder on the strength of its credit standing, but never in excess of the fair market value of its interest in the property. During the period in issue, from 1973 to 1976, there were no laws or Treasury regulations17 which would prohibit treating petitioner’s open-end commercial agreements as leases. We conclude that these agreements were qualified motor vehicle leases as defined in section 210 of TEFRA. Accordingly, petitioner is entitled to the investment tax credit for vehicles leased to commercial users18 in 1975 and 1976, as well as investment credit carry-overs on these vehicles for 1973, 1974, and 1975.
A different result obtains as to petitioner’s non-business-use leases. The Court is not without guidance on this issue for Swift Dodge v. Commissioner, 76 T.C. 547 (1981), revd. 692 F.2d 651 (1982), presents a closely analogous fact pattern to the case at bar. Swift Dodge concerned an automobile dealership that, in addition to sales activities, purchased motor vehicles for use by third parties. It entered into agreements under which the vehicle users had many of the same responsibilities as those in the instant case, including the payment of taxes, licensing, and registration fees; operating and maintenance expenses; insurance premium costs; and the risk of depreciable loss.19 There, as here, the manufacturer’s vehicle warranty was made available to the vehicle user. Like the users in the instant case, customers of Swift Dodge might realize appreciation in the value of the vehicle by paying in cash the depreciated value of the vehicle and retaining it for their own purposes. The agreements did not restrict the use of the vehicles for trade or business or the production of income. During the years in issue, between 33 percent and 43 percent of those customers paid off the depreciated value of the vehicle and received title to it.
The parties in Swift Dodge approached the problem by analyzing the benefits and burdens of ownership. Respondent argued that the party who bore the risk of depreciable loss was the true owner of the property. Since under the terms of the agreement the user was responsible for any shortfall between market value and depreciable value, he or she bore the risk of decline in value. Such risk shifting, respondent asserted, amounted to a conditional sale rather than a lease. We rejected respondent’s position, noting that under the decided cases, the risk of fluctuation in the residual value of leased property is only one factor among many to be examined in determining whether a contract is, in substance, a lease or a conditional sales agreement. We stated,
In making our determination, we are concerned with the economic substance of the transactions in the case at bar. Upon normal termination of the "Lease Agreement,” the motor vehicle user was responsible for returning to petitioner a vehicle worth at least the stated "depreciated value.” If unable to fulfill this obligation when returning the vehicle, the user had the additional duty of paying to petitioner the difference in the values. Yet, if the user were astute, pursuant to petitioner’s unannounced business practices, the user could pay in cash this depreciated value and retain the car for his own purposes. Because the depreciated value was a reasonable projection of the fair market wholesale value of the particular vehicle upon lease termination, if the user retained the car, paid the petitioner the stated wholesale value, and sold the car to a third party at retail, he could have offset any potential loss attributable to fluctuation in the vehicle’s residual value. In our view, the inclusion of a contract provision that shifts the depreciable loss to the extent of wholesale value away from the taxpayer in an attempt to minimize business risks does not control for purposes of determining whether the agreement is a lease or conditional sales contract. [76 T.C. at 569; fn. ref. omitted.]
See also Lockhart Leasing Co. v. Commissioner, 446 F.2d 269 (10th Cir. 1971), affg. 54 T.C. 301 (1970); Northwest Acceptance Corp. v. Commissioner, 58 T.C. 836 (1972), affd. per curiam 500 F.2d 1222 (9th Cir. 1974).
On appeal, the Ninth Circuit reversed our holding. Swift Dodge v. Commissioner, 692 F.2d 651 (9th Cir. 1982). It found that the allocation of duties in the agreement was no different from that under a conditional sales contract. For example, it compared Swift Dodge’s duty to secure a high wholesale bid at the termination of the agreement to a seller’s duty to mitigate damages before suing the buyer for a deficiency in an installment sale in California. See Cal. Civ. Code sec. 2983.2 (West 1974); Hill v. Dominquez, 138 Cal. App. 2d 891, 291 P.2d 203, 204 (1955). It found that the parties’ legal rights were essentially the same rights they would have enjoyed under a typical conditional sales contract. For example, Swift Dodge retained legal title to its vehicles and could assign users’ payments to third parties. If the agreement were prematurely terminated, Swift Dodge could repossess the vehicle and attempt to sell it. Those rights, as well as the user’s informal understanding that he could keep the vehicle at expiration of the agreement if he paid off the vehicle’s depreciated value, the Court stated, were no different from those of a purchaser and a seller under a conditional sales contract.
The Court also analyzed the parties’ risks and found that they were the same as those of parties to a conditional sale. The user bore the risks of damage, theft, destruction and, most important, the risk of depreciation. By contrast, the only risk the dealership assumed was the risk of the user’s default, a risk similar to that assumed by the holder of a security interest in a conditional sale. Swift Dodge, the Court found, incurred a loss only when the sale of the vehicle produced less cash than the amount owed. Having examined the benefits, rights, and obligations of the parties, the Court concluded that Swift Dodge did not retain significant and genuine attributes of a lessor. Frank Lyon Co. v. United States, 435 U.S. 561 (1978).
Because the facts in the instant case are markedly similar to those in Swift Dodge, and as the Congress has not spoken regarding consumer leases, we are constrained to follow the holding of the Ninth Circuit respecting petitioner’s non-business-use "lease” agreements. Golsen v. Commissioner, 54 T.C. 742, 756-757 (1970), affd. 445 F.2d 985 (10th Cir. 1971), cert. denied 404 U.S. 940 (1971). We leave to another day consideration of our position where the constraints of Golsen are not present.
Accordingly, petitioner is not entitled to investment credit in 1975 and 1976, or investment credit carryovers for 1973, 1974, and 1975 on these vehicles.20
Decision will be entered under Rule 155.
This case was tried before Judge Cynthia Holcomb Hall who subsequently resigned from the Court. By order of the Chief Judge, the case was reassigned to Judge Perry Shields for disposition.